Environmental Innovation and Societal Transitions 6 (2013) 9– 23

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Environmental Innovation andSocietal Transitions

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Unleashing a golden age after the financial collapse:Drawing lessons from history�

Carlota Pereza,b,∗

a LSE, Cambridge and Sussex Universities, UKb Technological University of Tallinn, Estonia

a r t i c l e i n f o

Article history:Received 7 October 2012Received in revised form 19 December 2012Accepted 19 December 2012Available online 15 January 2013

Keywords:Financial bubblesGolden agesGreat surgesGreen growthIndustrial policyTechno-economic paradigmsTechnological revolutions

a b s t r a c t

The current crisis is not a “black swan” but a recurrent historicalevent midway along the successive technological revolutions. Incontrast with other crises, the ones that follow the major technol-ogy bubbles install a vast innovation potential that can be unleashedwith adequate government policies. The so-called golden ages inthe past two centuries (the Victorian boom, the Belle Époque, thepost war golden age) have followed post-bubble recessions. Aftergovernments save the banks and jump-start the economy, theyneed to regulate and reorient finance toward the real economywhile fostering synergistic growth in agreed directions. The arti-cle holds that the possibility is there for unleashing a golden age –national and global – by tilting the playing field in favor of “greengrowth”. The question is whether the conditions for government tobecome proactive again are as favorable as after WWII.

© 2012 Elsevier B.V. All rights reserved.

1. Introduction

There are few people left who doubt that the crisis ensuing from the 2008 meltdown is serious,is global, may be prolonged and requires decisive government intervention of some sort. However,there is a long way to go yet to reach agreement on the need for far-reaching institutional changes asthe way toward a stable solution.

� This article is based on “How to make the economic crisis creative”, published on the web in Open Democracy (2009b) underthe Creative Commons License.

∗ Corresponding author.URL: www.carlotaperez.org.

2210-4224/$ – see front matter © 2012 Elsevier B.V. All rights reserved.http://dx.doi.org/10.1016/j.eist.2012.12.004

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The frequent comparisons with the 1930s and the calls for a new Bretton Woods are the intuitiverecognition of a structural similarity between those times and these and between the actions takenthen and the actions needed now. What this article will hold is that the capitalist economy has livedthrough four previous situations equivalent to the current crisis and that these occur regularly –and perhaps inevitably – midway along the diffusion of each of the technological transformationsexperienced since the first industrial revolution at the end of the 18th Century. Seen in that framework,this crisis of the fifth such revolution requires the return of an active State to provide the stage forthe convergent and synergistic actions that will lead markets and society to the next golden age. Thespecific conditions provided by the new wealth creating potential suggest that such a golden agewould be enabled by the ICT revolution, would be unavoidably global and necessarily sustainable. Infact, it would seem that only through massive “green” innovation radically transforming lifestyles canthe incorporation of hundreds of millions of new global consumers become feasible.

The following section locates the current crisis in historical perspective, following the theory pre-sented by the author about the long-term dynamics of bubbles and golden ages (Perez, 2002). Section3 outlines the three tasks required of governments in confronting these once-in-a half-Century crises.Section 4 describes some of the actions needed to tilt the playing field to redirect innovation and invest-ment in order to unleash a potential golden age. The final section compares the current conditionswith those prevailing after WWII when the post-war boom was enabled by setting up the WelfareState and discusses whether the socio-political conditions are favorable to governments adoptingequivalent proactive measures.

2. Not a “black swan”: the historical recurrence of bubbles and crises

Growth in the world economy takes place by successive surges of about half a century,1 each drivenby a technological revolution (Perez, 2002). The massive changes that this brings each time around,not only in technology but also in production systems and organization, in means of communication,transport and distribution, in patterns of consumption and styles of living involve great behavioralupheavals in the economy and society.2 For this reason, the difficult process of unlearning the oldand absorbing the new takes twenty or thirty turbulent years of “creative destruction”. It is after themassive paradigm shift has been basically achieved, that the fruits of the new technologies in higherproductivity and widespread innovation can be reaped and socially shared. And this is when the twoor three decades of well being, usually recognized as the golden ages, have occurred.

Historically, the first half of each great surge – or what can be called “the Installation period” – hasbeen the time when financial capital shapes the economy, while the ideology of laissez faire shapesthe behavior of governments. It is a grand experiment when unrestrained finance can override thepower of the old production giants and fund the new entrepreneurs in testing the vast new potential.Finance then provides the stage and the funds for a massive process of ferocious competition, wheremany disappear, others survive and the new giants emerge. At the same time, since each revolutionbrings with it a new techno-economic and organizational paradigm, finance also enables and fundsthe modernization of the mature industries.

But what is perhaps the crucial role of the financial bubble is to facilitate the unavoidable overin-vestment in the new infrastructures. The nature of these networks is such that they cannot provideenough service to be profitable unless they reach enough coverage for widespread usage. The bubbleprovides the necessary asset inflation for investors to expect capital gains, even if there are no profitsor dividends yet. Thus the extreme “free market” ideology and the major bubbles have a role to playin the early decades of each great surge (Perez, 2002). As Bill Janeway (2012) puts it, technology bub-bles are the instruments of what he calls “Schumpeterian waste”, which is essential for the marketselection of the innovations that will drive the economy.

1 The use of the concept of “great surges of development” is a break with the long wave tradition of identifying them asupswings and downswings in GDP. Instead, the surges refer to the emergence and process of diffusion and socio-economicassimilation of successive (and overlapping) technological revolutions (Perez, 2002, pp. 60–61).

