Introduction

This chapter analyses one of Carlota Perez' main insights regarding the contradictory nature of the ‘installation’ period of the current new technoeconomic paradigm, as well as the role of these contradictions in the genesis of the ongoing financial crisis. Basically, despite the enormous potential for increased productivity growth unleashed by the current technological revolution, productivity growth in industrialized countries (and in most of the developing world) has actually declined since the irruption of the new ‘Age of Information Technology and Telecommunications’ (for the case of the US, see Figure 17.18). In essence, the period of ‘installation’ not only creates all the conditions for unleashing economic progress, but also generates ‘tensions’ of an economic, social and political nature that can turn into formidable obstacles to economic growth.

Perez identifies three main ‘tensions’ that are bound to arise during the period of ‘installation’ of a technological revolution: the first is the tension between ‘the paper economy and the real economy’ (i.e., between financial capital and productive capital); the second is the tension between ‘the size and profile of effective demand and those of potential supply’ (i.e., the real-economy effects of increased inequality); and the third is the political tension between ‘the poorer poor and the richer rich’ (Perez 2005, 16–19).

The first ‘tension’ relates to the very essence of the technological bubble that characterizes the period of ‘installation’ (see Figure 17.15); according to Perez: ‘[this is] a process of asset inflation in which the stock market (paper) values decouple from the real value of the companies they represent.

Introduction

Ragnar Nurkse (1907–1959) is one of the founding fathers of classic development economics (also called classical economic development theory, or early development economics) as it emerged during the times after World War II. His work on capital formation, balanced growth and international capital flow was highly important, and his influence as an academic teacher at Columbia University was significant. In several respects, Nurkse is quite easily applicable today, not least because his ideas of globalization and governance are largely the ones used currently (see Nurkse 1952a, 576) – even down to the importance of tourism (1935a, 21).

The purpose of this essay is first, to show that Nurkse can also be classified as a Law & Economics thinker. Given the recent interest in the Law & Economics of Development, showing how a classic figure in the field successfully used such an approach might be of considerable interest, especially because development economics is an emotional field that may well profit from the ‘objectivizing’ the function of Law & Economics. Nurkse's classic contribution underlines that, and how development economics can be done sine ira et studio, and perhaps to a greater effect, via, or at least including, such an approach.

The year 2009 marks a round and significant birthday for Carlota Perez thus presents us with a welcome occasion to celebrate her work. There could not be a better time to do this, because the events, as this book goes to press, have impressively proven its relevance and accuracy. By now, this has been widely noticed in scholarship and media, by large corporations, governments and supranational organizations, and NGOs alike, and Carlota has attracted what could almost be called a cult following. Well beyond her home base of Evolutionary Economics, we see the economic world, as it is really unfolding, with other eyes because of her theory of Techno-Economic Paradigms (TEPs) – and there are few economists today about whom this can be said. For us, her friends and colleagues at Tallinn University of Technology's Technology Governance graduate program – which has served as the academic-institutional center both for Carlota and for the reflection of her work in recent years – who have worked closely with her over many years, the idea of a Festschrift seemed obvious.

However, as many references as there are to her work (and as many unacknowledged takeovers of her theory!), a detailed and somewhat comprehensive account of the work is still missing. We had discussed and tentatively planned such a book, or special journal issue, for quite a while, and so it seemed obvious to combine this project with the current celebration.

Carlota Perez was born in Caracas, Venezuela, on 20 September 1939, the oldest of five children. Her father, Jose Henrique Perez Perez (1913-1978), was a very successful civil engineer as well as an international chess player who enjoyed playing up to twenty simultaneous games, including one in which he wasn't even allowed to look at the board. He devised a system for geographers to define the exact coastline in relation to tides, which was patented by the German company that built the equipment, and a method for scheduling his construction projects that predated PERT-CPM. Her mother, Carlota Perez Arenas (born 1919), is a painter and a determined, charming and courageous woman who, at ninety, drives a car and surfs the web.

The children were raised with very high expectations, and all, including the three girls, were expected to become engineers like their father. By the time Carlota entered kindergarten, at the age of three, she was already reading and writing. Her father's work took the family around the country, and Carlota ended up attending five different elementary schools.

The year Carlota turned eleven, the family got their first TV, she started high school and her parents divorced. Her mother, then 30, embarked for Buenos Aires with the five children – aged 6 to 11 – her sister, her aunt and her Oldsmobile. The Venezuelan petro-dollars were hard currency in Peron's Argentina and the children all went to private schools.

