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A theory of cycles suggests a new golden economic age

Illustration: Rebecca Zisser / Axios

As of now, no one knows how to break the grip of low incomes, blighted towns and popular anger in the U.S. and elsewhere. But a Venezuelan economist named Carlota Perez says that, if history is correct, things only look uniquely tough. In her view, government needs to step in now, trigger serious market demand, and dampen financial excess in order to ignite a new golden economic age.

Why it matters: According to Perez, the last couple of centuries have been cycles of such maladies, each time leading to a decades-long period of broad prosperity. If she is right, the question is: How and when do we get to the golden age part?

The background: Lots of scholars resist the notion of cycles — that the arc of history repeats itself, or at least rhymes. The rap against such theory is that human behavior is not a hard science like physics, and thus it's impossible to reliably forecast the next big thing.

But, in American politics, Arthur Schlesinger Jr. found traction among peers with his theory of a repeating cycle of idealism and pragmatism. The message is that, yes, human history is not science. But neither is it chaos, and picking out repeating trendlines helps us figure out how to react to the crisis of the day.

In her work, Perez divides the last two centuries into five technological "surges," the first four of which led to golden economic ages, per a debate at Strategy + Business. They start with the industrial revolution, beginning in the 18th century; and are followed decades later by the age of steam and railways; then of steel and electricity; the age of oil, the car and mass production; and finally the information age, which began in the 1970s and continues today.

  • In the first four, financial manias erupted, until the bubbles burst and led to populist uprisings. Governments of the day stepped in, creating massive economic demand with tax- and debt-supported transcontinental railways, port projects and gun diplomacy in the Victorian boom; and, after World War II, highway construction, policy-backed suburbanization, farm subsidies, and the Cold War.
  • Perez did not respond to emails, but in numerous appearances over the last couple of years, she has suggested that market forces naturally create inequality and political turmoil, thus requiring those state interventions. There was no other way of defusing the crises and spreading the wealth.
  • And neither is there today. That is why she urges similar robust state intervention to usher in a fifth golden age. Perez suggestion — "smart green growth," by which she means renewable energy and the funding of a new urban lifestyle.
  • This is in fact what China is already doing — pouring tremendous amounts of resources into dominating electric cars, solar power, batteries, fast trains, and urbanization, while spending big money to retire legacy industries such as coal and steel. If the West fails to follow suit, and Perez is right, China may enter its own golden age without the U.S. and Europe.

In interviews, economists said a burst of state-prompted demand is probably not all that is required. Michael Gapen, chief economist at Barclays, tells Axios that something must be done about a concentration of economic power, including in Amazon, Apple, Facebook and Google.

"They have amassed a tremendous amount of concentration. There is general economic angst that the benefit is not as diffuse as we need," Gapen said.

Lee Branstetter, an economist at Carnegie Mellon University and co-author of a recent paper on lagging productivity in the U.S., said it's not even clear that the technological and financial pieces are in place for a new golden age. He said artificial intelligence may be the bridge to the next economic burst, but that investment in AI hardware and software is relatively weak.

"I want to believe that we are powering growth for the next several decades, but the dispositive evidence we'd want is not there," he said. "It's possible that slow growth is masking a great economic dawn. It's also possible that that we'll have to wait awhile till we can reorder and substantially impact the economy."

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