2 This feedback relationship between the socio-institutional sphere and the techno-economic one is akin to Foxon’s (2011)notion of co-evolution. In neither case are we claiming a deterministic view of the role of technology in relation to social change.

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Fig. 1. The historical record: different prosperities on either side of the financial collapse.

The Installation period has led each time to a major bubble followed by a major crash. The canaland railway manias ended in panics in the 1790s and 1840s, the multiple booms fueled by the Cityof London in the Southern Hemisphere in the 1880s led to several financial collapses in the emergingcountries of that period; the “roaring twenties”, with the wild investments in radio, autos, electricityand airways led to the major crash of 1929. The collapses reveal the need for regulation to restrainfinancial excesses and to favor the real economy, usually under political pressure for reversing theincome polarization and other negative consequences of the bubble times. If adequate policies areput in place to facilitate and develop the conditions for healthy market operation and social fairness,what follows is a golden age – or “the Deployment period” – when production (rather than finance)leads the expansion, when the benefits of the new technological potential are fully realized across theeconomy and its social benefits are better spread. Such were the Victorian Boom, the Belle Époqueand the post war golden age. Fig. 1 locates the recurrence of Installation and Deployment periods inthe historical record.

The most striking feature of each of these revolutions is the explosive appearance of new productsand processes, the fast growth of important new industries and of the new infrastructures wideningand deepening markets at lower cost. But the deepest impact they have on the economy and societyis brought by the new and different best practice common sense or “techno-economic paradigm”that, together with the new technologies, offers a quantum jump in potential productivity and qualityfor all sectors of the economy. Ironically, it is the paradigm shift that breaks the diffusion processin two. It is because of the profound adaptation to the previous practices and behaviors that thenew ones are strongly resisted by the incumbents. Reaping the higher productivity will require theunlearning of many of the old behaviors, the abandonment of what seemed obvious “common sense”and the systematic learning of the new best practices. In the previous surge it was the adoption ofmass production and scientific management; in the current one it has been the shift from pyramidsto networks, from human resources to human capital, from inter-nationalization to globalization andso on. It is precisely due to such difficulty of assimilation that the diffusion process is broken in twoby allowing finance to take control during the early decades in order to force the adoption of the newand more successful technologies and practices, through ruthless competition and relentless pressureon cost-cutting and short-term gains.

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Yet, in spite of their fundamental similarities in structure and sequence, each great surge is uniquebecause the technologies and world conditions are in each case different. If we take the bubbles, forinstance, we see in Fig. 1 that the post collapse-recessions have dissimilar durations (as indeed do theInstallation and Deployment periods in each case). In the 1920s the technology and financial bubblescrashed in one go in the USA (which was the core country of the mass production revolution)3; thistime they occurred worldwide and in two episodes (Perez, 2009a). The first was the Internet maniawhich was truly driven by new technology and ended in the NASDAQ collapse of 2000. The otherwas the set of easy credit bubbles of 2003–2008, when investors were pushed by an abundance ofquasi-free money into finding anything but technology as an object of speculation (from commodityfutures to securitized sub-prime mortgages). The unprecedented scale of this financial bubble wasfacilitated by the process of globalization and the capacity for computer-aided financial “innovation”acquired during the NASDAQ boom. So we could say that the first bubble was fueled by innovationin ICT (information and communications technologies) and the second by financial innovation withICT.

It is partly because regulation did not follow after the 2000 NASDAQ collapse that free-wheelingfinance was able to reach such astonishing levels of systemic risk. It is only now, when many ofthe crooked doings of the casino have been revealed and their painful consequences for the realeconomy are being suffered, that there can be enough political pressure for regulation and institutionalrecomposition.

Of course, the way in which easy credit was made available to reconstitute the casino of the InternetBubble beyond its useful life has already had its explanations. The Greenspan reduction of interestrates and the increase of liquidity after the 9/11 attack; the growing imbalances and the savings glutin Asia (Roach, 2009) plus the way the surplus was ploughed back to the importing countries feedingconsumption of lower priced goods, inflating housing bubbles and encouraging financial “innovation”.It is always important to analyze the immediate causes that unleash structural phenomena; that iscrucial for designing the avoidance mechanisms. However the true solutions to the underlying tensionscan only be found by facing the fundamental causes.

One of the explanations that go to the root of the problem is provided by Minsky (1986)when revealing how the mechanism of credit inevitably leads to financial crises in marketeconomies. More recently, Keen (2001:2011), follows up on Minsky and criticizes the currenteconomics orthodoxy for ignoring money and especially debt creation. Keen correctly identifiedthe bubble and predicted its collapse by incorporating the accumulation of debt in the analy-sis.

Yet not all financial bubbles and collapses are of the same nature, even if they all depend ondebt creation and asset inflation and follow the Minskian sequence (Kindleberger, 1978:1996). Asmentioned above, there is a class of bubbles that stands apart, caused by the way technological rev-olutions propagate (Perez, 2009a). These bubbles occur midway along the half-a-century or moretaken by each of those great waves of new technology to make the transition to the new paradigmacross the whole economy. There have been only five such major technology bubbles since theend of the 18th Century, including the recent double bubble of the ICT revolution (as shown inFig. 1).

The rest of this article will be concerned with the role of government in unleashing the golden agesthat can follow the major crashes of these special bubbles and the recessions they provoke.

3. Three steps out of the post-bubble collapse

The long-term pendulum has swung again. We are now in a global recession that is the historicalequivalent of the 1930s and which requires equally radical transformations in society and institutions.