Preface

I could not ignore the invitation to contribute to a Festschrift in honour of Carlota Perez. For Carlota's work stands at the hinge of my own career-long engagement at the interface of finance and technology. In Technological Revolutions and Financial Capital (Perez 2002), she defined an agenda too neglected in the history of economic development and in the analysis of the dynamics of capitalism. In doing so, she provided a framework for understanding the complex feedback loops that link technological innovations, embodied both in physical assets and business models, with the financial assets created to fund them and the necessarily speculative trading of those assets that follows on their distribution.

In her working paper on ‘Finance and Technology: A Neo-Schumpeterian Perspective’, Carlota Perez wrote:

This contribution is intended to put some flesh on the bones of that abstract ‘financial agent’.

Introduction

Between the two World Wars, Virginia Woolf wrote these lines about an ideal cosmopolitan world we yearn for. This book is about an ethnic community that wished to belong to “a” country but was excluded and denied its wishes. The experience of this community is virtually unprecedented, although perhaps parallels could be drawn with the Jews under Hitler, the Turkish minority in Western Thrace – who were deprived of citizenship when the country ceded to Greece in 1920 – and, more recently, the Bhutanese Hindus of Nepalese origin, who in 1995 were stripped of their citizenship and forced into exile; like these people, the Indian Tamils, too, became stateless. As Hannah Arendt observed (Arendt 1958, 279), “…the man (woman) without a state was an anomaly for whom there is no appropriate niche in the framework of the general law, an outlaw by definition.” Further, as Arendt goes on to elaborate (283), “non-recognition of statelessness always means repatriation, i.e., to a country of origin.”

In the context of the situation experienced by the plantation workers in the post-independence period in Sri Lanka, applying the term “repatriation” as defined above by Arendt is problematic. The use of the term seems to concede too much to the claims of the state (Cohen 1995, 322).

This chapter presents a condensation of the findings and the argumentation set out in the previous chapters. It was established in the first chapter, the ways in which this study contributes to the existing literature, namely, by breaking out of the straitjacket of analysing issues solely in relation to Indo–Lanka relations and by bringing in configurations within Sri Lanka, as they explain and contribute to the subject. This study spans the period from 1948 to 1988. This period is the time frame within which the Tamils of Indian origin lost their rights to citizenship in Sri Lanka and were subsequently repatriated by the thousands, until 1988 when the remaining stateless persons were acknowledged and granted citizenship.

The main idea has been to place repatriation within the context of economic, political and ideological development within Sri Lanka. In this context, the course of inquiry also extended into questioning the paradoxical situation in which the urgency with which the laws and agreements were introduced was in contrast to their implementation, which at best was slow and belated.

In order to satisfactorily answer the main question, five subsidiary questions were derived from issues that dominated the status and the very presence of the Indians in Sri Lanka. One was by inquiring whether economic pressure and the need to remove surplus labor from the estates satisfactorily explained the denial of civil status and the expulsion of Tamils of Indian origin from the estates.

Introduction

The development of capitalist world economy has exhibited discontinuous or wave-like patterns of rapid expansion (upswings), which in turn are followed by periods of relative stagnation or ‘crisis’ (downturns) and vice versa, in successive phases. This cyclical rhythm is captured in the theory of long cycles or waves of 40-60 years, first articulated by Nikolai Kondratiev. Kondratiev's theory on cyclical rhythms in capitalist development argues that these patterns are constitutive of the logic of the world economy, and that they are a response to the contradictions inherent in the endless pursuit of capital accumulation. This is most evident during periods of stagnation or downturn when the world economy faces ‘crises’ in accumulation. It is these periods of tension that gives capitalism its dynamic, or what Schumpeter has described so lucidly as the paradox of ‘creative destruction’.

Shifts in the techno-economic paradigms are a key feature of the long waves of the capitalist world economy in that they indicate the arrival of an innovationrich phase that gives rise not only to new leading sectors (e.g., product and process innovations), but also to new organizational and managerial innovations that ultimately have a pervasive effect on how business is conducted throughout the world economy (Freeman and Perez 1988; Perez 2002, 2004). The arrival of new techno-economic paradigms is not just economic and business phenomena, as it triggers transformations in socio-institutional and political structures both at the national, regional and global level.

To many Americans to-day the problem of international investment is doubtless a source of perplexity and even of some irritation. Ever since the last world war great expectations have been placed on the export of private American capital as a means of bridging the dollar gap as well as financing world economic development. In reality, private foreign investment throughout the period since 1945 has fluctuated at a low level and without any sign at all of an upward trend. This is most disappointing. We suspect that the export of capital from Great Britain was one reason why the international economy of the Victorian era did not know of a chronic sterling shortage. We recognise, above all, that foreign investment was associated during that era with a tremendous spurt in world production and trade. There is in America a feeling of nostalgia for the nineteenth-century environment that made this flow of capital possible. The question is: why can we not re-create that environment?

