The fifth technological revolution: context and background

CHAPTER TWO

The fifth technological revolution: context and background Contents 2.1 Technology and technological change in the historical perspective 2.2 Technology, economy, society: A few words on techno-economic paradigms 2.3 ICT as GPT 2.3.1 Final note References Further reading

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2.1 Technology and technological change in the historical perspective The Industrial Revolution created a critical juncture that affected almost every country. nations (…) not only allowed but (…) encouraged commerce, industrialization and entrepreneurship grew rapidly. Many, such as the Ottoman Empire (…), lagged behind as they blocked or (…) did nothing to encourage the spread of industry. —Landes (2003)

Technological change and human progress are historically inseparable. Throughout the ages, we observe a continuous interplay between technology, technological change, and socio-economic development (Galor & Tsiddon, 1997). Undeniably, the dynamics of technological change and economic growth are mutually conditioned, as technology and all the knowledge embedded in it profoundly affects the way societies and economies work (Inglehart & Welzel, 2005; Nelson & Phelps, 1966). The argument set forth by Saviotti (1997) makes it clear that technological progress contributes to economic change not only qualitatively but also quantitatively, stimulating the emergence of new products and services and boosting the demand for them. Mokyr, Vickers, and Ziebarth (2015) noted that ICT-Driven Economic and Financial Development https://doi.org/10.1016/B978-0-12-813798-7.00002-6

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‘technology is widely considered as main the source of economic progress’ (p. 31), while Franko (2018) emphasised that economic growth pulls societies out of material poverty, the low-productivity trap, and enables them to climb up the development ladder. In Platteau (2000), we learn that institutions and societies as such, with their norms and attitudes, culture, and value systems, also heavily condition the acquisition of economically efficient technologies; put differently, technological change translates into social development and economic wealth only when it is accepted by individuals in the society (Drucker, 2017). Castells and Cardoso (2006) contend that technology often becomes the main driving force in societal transformation, even though technology alone is not a sufficient condition for it. These works have established a number of generalisations concerning technological change and socio-economic development; they direct our attention to more extensive research on how and why technology determines shifts in economies, redefines the way in which people communicate, and ushers in different types of network that in the long run become driving forces of both economies and societies (Hakansson, 2015; Metcalfe, 2018; Rosenberg, 1969). And while a precise definition or quantification is difficult, it is widely acknowledged among scholars that technology and technological knowledge are fundamental elements in economic, social, institutional progress (Rosenberg, 1994), although it must be borne in mind that the impact of technology is usually neither direct nor easy to measure (David, 1999; Triplett, 1999). Before we start putting the puzzle together, let us attempt, at least in part, to capture the generic meaning of technology and technological change. Technology and technological change are inherently characterised by complexity, interdependency, and multidimensionality (Lechman, 2017). In fact, the literature offers a solid if varied body of definitions of technology, which, although differing, do interestingly share one common element, namely, knowledge, even though direct connotations are not always easily recognised. For instance, in Singer and Williams (1954), we read that technology may be defined as ‘how things are made or done’ (I:vii). This short and simple, albeit indirect, definition directs our attention to knowledge; the word ‘how’ implies that human action, skills, and knowledge are all involved in the creation of technology. Campbell, Wang, Hsu, Duffy, and Wolf (2010) perceive technology in a similar vein, through the lens of developed tools, crafts, and techniques that, if adopted by the society, serve to control the production process and possibly the environment. Comin, Hobijn, and