3 Even though each new surge of technologies eventually encompasses the whole world to varying degrees, up to now, eachhas emerged in a core country, where its effects are more intensely felt and where the sequence of diffusion is clearest, andthen it spreads unevenly across countries (Perez, 2002, Chapter 6). Fig. 1 indicates the core countries of each of the five surgesto date.

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The question is: what are the adequate policies – the New Deal, the Bretton Woods, the Keynesianmechanisms and the Welfare State equivalents – to stimulate the global and national economies afterthis particular meltdown. If history is any guide, this is the time for the State to come back actively inorder to be the enabler of a shift in the balance of power from finance to production, and to changethe focus from the stock market indices to the expansion of the real economy and to the increase insocial wellbeing.

This cannot be done by copying any past recipes but by massive institutional innovation, as boldand as numerous as those of the 1930s and 1940s but responding this time, not to the demands ofFordist consumerism, but to the needs and the potential of a sustainable global knowledge society.

The above in no way implies that financial companies should not be rescued. What it means is thatthe real goal is not to save them but to restructure the economy and its drivers. You must first savethe life of the patient, but after that you must radically change the conditions that led to the mortaldisease. The voices that claim that the solution is “to restore trust” implying a return to “business asusual” are staying on the surface of the problem. The whole financial edifice that is now crumblingwas built on trust (and the illusion of riskless lending and profiting). What needs to be restored nowis trustworthiness!

The complexity and dimensions of the crisis suggest a step by step sequence in the actions tobe undertaken: the immediate term is about emergency action; the short term must confront theregulation of finance plus the support measures for the revival of the real economy while the mediumterm requires engaging in major institutional recomposition and intelligent policy action. Success inthe first, even if only relative, is crucial in order to undertake the second. But stopping at financialregulation would achieve little if it is not part of a wider package of measures that tilt the playing fieldin favor of real investment in job-creating production activities within each country and across theglobe.

What needs to be understood is the nature of the current moment in historical time. There is a fun-damental difference between the stagflation of the 1980s and the current recessionary period. Then,the world was experiencing the exhaustion of the Fordist revolution; most of the major industries werein decline and there was almost no potential for profitable innovation. The information and commu-nications technologies (ICT) were still in their infancy and, although some spectacular successes werealready emerging, they were still too small to make a difference and their transformative power hadnot yet developed to come to the rescue of the whole economy. Since 2007–2008, by contrast, weare at the dawn of what could be a global sustainable golden age. Most of the old industries havebeen rejuvenated by the ICT revolution and they are all poised to innovate. The range of possibilitiesis extremely wide but demand and profitability are uncertain. What was needed in the 1980s was totake all the obstacles away for finance to take control of investment and take advantage of the bud-ding technological revolution in order to unleash the process of massive “creative destruction”. Whatis needed now is a stable institutional framework that will lead to increasing synergies by providingreliable demand volumes and convergent directions for innovation and growth. Thus we are facinga situation more akin to that during and after WWII, when a vast potential for innovation is readyto be unleashed as long as it can count on dynamic demand conditions and on a framework favoringcertain preferred directions for innovation. It is more about “creative construction” in the sense ofenabling convergent innovations that generate synergies for further innovations in the same coherentdirections.

The post-war boom was unleashed by policies enabling suburbanization with its insatiable demandfor automobiles, electrical appliances, supermarkets with refrigerated foods and everything else thatgoes with such developments, including construction materials. Together with that, there was theincome redistribution of the Welfare State and the official recognition of the trade unions that madeit possible for blue collar workers to join the middle class in owning such suburban houses withall their trimmings. And finally, there was also the Cold War that complemented the consumerinnovation boom with the military one. And all of these spurred the oil and petrochemical indus-tries to innovate in production processes and new materials and the electronics industry to providesmaller and smaller components to enable portability. It is by creating equivalent synergistic condi-tions for innovation with the current potential that the global sustainable golden age can be madepossible.

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3.1. Emergency action to save the patient

Step one is essentially the ‘intensive therapy’ treatment, when the financial system must be savedand the real economy has to be stopped from slipping into deep recession. There is no doubt thatin 2007–2008 most governments stepped up to the challenge and were ready to go to any length tosave the banks. If anything, one could say that they probably overdid it and the pain that would havemade the financial world less arrogant and less powerful was almost completely avoided. Instead,most countries ended up in serious fiscal deficits and in debt crises sometimes brought about by thesame bailed out banks through what must have been conscious “sub-prime sovereign lending” to thecountries in trouble now.

But the emergency measures have to aim at an adequate balance between saving finance and savingjobs and between facing the deficits and promoting growth. It should be clear that rescued banksfacing a languid economy will inevitably turn into casinos again; they will not take risks financingproduction with uncertain demand and unlikely profits. They are essentially frozen in their track byfear of risk. Austerity cannot bring back prosperity and growth. Action has to be taken directly on theeconomy. Thus the intensive therapy involves not only central bankers and finance ministers; it needsaction from parliaments and pressure from social movements and opinion shapers. It made sense tosave mature industries (such as automotive) while helping them move toward fundamental productchange, instead of letting them fall precisely in mid-recession, when they were likely to pull the rest ofthe economy further down. The argument that you should not throw money at hopeless cases couldjust as well be used for most of the money being thrown at the banks. If the auto companies andothers with big employment rolls are to go bankrupt, let them do so in competition after the economyis prosperous and can absorb the shock so that their demise will not become a downward multiplier.

