The Turning Point

Democracy, capital markets and innovation cycles

4 years ago, I was on vacation with my wife. Trump had just been elected and we were escaping a frigid Chicago winter to relax on a warm beach. I’m not a casual beach reader and opted to read a relatively academic, twenty-year-old book on innovation cycle theory titled Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, attempting to rationalize recent events and figure out what would happen next. That book has become an atlas for me over the last 4 years (and ultimately a major motivation for me to co-found Equal Ventures) and given yesterday’s event, I feel it’s important to share some of the core learnings.

Perez (the book’s author) posits all innovation cycles initiate with an epochal innovation event (such as Henry Ford’s assembly line) leading to rise of that technology as it diffuses across the economy — this is the initiation of the “Installation Period.” Ultimately the initial implications of the technology are small, but the wealth accumulated by the inventors (and financers) of the innovation is expansive given the forward-looking speculative value of that technology. As these technologies gradually permeate society, they begin to destruct the existing economy. Earned skills become irrelevant and jobs are displaced as industries are turned over. While parts of society lay in hardship, the investors and financiers amass increasing wealth. Additional investors swoop in, chasing profits to incite an asset-bubble (aka a “frenzy.”) The wealth gains by those with financial capital to invest (who benefit from the speculative rise of the technology) further separate this group from those who don’t, as they are displaced by technology and left worse off than before.

We enter a new phase — the “Turning Point.” Society becomes contentious. Income inequality grows and politicians call for regulation of the technology. Populism and nationalism mount, seeking a return to the old as the savior of the disenfranchised. Political polarity and civil discourse approach a heated boil. Historically, this is when we’ve seen societal chaos, recessions, wars and (at its worse) loss of life on tremendous scale. In the most horrific of cases, the rise of Nazi Germany and World War II coincided with the Turning Point period for the Age of Oil, Autos and Mass Production. In nearly all these cases, the riff between the “haves” and “have nots” creates a structural tear. Historically, these have been dark times, so when I started to see instances of income inequality, populism, nationalism and societal polarity grow 4 years ago, I feared we may be headed in this direction. As you read this paragraph, I imagine (like me) you see the corollaries between the events of the past and the events of today. I anticipated tough political rhetoric, a run-up in asset prices and an inevitable crash, but felt that the foundation of our democracy was virtually impenetrable. The last several months have made me question that and yesterday it faced one of its greatest tests.

Many on Twitter last night questioned “where do we go from here?”. As Mark Twain once said, “history doesn’t repeat itself, but it often rhymes” and the consistency of history (as demonstrated in the graph below) suggests that we follow one of two paths.

On one hand, we could be on the doorstep of the next phase of the innovation cycle, the “Deployment Period”. This phase is often characterized as the “Golden Age” as society digests the technology, enabling a broader portion of the economy to benefit. We rotate from speculative value to production value as the technology manifests in economic gains in the way we work and live. The dream of the technology is realized as it becomes mainstream and the technology is thoughtfully rolled-out across industries to achieve progress. These periods have generally facilitated broad based living standard increases across populations and the wealth created in this phase (in aggregate) is far greater than that of the installation period. I started Equal in the hopes that we were on the doorstep of a Golden Age. One where I could play a role in deploying technology across broad swaths of the economy to improve the way people work and live. This transition was so core to our mission that we put it on our website.

The other path we can go from here is far darker. “Turning Point” phases are nebulous — they can be two years or they can be twenty. What we do in 2021 will decide that. Many of the events of the last year would have been incomprehensible to most just a few years ago, but seem increasingly normal today. That should terrify us. This is the cognitive fallacy of a “slippery slope.” As this behavior becomes increasingly normalized, the bounds of “normal” continue to be pushed. I fear, if we continue down this path with the false belief that our institutions (whether its democracy or capitalism) are impenetrable, it’s only a matter of time until they are dismantled. While this is unlikely, it’s a non-zero possibility. Empires have fallen before and ours (albeit not an empire) will inevitably fall as well. Our own awareness serves as one of our most critical safeguards to prevent that from happening.

I’m a big believer that our future is a function of 1) our understanding of the past and 2) our empathy toward one another. One of the understated elements of Perez’s theory is that society (and its political institutions), the economy and technology innovation are intrinsically linked. They are always evolving and in turn, evolve each other. We can’t decouple what happens in capital markets from its implications on our technology ecosystem and its societal implications. We need to be honest with ourselves to find productive means to forge a path forward that ushers toward the Golden Age rather than further divide. I’m hopeful for that future, but it won’t be easy and it won’t happen overnight. These three spheres of influence must collaborate with one another to achieve a productive outcome and I can only hope that yesterday served as the rallying cry for that to happen.

There’s much more that I can opine on for this book, but such would require several more pages, so I’d suggest for those interested in this topic to read this interview with Perez or this overview by Jerry Neumann on The Deployment Age, listen to this podcast I did with Erik Torenberg of Village Global on the subject or (better yet) buy the book. 😊