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Rovito (2006), in their definition of technology, stress the importance of knowledge in developing new technologies, which allow people to use new methods and technical processes. This straightforward conception of technology can also be found in Olsen and Engen (2007), who stress that technology is frequently perceived exclusively in terms of tools, machines, or devices for use in the production of goods. And in Gomulka (2006) we read that technology may be simply defined as a bundle of techniques that are used to produce goods. The view of Olsen and Engen (2007) is to some extent consistent with the proposition of Pinch and Bijker (1984) and Bijker, Hughes, and Pinch (1987) that technology may be understood as both artefact and knowledge. Clearly, even when technology is narrowly defined and viewed only from the standpoint of new techniques and tools for material production, it always embodies human knowledge. Dosi (1982) emphasises that tacit knowledge demonstrated through technological change can help to solve both practical and theoretical problems that arise in the production process, and in this sense, technological progress is the demonstration of human knowhow and skills. Qualitatively similar arguments for the thesis that technology embodies human knowledge are also found in Wilson and Heeks (2000) or Collins (1990), all arguing that technology is a specific kind of activity designed for people’s application of their entire stock of knowledge. In J. Mokyr’s influential Gifts of Athena: Historical Origins of the Knowledge Economy (Mokyr, 2002) we read that ‘technology is knowledge, even if not all knowledge is technology’ (p. 2). An analogous understanding of technology is to be found in the conceptual works of Law (1991) and Bijker and Law (1992), while Arrow (1962), Dosi (1988), and Pavitt (1999) claim that in addition to human knowledge, technology as such and technological progress encompass another important component, namely, information. In their view, technological change is an outcome, the end result of accumulated knowledge and information, but at the same time technology also facilitates flows of knowledge and information among social and economic actors. This dual role of technology and technological change, in society and the economy, is essential. That is, technology is not only a desired result of knowledge but also itself a force for change in the socio-economic environment, inducing further propagation of both technology and knowledge. The concept of technology as knowledge (Mokyr, 2002, 2013) carries far-reaching implications. First, it defines technology as a ‘product’ of the human brain, thought, and intelligence, embodying the knowledge

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accumulated through the ages. Second, it means that technology can serve as a tool to propagate and transmit this knowledge across societies. Needless to say, technology and technological change have always been at the centre of human interests. The modern era can be termed the era of technology-led economic growth. In the past two centuries, per capita output has increased dramatically, and the increase has happened in a sustained manner, as never before in history. The universal consensus associates the beginning of these phenomenally rapid economic advances with the Industrial Revolution. Angus Deaton, in his book The Great Escape: health, wealth, and the origins of inequality (Deaton, 2013), writes: ‘The desire to escape is always there. (…) New knowledge, new inventions, and new ways of doing things are the key to progress’, and ‘Economists think of eras of innovation as powering up waves of “creative destruction”. New methods sweep away old methods, destroying the lives and livelihoods of those who were dependent on the old order’ (p. 9, 10). This passage suggests just how powerfully technology and technological change can impact society and the economy; how disruptive and profound they can be in destroying the status quo and driving the emergence of a new social, institutional, and economic order. Therefore, it is easy to conclude that technology is useful for social and economic development, but if it is to truly transform economies and societies, it must be widely accepted, adopted, and used by individuals and firms. The unbounded diffusion of technology is critical. If technologies and knowledge do not come into widespread use, their impact on society and economy remains negligible. In pre-industrial times the rate of economic growth was regularly negligible or even nil (Cipolla, 2004; De Vries, 1994). Deane (1979) and Hartwell (2017) argue that in pre-industrial society the increase in material wealth was painfully slow and easily reversible; there was no fundamental upward trend in economic activity. For centuries, living standards and average material well-being rose little if at all, while the population was growing dramatically ( Jones, 2001). This is not to say that pre-industrial economies were completely without technological advance. In fact, even medieval European societies made path-breaking inventions (Mokyr, 2005a, 2005b) and produced a wide variety of goods and services. The Middle Ages saw the invention of paper, mechanical clocks, and gunpowder, to cite just a few examples. Inventions such as navigational instruments and innovations such as Arabic numerals were relatively broadly adopted among these societies (Aiyar, Dalgaard, & Moav, 2008; Crone, 2015). All of these constituted a kind of technological progress that societies could benefit from, but before