The classic Keynesian recipe of public investment in infrastructure in all countries is, of course, away to soften the recession by replacing the void left by private lending and investment in generatingjobs and demand for materials and equipment. But even in these hard times, a look to the future isin order. What the Installation period did was to provide a vast innovating potential based on theuse of ICT, on the establishment of global markets and on the application of the new organizationalparadigm across the economy. Any policies that can enable taking greater advantage of that triplepotential become important social assets.

Thus, while it is important to invest in the traditional physical infrastructure (though renewingand modernizing it), it is vital to expand Internet access either with fiber to the home (which can –and perhaps should – be coupled with any other physical infrastructure works) or with wireless. Onthe other hand, since the threat of global warming and of scarcity and high prices of materials, foodand water are increasingly recognized, it makes sense to make the easy “green” investments. Thatdirection is likely to become a central feature of future innovation. Thus, in the short term, invest-ment in environmental protection, alternative energy development and diffusion, pollution cleaning,materials saving, recycling and other such projects are also job-creating and forward looking. Someof these are a training ground for the future growth of “green jobs”.

Finally, there is a list of countries, beginning with Greece, that are threatened with collapse. Theywill need to be salvaged for everybody’s sake. In a world of globalized finance no country can assumeimmunity from what happens to another. But saving the banks alone is a myopic solution. What reallyneeds to be rescued is the real economy, what needs to be increased is demand from governments,consumers and businesses. If money can be printed for quantitative easing (to save the banks) it canalso be printed for job creating production activity and the banks will fare much better if they get themoney from the debtors rather than keep the bad debts in the books (Keen, 2001:2011).

3.2. An adequate institutional framework for global finance

Step two is proper financial regulation. Generically, that is no longer in question. Those who refuseto blame free markets for the financial mess tend to prefer pinning the guilt on lack of governmentregulation (or on excess of the wrong type of regulation). However, the current battleground presentsmultiple forces pulling and pushing in different directions. At one extreme there are some who mainlywant to punish and control (a sort of revenge against the culprits), at the other, there are those who

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would like to make regulation that looks strict but has plenty of loopholes that would allow the casinoto keep going.

Neither of those extremes will solve the underlying problem and lead to a reliable and effectivebanking structure. What is needed is the redesign of the financial architecture so that the system willgo back to its basic role of reallocating resources, smoothing the flow of money from savers to investorsand making its profits by sharing in the wealth it helps create and acquire. Of course, there will alwaysbe special instruments that take advantage of imbalances or misjudgments, such arbitrage is part ofthe legitimate workings of the market. But the idea that money can “work” for you and make you amillionaire in no time and with no risk has to be clearly ruled out if the global economy is to get thefull benefits from the growth, profits and social welfare potential offered by the current paradigm.

There are many regulatory directions to follow, and certainly the structure of the tax system todiscourage “easy” capital gains or casino profits and encourage patient capital is one of them. But thereare two elements that will define whether finance will be constructive or will continue to be decoupledfrom the real economy, playing its own game. One is transparency, the other is global reach. The needfor transparency is obvious. One of the main strengths of the synthetic instruments, hedge funds, creditdefault swaps, securitized mortgages, derivatives and other supposedly sophisticated innovations ofrecent times was precisely their opacity. Without full information there is no accountability and noprotection for investors, while proper supervision and successful regulation are made impossible. Onlythe truly savvy financiers could help define effective disclosure rules – quite a few are willing – andonly with very determined political will is it possible to effectively set and enforce them.

Global regulation is even more difficult as a goal. Finance wants to play one country against anotherand politicians want to keep their national power intact and untouched by any supranational authority.That is self-defeating. We all know that financial flows no longer respect any borders and function24 h a day around the globe. So national governments have already given up part of their power to thefinancial sector. Regulation limited to the national level is like trying to tame a wild horse in the middleof the street, with the cowboys inside the houses throwing the ropes through the windows. Informationtechnology has fundamentally transformed the conditions for financial flows and, in so doing, made itimperative that some basic global regulation should be established (Soros, 2000). Whichever existingor new institution assumes overseeing responsibility it will require a means of enforcement commonto the whole planet. Fiscal and monetary policy would continue to be national; that, together withsome sort of industrial policy, is part of how each country defines what role it wants to play in theglobalization game. Unless the basic financial rules apply equally to all, the globalized world cannotbe “flat” as Friedman (2005) suggests referring to innovation and competition.

One can see a historical parallel with the arrangements made with the trade union movement inthe 1930s and 1940s to facilitate – consciously or intuitively – the deployment of the mass productionparadigm. Having a single industrial union for all the auto workers, while making it possible for theunion to be stronger and capture a portion of the productivity gains for all its members, relieved theautomakers from competing on the costs or conditions of labor. Once that playing field was com-mon, they could concentrate on other forms of oligopolistic competition (design, models, innovation,productivity, marketing, advertising, etc.) and, in addition, they could count on the growing salariesas a source of increased automobile demand. Similarly, with a basic set of global rules, countrieswould stop competing on attractive conditions for finance and the banks would compete with eachother by providing high quality services. National governments in turn, would stop worrying abouttheir neighbors’ policies toward finance and concentrate on fostering smooth and dynamic economicgrowth based on productive activities which can increase social well being and equity.

Of course, the financial world as mentioned before, although being criticized, is still extremelystrong and has great power over the political world. A global regulatory floor is the last thing theywould want implemented. Perhaps only if things get really much worse and public anger and pressureincreases enough for politicians to take heed, can this essential measure be taken.