The answer, I submit, must start from the fact that the circumstances in which overseas investment, and more especially British investment, went on in the nineteenth century (which I take to have ended in 1914) were in some ways quite exceptional. To realise this is of more than historical interest. So long as the peculiar features of that experience are not fully appreciated, memories of wonders worked by foreign investment in the past can only lead to false hopes and frustration.

Introduction

The present discussion on a ‘rebirth’ of systematic development economics (Herrera 2006) renders it appropriate to look more closely at its theoretical foundations before it became absorbed in an ad-hoc reasoning vis-à-vis the increasingly complex reality of (many) falling-behind and (few) catching-up processes, eventually falling into near oblivion for three decades (Krugman 1994). Undoubtedly, Ragnar Nurkse, the great Estonian-American economist, was undoubtedly one of the most rigorous theoreticians and therefore his contribution to the sub-discipline of development economics deserves special attention when discussing the relevance of classical development economics for today.

Ragnar Nurkse's contribution to economics was in three areas, the later being an extension of the previous ones (for details on the bio-bibliographical background see Basu 1987, Kukk 2004, Bass 2007): The first period of his work (in the 1930s) was dedicated to research on international capital movements. In the middle period (in the 1930s/1940s), he additionally covered issues of international trade and finance. Finally (from the mid-1940s to his death in 1959), he considered the international commodity and factor movements and their financial framework as merely one aspect of a broader issue in the world economy, to which he then turned his attention: the overcoming of structural underdevelopment. His three most eminent publications are hallmarks of these three phases: Internationale Kapitalbewegungen (in German, 1935), International Currency Experience (1944) and Problems of Capital Formation in Underdeveloped Countries (1953).

Contrasting Trends in Nineteenth and Twentieth Century World Trade

In the Western world today some widely accepted doctrines of trade and development are still to a large extent influenced by the experience of the nineteenth century. It is inevitable that economic thought should lag behind the facts of economic history. Even economists are human; our mental activity is, and indeed should be, shaped in some measure by limits set by experience. When conditions change, however, conceptions and preconceptions derived from earlier experience can become a shell that inhibits the development of thought as well as action. Thus the nineteenth-century model of world trade is one which many of us still tend to carry in our minds as something like the normal or ideal. As it recedes in time, it appears more and more clearly to have been the product of very peculiar circumstances. We economists should always be ready to adapt the framework of our thinking if our work is to have relevance to the changing real world. It is in this spirit, and with these preoccupations as a motive force, that I venture to attempt a comparative sketch of long-term trends in international trade.

Trade Expansion and the Transmission of Economic Growth

The volume of world trade reached an all-time record level in 1957, but this is not surprising since nearly everything is bigger now than ever before.

More or less a decade ago, I started cooperating on a project that was to turn into one of the biggest thrills of my professional life. At the Institute for Prospective Technological Studies (IPTS), we were tasked by the ISTAG to chart the future of Europe's information society. European policy makers needed an independent vision that went beyond the infrastructure one being propagated mainly by the United States. The result was a comprehensive concept called Ambient Intelligence (ISTAG 2001). We produced a European project for 2010 and beyond based on several visions of the future and what they implied for research and development in information and communication technologies. Our focal point was that within a not-too-distant future, our real environment would be filled to the hilt with intelligent hardware and software. It would allow us to envisage what we would be able to do as employee, citizen, student, human being – you name it. That is why Ambient Intelligence is more than ‘ubiquitous computing’, one of the futuristic visions that was then especially popular in the United States.

Let me back up this vision with some excerpts:

Recent discussion on trade-cycle theory has served to emphasize the importance of a clear recognition of the fundamental characteristics of the productive system in general, largely by bringing into prominence the particular view of the structure of capitalistic production which underlies the “Austrian” approach to the theory of capital. It is the purpose of the present note to examine the adequacy of that picture as a representation of reality, and to contrast it with a different view of the productive process which, although it might claim to be the common-sense view, has perhaps been unduly neglected.

The first picture of the productive process which we will here consider is that which forms the basis of the Böhm-Bawerkian theory of capital. The fundamental point of Böhm-Bawerk's position lies in his conception of capital as the aggregate of intermediate products: capital goods merely represent the intermediate form which the “original” factors (i.e., labor and land) assume on their way to final “maturity” as consumable commodities or services. Since—it is argued—neither fixed nor circulating capital is capable of satisfying men's wants directly, these two types of producer goods are treated on the same footing and are both included under the significant designation of “intermediate products.”

This view of the nature of capital leads naturally to the concept of the “period of production.” The longer the period for which original factors are invested, the larger the total stock of intermediate products at any point of time.