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about 1750, most people were too poorly educated and knew too little to convert this technological progress into long-term growth in wealth (Bell, 1976). In a way, technological advances in pre-modern societies remained uncodified and informal; they were rarely diffused throughout the society. Knowledge was mainly tacit and hard to transmit. As noted by Mokyr (2005b), individuals in pre-industrial societies were not in a position to lay the intellectual groundwork for technological progress; indeed, the impact of what inventions there were on material well-being remained barely detectable. ‘The quality of life failed to improve in any (…) observable dimension. (…) nor the variety of material consumption improved. (…) For the majority of the English as late as 1813 conditions were no better than for their naked ancestors of the African savannah’ (Clark, 2008, p. 1). In order to work effectively, knowledge and technology must be shared among individuals. Those pre-industrial societies were locked in the Malthusian trap (Nelson, 1956; Steinmann, Prskawetz, & Feichtinger, 1998), and any gains in income, thanks to technical advances, were immediately swallowed up by population growth (Galor & Weil, 1999; Wood, 1998). Still, the pre-1750 period did produce several episodes of economic growth, which, according to economic historians, was enhanced by institutional change. The period of so-called ‘Smithian growth’ (Barkai, 1969; Kelly, 1997) consisted of some economic growth that enhanced the increase in economic output that was generated by commercial progress but not by technological change. Improvements in the quality of institutions (North, 1990; Shleifer & Vishny, 1991; Baumol, 2002; Greif, 2003) made it possible to take advantage of the economies of scale that were emerging in trade, which sparked competition among market agents, in turn stimulating efficiency gains and better resource allocation. Apparently, sound institutions, trust, the introduction of money, and credit institutions were solid foundations for economic growth even in the absence of rapid, deep-going technological advance. Evidently, economic growth before 1750 was primarily based on Smithian and Northian effects, namely, the benefits of trade and efficient allocation of resources. ‘The wealth of Imperial Rome and the flourishing of the medieval Italian and Flemish cities (…) were based (…) on commercial progress, (…) woolen cloth production in Flanders or the production of glass in Venice’ (Mokyr, 2005a, p. 1119). Those pre-industrial times have been called a ‘consumer revolution’ (Breen, 1988), which unquestionably produced a significant rise in income prior to 1750 (Weatherill, 2002). Some economic historians suggest that the peak of the ‘consumer revolution’ can be dated to between 1680 and 1720, and

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contend that without this significant boost in consumer demand the historical success of the First Technological (Industrial) Revolution would remain inexplicable. Mokyr (2005a, 2015b) writes, ‘On the eve of the Industrial Revolution, large parts of Europe and some parts of Asia were enjoying a standard of living that had not been experienced ever before, in terms of the quantity, quality, and variety of consumption’ (p. 1118). This created the groundwork for the Technological Revolution of 18th-century England. On the eve of the Industrial Revolution, England seemed to be relatively well prepared for what was about to arrive. The Glorious Revolution of 1688, Parliament’s Bill of Rights in 1689 (Landes, 2003), and the institution of the Bank of England in 1694 as the source of funds for industrial development effectively paved the way for the Industrial Revolution. The profound transformation of English institutions towards greater pluralism, the strengthening of property rights, the economic reforms passed by the Parliament to promote manufacturing, and the first ‘financial revolution’ gave solid background for the emergence of inclusive economic institutions. As Landes (2003) emphasises, ‘also significantly, after 1688 the state began to rely more on talent and less on political appointees, and developed a powerful infrastructure to run the country’ (p. 197). The Manchester Act of 1736 stimulated the nascent cotton manufacturing industry, with far-reaching social and economic effects throughout the rest of the 18th century; technological advance in textiles played a dominant role in the First Technological Revolution, profoundly reshaping social and economic structures. ‘The Industrial Revolution was manifested in every aspect of the English economy. There were major improvements in transportation, metallurgy, and steam power’ (Landes, 2003, p. 197). In similar vein, Peter Stearns writes, ‘The industrial revolution was a global process from the first. It resulted from changes that had been occurring in global economic relations. (…) It has changed the world. (…) Focused on new methods (…) for producing goods, industrialization has altered where people live, how they play, and how they define political issues—even, many historians would argue, how they have sex’ (2018, p. 1). It is hardly possible to date the First Technological Revolution or First Technological Wave exactly, but this turning point in the world economic history is conventionally placed somewhere between the 1770s and the 1840s. This revolution brought radical changes in the social, institutional, and economic spheres, eventually lifting the masses out of material misery and creating decent living standards. A series of minor and major inventions,