3.3. Creating conditions to guide synergistic growth

Step three is shaping the future. Even though some of the transformative actions may need to bedelayed while the storm is being braved, the opinion-shaping debates cannot wait and they can serve to

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provide criteria for choosing among the options for the short-term stimulus policies. The long decadesof laissez faire have made a dogma of the “free market”. It has been seen not as a rule-guided mechanismto serve social ends, but as an unrestrained process the consequences of which, however toxic orharmful for the economy and society, must be accepted as right and legitimate. This is the typical –perhaps inevitable – view that prevails during Installation periods. Those are the conditions that enablea technological revolution to profoundly transform the economy and to let the new leaders emerge.But, once Installation has run its course, this view needs to be replaced. Fortunately, bubble collapsesand the many revelations of market wrong-doing put the dogma into question. The debate has nowmoved from whether regulation is necessary or not to what is good or bad regulation. Further still, thenotion that the State has a direct responsibility in what happens in the economy has been reinforced intwo senses: first, by the widespread recognition that the lack of (good) regulation facilitated the casinoand, second, by a general agreement on the need for government to come to the rescue directly andto stimulate the economy well beyond simple monetary policy. Ironically, the staunchest opponentsof government intervention to save the real economy are precisely the banks whose survival wasengineered by just such a public intervention.

4. Overcoming the crisis by tilting the playing field to redirect innovation

It should be clear that this is not merely a financial crisis; this is the end of a period. As Roach (2009),then Chief Economist at Morgan Stanley, put it: leaders must have “the wisdom and the courage toshift the policy debate away from tactics and toward strategy” because the “era of excess” is over. Tomove ahead is not just to restore the previous “normality”, i.e. the type of gilded prosperity createdby the financial boom. What is needed is to facilitate structural change and to create new conditionsfor a different sort of prosperity into the future, where market and competition function under welldesigned rules and with a set of incentives that maximize growth and well being in a socially agreeddirection.

In other words, it is not enough to define the criteria for good regulation. It is also crucial to definecriteria for a whole set of other policies that must accompany the treatment of finance in order to guidemarket behavior in the direction that is most beneficial for all, combining an effective and profitablefinancial world with increasing well-being for the majorities.

Institutional recomposition should include fiscal policies strongly favoring investment in the realeconomy and discouraging short term speculation. An example is the Gerstner (2002) proposal ofencouraging patient capital and greater acquaintance with the company being financed through estab-lishing high capital gains taxes for short-term operations, phased down to zero in five years. Fastdepreciation of investment in equipment made in the next three years, say, could be another. This hasboth the advantage of stimulating investment, creating new jobs and improving demand for capitalgoods in these difficult times. Friedman’s (2005) tariff on oil, that kicks in whenever the price dropsbelow 60$/barrel, would be another example, especially if the income from it is earmarked for alter-native energy investment. A fiscal paradise for the education systems (both for those who educate andthose who pay for the education) is a must when stimulating a knowledge economy. These are just afew examples; what is important is to clearly define the highest level intentions and directions.

The other necessary debate is about the relative roles of investment and consumption in revivingthe economy. In the shortest term, consumption is the realistic target. But, since in the long run itis investment that generates new wealth (and new demand, both from the producers and from thepersonnel they employ), the balance needs to be regained as soon as possible. Only producing newwealth – apart from possible write-offs – will bring down the mountain of debt that is burdening indi-viduals and countries. But this has to be understood in the context of globalization and sustainability.Overall consumption will grow across the planet following new investment and new jobs. However,continuing with the current pattern of globalization without drastically reducing energy and materialsconsumption in our ways of living and producing would require much more than the single planet wehave (OECD, 2011).

Paradoxically, this environmental constraint may yet be the saving factor for inducing massiveinnovation, sustaining economic growth, while also shifting consumption away from unsustainablelifestyles. There is an enormous wealth creating potential, not only in alternative energies but also in

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facilitating a major overhaul of most products and production methods and a redesign of consumptionpatterns to stress quality, durability, low energy consumption, low or no emissions, recyclability,upgradeability, etc. Waste management itself, when handled as a wealth creating process is a verypromising direction for investment and innovation (Murray, 1999). It is a question of decouplinggrowth from resource use (European Commission, 2011), of innovating to multiply the productivityof energy and materials and of increasing the creative and intangible portion in consumption.

There can, of course, be doubts about the systemic effects of all these efforts on actual energyconsumption (van den Bergh, 2013) and this should be taken into account in policies, programs andprojects. Nevertheless, the green route is perhaps the only sustainable one both to give a powerfulboost to the US and European economies and to incorporate the hundreds of millions of new consumersfrom the rest of the world that full globalization offers to bring into the market.4

The true key to unleash all that transformation is the establishment of strict environmental regu-lation – better if globally – accompanied by clear incentives (Jacobs, 1991). That may require a broadconsensus among global corporations, recognizing that this direction of innovation is in their bestinterests and deciding to lobby governments in that direction (that is, if they can relearn the long-term view of their business and overcome the habit of thinking from quarter to quarter in order toplease the stock markets).