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introduced initially in the cotton textile industry, allowed the transformation of domestic manual work (cottage industry) into factory production. The textile industry grew dramatically; mechanisation and the massive application of machinery produced exponential gains in productivity. In Teich and Porter (1996), we read that ‘the cotton industry presented the most dramatic example of rapid transition from traditional (…) and loosely organized (…) system to rationally managed (…) factory system using large-scale machinery’ (p. 17). However, the textile revolution triggered by the spinning jenny was not the sole achievement of the First Industrial Revolution. Much also changed in iron-producing techniques, and the steam engine was invented. These two last inventions were of seminal importance for a further profound mechanisation of production; even more important, they ushered in totally new industries, bringing not only quantitative changes but also structural shifts in the English economy. Across England there emerged waterways, canals, turnpike roads that engendered novel industrial networks and greatly increased the country’s economic potential. This first period of extraordinary innovation and economic transformation was followed by a Second Industrial Revolution between the 1830s and 1870s. This era, also dubbed the ‘Age of Steam and Railways’ (Briggs, 1982; Crump, 2007), was a period during which the full potential of the main innovations of the First Industrial Revolution—the steam engine and steam-powered railways— were fully unleashed. The Second Industrial Revolution unfettered the full potential of the productivity of labour and capital. Economic growth took off. According to Jones (2013), by 1861 only 21% of the English labour force was engaged in agriculture. Steam engines, the ramifying canals and waterways, the explosive expansion of railways, the postal and telegraph services, great international ports and depots all helped the formation of new networks, which made for increasing interconnectedness, but also interdependency, among the social and economic actors. Obviously, those networks quickly became the driving force of economic growth, facilitating the expansion of trade and cooperation between firms. Unexpectedly, however, all this led to uncontrolled capital accumulation and the advent of large corporations. In the ensuing decades, the formation of trusts and the tendency towards monopoly became a crucial issue. Since the late 18th century, the English economy had gradually grown not only in material wealth but also in complexity, with profound structural transformations. The question is whether it was during the First and the Second Technological Revolutions that modern economic growth actually

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began (Clark, 1996; Kuznets & Murphy, 1966). Arguably, the period from the 1750s to the 1870s was the time when economies started to record regularly higher growth rates than in the past; when technology began to have ever-increasing weight in the generation of material wealth; and when economic growth accelerated radically. As Maddison (2007a) calculates, the estimated average annual growth of 0.15%–0.20% in Western Europe between 1000 and 1500 AD, marked, moreover, by high volatility and frequent setbacks, was supplanted in the later 19th century by much steadier, and faster, growth of 1.5% annually (Galor & Weil, 2000). While, of course, the First Technological Revolution cannot be taken as the starting point in economic history, it undeniably constituted a watershed separating Malthusian and post-Malthusian socio-economic regimes, impossible without a sharp acceleration in the pace of technological advance and consequently economic growth (Galor & Weil, 2000). With the industrial revolutions, the prime factor in the expansion of the economy came to be technical progress and hence productivity leaps rather than population growth. The causal links between technology, economy, and demography cannot be neglected. As the First Industrial Revolution dawned, the Malthusian world came to an end; the expansion of output no longer depended strictly on population growth and access to arable land but was increasingly technology- and productivity-driven. The 1880s saw the advent of the ‘Age of Steel, Electricity and Heavy Engineering’—now also known as the Third Technological Revolution (Rifkin, 2011). This relatively brief epoch—historians tend to define it as running from the 1880s to World War I—was characterised by the very widespread adoption in a broad range of industries of cheap steel, copper, cables, and other electrical equipment (Stine, 1979). These sparked the take-off in civil engineering and chemicals and a rapid expansion of communication and transportation networks. Railway, telephone and telegraph, and electricity networks spread economy-wide, establishing solid foundations for an extensive development of various sectors. Giant corporations arose, along with trusts and cartels (Greenwood, 1997). The British economy faced a serious threat of massive monopolisation. With the first decade of the 20th century, the West underwent its Fourth Technological Revolution: the ‘Age of Oil, Automobile and Mass Production’ dawned as all the inventions of past technological revolutions now actually ‘started to work’. Cheap oil, other petroleum fuels, and synthetic petrochemicals were used massively not only by industry but also by consumers. Networks of railways, roads, ports, and airports allowed further

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development, heightening demand, on the one hand, and boosting production and trade, on the other. Electricity now began to be used not only in industry but also domestically. Telecommunication networks flourished. Inventions made in earlier technological revolutions played a major role as the drivers of structural change in the society and the economy. They reshaped and extended market boundaries and opened up new opportunities. Such fundamental changes came, thanks mainly to the diffusion of those innovations, progressive mass access to the knowledge embodied in them. Economies started to be more efficient, more productive, and more complex. The ‘Industrial Enlightenment’ (Mokyr, 2005a) gave rise to new manufacturing and service industries, networks, the explosive growth of mass production, the intensification trade flows, and so on, contributing significantly to the creation of wealth. The history of technological revolutions demonstrates that, to be useful to the society and the economy, knowledge and technology must spread and be sustained, and ‘as far as future technological progress and economic growth are concerned, not even the sky is the limit’ (Mokyr, 2005a, p. 1180). The Fourth Technological Revolution appeared to be on the wane by the early 1970s, as totally new and pervasive innovations saw daylight. The Fifth Technological Revolution was now reality. Societies and economies observed radical path-breaking inventions that completely reshaped social and economic life. This new ‘Age of Information and Telecommunications’ offers cheap microelectronics, computer hardware and software, and telecommunication tools. The Fifth Technological Revolution has forged a new digital world: high-speed optical fibre allowing for fast data transmission, and mobile telecommunication instruments that are flexible and multipurpose (Freeman, Louc¸a˜, & Louc¸a˜, 2001; Perez, 2003). Since the 1970s, digital technologies have invaded societies and economies, so this is often labelled the Digital Revolution (Brynjolfsson & McAfee, 2014; Helbing, 2015; Perez, 2010). The emergence of the ‘digital economy’ (Brynjolfsson, Diewert, Eggers, Fox, & Gannamaneni, 2018; Tapscott, 1996) is driven by massive and unbounded flows of information and knowledge, making the physical location of agents practically irrelevant, and at nearly zero cost. Digitalised information and knowledge become a strategic resource, the main factor in comparative advantage. Digital technologies have created new types of network in which growth is enhanced by externalities (Katz & Shapiro, 1985, 1986); these networks are gradually becoming a decisive element in the way organisations, economies, and societies function.

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Historically, it is evident that the impact of technological change on economic growth and development is fundamental. Through the ages, technology has been economically important. Technology and knowledge have been decisive to nations’ economic power, their share in global production, and thus their material wealth. Obviously, before the First Industrial Revolution the world was locked in the Malthusian trap; economic systems were a sort of ‘zero-sum game’ in which a gain in wealth by one individual came only at the expense of another. If someone was to win, someone else had to lose. As we know from the historical statistics calculated by Maddison (2007b), between years 1 and 1500 AD, the average per capita income hardly changed at all. People were equally poor for hundreds of years; average per capita income growth for a millennium and a half was a bare 0.13% per annum, and from 1500 to 1820, it was still just 0.15%. In pre-industrial times economic growth was very slow, spasmodic, easily reversed; and per capita income growth was indecently low. In fact, until the end of the 18th century there was simply no increase in per capita output. The Malthusian trap meant that the expansion of the economy depended strictly on the growth of population. Still, even then there were multiple inventions, but owing to the lack of mass education and the limited diffusion of innovations, their impact on society and economy remained almost imperceptible. Obviously, positive feedback from ‘pre-industrial technological progress’ was observable but only in the short run. Over the long-term horizon, the short-run benefits vanished, swallowed up by population growth. In effect, people lived permanently at a bare subsistence level. In pre-1750 economies even the productivity improvements generated by technological change never led to permanent improvements in living standards. Fig. 2.1 illustrates the fact that prior to the industrial revolution, improvements in material well-being were practically unheard of. The left-hand graph in Fig. 2.1 shows the dramatically unequal regional distribution of economic power—approximated by share of global GDP—of regions before the First Technological Revolution. Note that Western Europe and its Offshoots, before AD 1000, generated something like 10% of total world’s gross output. In that year, according to Maddison (2007b), Western Europe, Eastern Europe, and the Western Offshoots, together with the areas that would eventually make up the USSR, generated less than 15% of gross world production, while Asia accounted for 68%, including 23% in China and 28% in India. For the next 500 years these shares changed only marginally, with some relative gain for Europe and Russia as compared with the overall world economy.

.35 .3

1.0e+07

.25 8.0e+06 .2 6.0e+06 .15 4.0e+06 .1 2.0e+06

.05

0

The fifth technological revolution: context and background

Share of global GDP by region, period 1–2008.