There is an implicit flavor of “industrial policy” in the above, which should be made explicit. Nextto the insistence on free markets, the strongest interdiction in recent decades has been on any sort ofindustrial policy. This is the legacy of the Installation period, which may be unavoidable in capitalism.However painful and costly it may be, the system seems to need unfettered free markets during theinitial decades of each revolution: new technological possibilities are still unknown and untested,massive experimentation is necessary to identify the best directions and to select the new industryleaders. Many routes will be blind alleys, there will be overshooting and misallocation and muchinvestment will be lost. However, since it all happens in an atmosphere where there are some casesof extraordinary profits and easy capital gains, free wheeling finance wants to take the risks, over-invests in the new industries and infrastructures and, in fact, forces the modernization of the wholeeconomy. The old production patterns have become obsolete and, as the new paradigm upgrades theorganizational models and sets higher productivity and innovation standards across the board, the oldindustries must modernize or disappear in competition. As was discussed in Section 1, it is the typicalperiod of Schumpeterian “creative destruction” or of Janeway’s (2012) “unavoidable Schumpeterianwaste”.

Once installation has been achieved, however, there is a vast innovation and growth potential thatthe economy is ready to tap. Unrestrained markets then become a very blunt and brutal instrument.In fact, after the bubble collapses and the flood of “supply push” projects and obvious investmentsassociated with the technological revolution start dwindling, the financial world becomes risk averseand is not willing to lend or to invest in the real economy, no matter how much governments mayentreat them to do so. The game has become one of “demand pull” but the recession creates demanduncertainty. So finance sits in the corner and plays casino while the economy is stagnating or declining.The stock market has diminishing volumes and the private sector high surpluses. When Zenghelis(2012) proposes government backing of green projects to help mobilize idle funds, he highlights that,according to UK ONS data, in 2011 the private sector in the UK had a net surplus of £99 billion andthat of the US $1.0 trillion, clearly preferring to invest in very low yielding bonds rather than take therisk of lending to the real economy.

The way to revive the economy is to establish conditions for dynamic markets, guided by policiesthat implement common visions arrived at through a social consensus, orchestrated by modern, wellinformed, realistic and socially responsible governments. That is the way to achieve the best resultsin the current circumstances.

4 This role of “green” for saving the economy though opening new paths for profitable investment, employment and inter-national trade is not necessarily upheld by all specialists and advocates of environmental sustainability in all their rich –sometimes confrontational – variety. Yet, it may well be that the green agenda, in whatever viable form it may take, will onlybe put into practice when it is understood by business, society and politicians that, rather than restraining the economy, it isgreen innovation and investment that can make it flourish again (Barbier, 2010).

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And industrial policy (although the term in the knowledge economy may be too narrow) needsalso to recognize and implement the role of the State in fostering innovation directly through fundingresearch development and engineering. As Mazzucato (2011) holds in The Entrepreneurial State, therehas been an overselling of venture capital and an under-recognition of the crucial role played byState in the funding and promotion of nanotechnology, biotechnology and the whole informationrevolution. From Internet to the algorithms behind Google and the basic technologies in the Applesuccess, government funding and public institutes have been the source. It is clear that the world ofgreen technologies that has to be deployed in the next decades will need much investment in publicresearch as well, next to direct “entrepreneurial” support from governments.

On this occasion, though, what we are facing is not only a national issue. Information technology hascreated the conditions for the globalization of the economy so that national policies are now mostlydefined as choices within the global space. The particular combination of static and dynamic advan-tages, together with conscious intelligent policies that will best enhance, complement or even createthem, will define the place that each region, country or locality will occupy in the global economy.Growth in a significant way takes place when there is a wide technological space for innovation and anadequate social and institutional context to take advantage of it. Re-specialization may be the answerto make sure there is enough wealth creation in each participating country to ensure that all boats arelifted and none have to lose out. The various policy instruments needed to tilt the playing field canbe a combination of new, old or renewed measures, all aided by market mechanisms, both sponta-neous and designed. What is essential is to have a basic strategic vision that is shared by government,business and society in each case. It is in this context that the proposal of taking the environmentalimperatives as a direction setter should be seen.

Another element of the necessary recomposition relates to education. The mass production modelof kindergarten to PhD with various irrevocable exit doors along the way is obsolete and inadequatefor making the best of the knowledge society for all. Not only is there an obvious need for lifetimeeducation entries and exits and re-entries but also for much greater flexibility in self-managed edu-cation and training, involving multiple methods and institutions, multiple combinations of contentsand different forms of recognition of skills, knowledge and specialization. At the same time, it must berecognized that the miserable salaries paid to teachers in most countries are a shot in the foot. Work-ing in the education industry should become a lucrative and, especially, highly regarded professionin order to attract the most competent and best suited. But in the meantime, the use of informationtechnology to provide access to top teachers would need to be incorporated in a much more intenseand serious way.

The range of institutions engaged in education – from public to private – needs to be much morediverse and to involve a blending of the traditional dichotomy between education and training. Infact, a part of the skilled labor force that has lost its jobs to the global economy could get gainfulemployment engaged in global training. Education – in other words – should become a diverse, denseand gigantic industry spanning from the local to the global. And it is everybody’s business to ensurethat this is so (especially in the US, where the shortcomings are particularly acute, except at the verytop).

A further important aspect in the promotion of investment is grassroots entrepreneurship, whichin this paradigm is much more diversified than in mass production times. Given the out-sourcingpractices of global companies and the segmentation of all markets, there are innumerable possibilitiescovering multiple niches from organic food to high technology as well as a vast array of specializedpersonal and business services. It is the density, adequacy and dynamism of that entrepreneurialmarket network that will determine the quality of life and the competitiveness of the economy inboth developed and developing countries. Enabling and encouraging the funding of entrepreneurshipin those areas will be a crucial element in the growth of local and national production and employment.