GDP total by region, period 0–2008. 1.2e+07

0 0

200

400

600

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1000 1200 1400 1600 1800 2000

Western Europe

East Europe

Former USSR

Western offshoots

Latin America

China

India

Asia

Africa

0

200

400

600

800

1000 1200 1400 1600 1800 2000

Western Europe

Eastern Europe

Western offshots

Latin America

Former USSR China

India

Asia

Africa

Fig. 2.1 Regional GDP and regional share of global GDP, AD 1-2008. (Based on data derived from Maddison (2007b). The world economy volume 1: A millennial perspective volume 2: Historical statistics. Academic Foundation; GDP expressed in 1990 International Geary-Khamis dollars.) 19

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Even a cursory look at historical world population statistics (Maddison, 2007b) shows the indisputably close relationship between population and production. In 1000, Asia had 66% of world population and generated 68% of total world production; in Western Europe, the comparable numbers were 9.6% and 9.0%. Until 1700 we detect further, but neither rapid nor radical, shifts in relative economic power (see the calculations provided in Table 2.1). Undeniably, the gain in Europe’s share of global output was the effect of the growing importance of innovations and the ‘consumer revolution’ in the 16th and early 17th centuries. Szpak (2001) and Sanyal (2014) label this period ‘pre-capitalism’ or ‘early capitalism’. This period saw a gradual loss in the economic power of Asia, including China and India, while Europe steadily improved its global position. The new economic system that was gradually emerging, with farreaching social and economic change that overwhelmed significant parts of the European continent, laid down solid foundations for the First Industrial Revolution. Acemoglu and Robinson (2012) call this technological breakthrough the ‘turning point’ in world economic history, and in fact there is no question that it utterly disrupted the pre-existing economic order, the economic status quo, which had remained untouched for centuries. It spelt the definitive end of the Malthusian epoch of slow, populationdependent, low-productivity growth and, as is argued in Hobsbawm (2010), ushered in the modern age of technology-led economic development. There was now a solid basis for leaps in productivity and—in the long-run horizon—rising incomes and personal welfare. The First Technological Revolution ignited the ‘global economic take-off’ or ‘take-off into self-sustained’ growth, permanently transforming the world economy and social structure. From that moment on, a country’s economic output was no longer strictly subject to its population size but became productivity-driven. Growth gained dynamism, stability, and irreversibility. Fig. 2.2 (left-hand graph) draws the new world contours shaped by the Industrial Revolution, the phenomenon labelled ‘global shift’ (Clark & Wo´jcik, 2018; Dicken, 2007), which determined long-term radical changes in regional shares of global output, their relative economic power. The numerical evidence summarised in Table 2.1 shows the changes in the dynamics of economic growth in world regions in the first two millennia of the Common Era (1-2008), highlighting the pervasive shift in economic output at the beginning of the Industrial Era. The period between 1700 and 1900 was characterised by fast economic growth, especially in the Western Offshoots, Western and Eastern Europe, and Russia. The regions of Asia, Africa, and Latin America developed at a significantly slower