Yet the measures to stimulate real investment need to encompass the whole world. Current glob-alization patterns are strongly biased toward Asia, leaving behind most countries in Africa, the MiddleEast and Latin America. The chemical, mining, metallurgical, agricultural and food processing indus-tries have a lot of innovation and investment to do in those less attended parts of the planet. However,technological and social dynamism needs to be injected from within those countries, in order to makethose parts of the global space more attractive and more successful (Perez, 2010; Kaplinsky, 2011).

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The relatively high rates of growth observed in the last decade in some African and Latin Americancountries, spurred by the high prices of natural resource exports, could be signaling a growing potentialfor self-driven growth. Such full global development would increase markets for technology, equip-ment and engineering services, which are dynamic sources of growth and employment creation in themost advanced countries, as they lose high-volume mass production to the emerging and developingones.

Poverty needs to be seriously tackled in a permanent way, not with emergency-driven charity, butwith wealth creating capacity. And this is not only in the name of justice. There is a whole range ofconsequences for the rest of the world, from migratory pressures to terrorism, which have their rootsin frustration, desperation and lack of hope. Willy Brandt’s old suggestion about global Keynesianismmay warrant reconsideration and so does the Tobin Tax on international exchanges or, even better,Keynes’ originally proposed tax on all financial transactions, the transnational part of which couldbe used to provide funds for development. This would reduce the need for aid from the advancedcountries (facing budget deficits) and would, in turn, contribute to creating dynamic markets forcapital equipment, engineering services and all other traded goods.

There are other areas of institutional innovation that merit attention now. For instance, the currentWelfare State – what has survived of it – was designed in a world of “jobs-for-life”. That is no longerthe case for the majority of the population; this paradigm involves continuous change, flexibility andadaptability. The social safety nets need to be redesigned to be adequate for such a world or they willsimply not provide the safety they promise. Already the notion of flexicurity, combining flexible labormarkets with income security, lifelong learning and other elements has been advanced in Denmarkand incorporated in the European Union employment strategy (Wilthagen and Tros, 2004; Lundvalland Lorenz, 2006).

Next to applying measures adequate to the nature of the paradigm shift, there is another recurringaspect that must be noted and confronted when designing policy. The fact that in the bubble times thenew industries and the financial world decouple from the sluggish mature economy and experienceextraordinary profits and capital gains leads to very unbalanced regional growth and to a concentrationof income toward the top of the scale. Both these phenomena need attention and reversing action.

An indication of the pendular movement in income distribution, from installation to deploymentand back, is provided by the work of Piketty and Saez (2003 updated 2010) with USA income tax databeginning in the bubble prosperity of the mass production surge in the roaring twenties, going throughthe golden age of the 1950s and 1960s and culminating with the bubble collapse of the current 5thsurge (that of ICT). Fig. 2 shows how the share of US taxpayer’s income going to the top ten percent ofthe population in the two Installation periods reaches 50%, whereas in the Deployment period of thepost-war decades it comes down to less than 35%. The consequences of this polarization for peopleand regions, especially for those that were strongly attached to the old technologies and industries,tend to be reversed after the post-bubble recession. This need has become stronger in the 20th Centurywhen consumer demand has become a significant driver of the economy and when democracy hasincorporated the whole of the population in the political process.5 Thus explicit measures towardovercoming polarization are in order because social expectations will make it difficult to accept alower level of welfare for the children of the current generation.

Taken together, all these policy elements (and the many that could be added) constitute a sort ofstrategic vision that would best be promoted and put in motion if it is jointly designed and agreed bygovernment, business and the various organs of civil society. Finance has already fulfilled its job inthe current technological surge. The next two or three decades – the Deployment period – should seeproduction capital at the helm (as it was in the 1950s and 1960s), deciding on long term investmentand expansion and making sure that the potential of the new paradigm is fully realized for widespreadinnovation and for increasing productivity and social well-being across the board.

5 In the Belle Époque there were a whole set of welfare policies applied in Europe based on taxing the wealthy such asLloyd George’s “People’s budget” in the UK and the spread of the Bismarck policies in Germany across most of Europe (Bruun,1959:1990). The Victorian boom saw reductions in hours of work, measures regarding salaries and the provision of relativelydecent worker’s housing (Bienfield, 1972). But such measures could hardly compare with the intensity of the reversal in thepost-war Welfare State.

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Fig. 2. Pendular polarization of income along each great surge of development in capitalism.

So in this case it can be truly said that the crisis is indeed an opportunity. As was shown in Fig. 1,the golden age of each technological revolution has come precisely after the major bubble bust andthe subsequent recession, which is where we are now. Conditions are set for a global synergisticand sustainable growth process. One way of achieving this is by combining the potential of ICT with“green” as the direction of massive innovation to transform production and lifestyles, while fosteringfull global development and catering in a sustainable way to the increasing demand it generates.

Unleashing such a process depends on the switch of leadership over investment decisions fromfinance to production. That will require the State to come back into action in every country, reorientingfinancial incentives and tilting the playing field decisively in favor of real production investment. Thiscan be done using market mechanisms in implementation wherever these are fitting, while redesign-ing the tax structure and creating policy instruments to spread the benefits of the new wealth to thewidest possible number (which is also a way of widening markets). That is what Bretton Woods andthe Welfare State did the previous time around.

The legitimacy of capitalism rests on fulfilling its promise of achieving the common good throughindividual pursuit of wealth and power. Installation periods, and especially bubbles, bring the system toextreme individualism and to insensitivity to the plight of the non-winners and of the impoverished;bubble collapses and the ensuing Deployment periods tend to bring back the balance and put theaccent on the common good.

5. Are the socio-political conditions favorable to unleashing the next Golden Age?

Great institutional and socio-economic changes do not happen automatically nor can they beimposed from above. Transitions are complex processes involving social, political, technological andorganizational experimentation trying to overcome the prevailing regimes (Geels and Schot, 2007);they are the result of a mixture of crises and tensions, conflicts and agreements, clashes between

C. Perez / Environmental Innovation and Societal Transitions 6 (2013) 9– 23 21

the old ideas and ways of doing things and the new ideas and behaviors. Success is reached whenconditions favor widespread consensus and a shared vision can be constructed.

After World War II the stage was set for the general acceptance of strong government interventionin the economy and for increasing social justice. The favorable circumstances were:

– The sacrifices of the war and the social cohesion they promoted had established a climate conduciveto solidarity and to providing social safety nets.

– The enormous production effort for war material had also created the conditions for a reconversionto massive civil production with all the acquired experience.

– The particular paradigm with the mass produced automobile, allowed what can be considered the“invention” of suburbia: cheap houses on cheap land with roads, electricity, water, telephones andsupermarkets. The working classes could then also become the consuming classes.

– Social democratic ideas constituted a program to put forth that worked as a positive sum game forbusiness and the great majorities.

– The 1930s had purged the system of financial frenzy and the faith in the unfettered free market hadbeen badly battered.

– In addition there was the threat of communism to move any of those who would otherwise resistthe “great transformation”.

The question of whether we are facing equivalent conditions today to facilitate the shift is a validand perturbing one. Some conditions are favorable but the balance is not clearly positive:

– It is true that the free market dogma has been shaken and that the State is being called in to therescue.

– Yet the people who led the frenzy and made all the decisions that have brought the debacle, are stillvery powerful, very rich and, essentially in control of the decisive levers almost everywhere. Theyare recognizing the need for a change but mostly superficial.

– There is no structured ideology or program to confront them; no positive sum political design hasbeen put on the table offering to intensify wealth creation in ways that will reverse the incomepolarization trends and compensate the negative effects of globalization on the weakest. And yetthis is within the range of the possible with the current paradigm.

– The recession, although serious and increasingly global, has not yet lasted long enough or had deepenough consequences to make people accept that the party of the 1990s and 2000s is truly over andthat radical solutions are required.

What are then the conditions that could be favoring the acceptance of significant changes in policyand regulation, including major institutional innovations?

– Understanding the historical pattern can provide a theoretical underpinning for such proposals.Already an intuitive appreciation of the character of the situation has brought calls for a new BrettonWoods and made parallels with the 1930s.

– The depth of the technological changes that have occurred in the past few decades and the accom-panying paradigm shift in organization have made people aware of the importance of innovationfor economic growth. Proposals that focus on favoring widespread innovation in the real economyas the route to a healthy recovery will fall on fertile ground.

– The increasing awareness of the threat of global warming and the geopolitical complexities of energysupply have created a general disposition to take measures on both counts. The “green” movementhas suddenly moved from the margins to the center of concerns throughout most of the politicalspectrum. It so happens that confronting the environmental challenges may this time play a crucialrole in stimulating innovation and in shaping markets.

– Globalization has created an imbalance between supply and demand in oil and in many naturalresources (eventually also including food, water and other essentials for life) that has brought a

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completely different scenario for current and future prices. The likelihood of much more expensiveenergy and materials will push economic pressures in the direction of the “green” agenda.

– The process of globalization has advanced enough to create a multipolar economy where the BRICSmust be brought to the negotiating table and where it no longer seems realistic to try to solvethe problems of the advanced world without taking into account what happens in the emergingcountries or the developing ones.

– There have been a few supranational institutions and actions that open some narrow windows ofacceptability in relation to global regulation. In finance itself, the Basel accords in the BIS – howeverone may judge them – are a timid beginning toward common global financial rules for banking.In other areas we find the WTO, the International Court of Justice, the Kyoto Protocol, the Baselconvention on hazardous waste, the use of UN troops in various parts of the world and several othersupranational arrangements. There are also the common markets such as NAFTA or Mercosur and,of course, the European Union where the euro crisis might be paving the way for more advancedsupranational institutions. All are, in one way or another, at the same time examples of success andof strong resistance. But they do signal a direction, given the conditions of globalization.

– The threat of terrorism, coupled with the increasing poverty, the migratory pressures and thehumanitarian tragedies in the marginalized countries of the developing world make it difficult toignore the need to include those regions in the plans for recovery.

– The increasing electoral successes of messianic leaders in the developing world, are clear signalsthat resentment and frustration with the current world order have already reached critical levelsand must be weighed in the balance for decision making.

– The beginning of demonstrations and the various forms of resistance within the advanced countries,together with the tendencies to protectionism, which are if anything likely to grow as the recessiondeepens, create political pressure toward restoring and strengthening the social safety nets. Lendinga deaf ear in the name of ideological rigidities may presage social explosions, such as those of 1848.

Ultimately, the length and depth of the global recession (perhaps depression) will depend, not onthe financial rescue packages but, to a much greater extent, on whether the wider measures takenare capable of moving the world economy toward a viable investment route with high innovationpotential. The technological transformation that occurred during the past few decades has alreadyprovided the means for unleashing a sustainable global golden age. The environmental threats offer anexplicit directionality for using that creative potential across the globe in a viable manner. The majorfinancial collapse has generated the political conditions to take full advantage of this unparalleledopportunity. It is everybody’s responsibility to make sure this possibility is not missed.

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