1 1000 1500 1600 1700 1820 1870 1900 1913 1940 1950 1960 1980 1990 2000 2008

– 0.76 4.04 1.48 1.24 1.96 2.31 1.84 1.34 1.48 1.04 1.06 1.02 1.01 1.04 1.01

– 1.33 2.58 1.39 1.23 2.19 2.01 2.04 1.32 1.37 1.00 1.06 1.01 1.29 1.04 1.04

– 1.82 2.98 1.35 1.42 2.33 2.22 1.84 1.51 1.81 1.21 1.10 1.00 0.98 1.08 1.05

– 1.67 1.50 0.82 0.91 16.21 8.26 3.11 1.68 1.79 1.56 1.03 1.00 1.02 1.04 1.00

– 2.04 1.60 0.52 1.69 2.35 1.83 2.63 1.68 2.08 1.65 1.07 1.05 1.01 1.04 1.04

– 1.03 2.25 1.55 0.86 2.76 0.83 1.15 1.11 – – 0.97 1.03 1.04 1.09 1.07

– 1.00 1.79 1.23 1.22 1.23 1.21 1.26 1.20 1.30 0.84 1.07 1.07 1.05 1.04 1.07

– 1.52 1.59 1.20 1.20 1.29 1.39 1.67 1.40 3.58 0.62 1.08 1.03 1.07 1.05 1.02

– 1.71 1.41 1.21 1.10 1.21 1.45 1.46 1.20 1.98 1.29 1.04 1.05 1.01 1.04 1.06

– 1.15 2.05 1.33 1.12 1.87 1.60 1.78 1.39 1.65 1.19 1.05 1.02 1.02 1.05 1.03

The fifth technological revolution: context and background

Table 2.1 Dynamics of change of GDP total by region, AD 1-2008 Year Western Europe Eastern Europe Former USSR Western Offshoots Latin America China India Other Asia Africa World

Note: GDP expressed in 1990 International Geary-Khamis dollars; dynamics calculated as chain index. Based on data derived from Maddison (2007b). The world economy volume 1: A millennial perspective volume 2: Historical statistics. Academic Foundation.

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Shares of global GDP by region, period 1–1870.

Shares of global GDP by region, period 1820–1960. –4

–3

–3

–2

–2

–1

–1

0

0 0

500 Western Europe Western offshots India

1000 Eastern Europe Latin America Asia

1500

2000 Former USSR China Africa

1800

1850 Western Europe Western offshots India

1900 Eastern Europe Latin America Asia

1950 Former USSR China Africa

Fig. 2.2 Share of global GDP by region, AD 1-1870 and 1820–1960. (Based on data derived from Maddison (2007b). The world economy volume 1: A millennial perspective volume 2: Historical statistics. Academic Foundation; GDP expressed in 1990 International Geary-Khamis dollars.)

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pace, lagging behind and losing economic power. The onset of the First Industrial Revolution produced rapid and profound changes in the global economic landscape, the economic contours of the world. Starting in the 19th century we observe gradual losses in economic power in China and India, while Western Europe benefited from the technical advance brought by the Industrial Revolution (Fig. 2.2 traces the changes in regional shares of global output since 1800). Western Europe forged ahead, while Asia and the rest of the world lagged. The fast-growing role of the Western Offshoots (Australia, Canada, New Zealand, the United States) is plain to see. These areas’ share of global output soared from 2% in 1820 to 10% in 1870 and 18% in 1900. In the decades that followed, the entire Western world developed dynamically, gaining uncontested world economic dominance. In 1960 the West accounted for 56% of global output, China and India just 9%. This shows how overwhelming the technological breakthrough can be for an economy and how technological change reshapes world economic contours. Undeniably, industrialisation and the series of technological revolutions it brought about constituted one of the major forces shaping the past and present world.

2.2 Technology, economy, society: A few words on techno-economic paradigms As Morgan (1980) observes, the concept of paradigm introduced by Thomas Kuhn (2012) can be understood and interpreted in three main ways. First, a paradigm defines a complete view of reality, a way of seeing and perceiving things and their interrelations. Second, the paradigm may relate to certain schools of thought, possibly social or economic, that are connected with specific scientific achievements. Third, the paradigm may relate to some specific tools employed in the process of solving scientific puzzles. Always, however, whichever of these is the case, the paradigm in itself denotes, meta-theoretically or philosophically, a particular view of reality. This ‘worldview’ may encompass different schools of thought, each having its own, broadly accepted, way of studying and interpreting reality. In a sense, the paradigm reflects a network of various schools, hence different views, perspectives, and approaches to reality. Lehnert (1984) writes that the paradigm provides researchers with ‘topics, tools, methodologies, and premises’ (p. 22). Still, paradigms are not fixed; they can change in the course of history (Koschmann, 1996); they may be extended, adjusted, refined, and redefined ‘under new and stringent conditions’ (Kuhn, 2012, p. 23).

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As Kuhn (1981, 2012) observes, with time, inventions and scientific progress give rise to new paradigms supplanting the old. This may stem simply from the force of logic, the intensity of fundamental changes, and experience. As is emphasised by Eckberg and Hill Jr (1979), paradigms may be perceived as a way of analysing economic development, a complex and long-term process driven by interdependent elements. Evidently, the first way of viewing paradigms is definitely the broadest one, and probably the most suitable for understanding the complex nature of relationships between society, economy, and technology that are our main concern in this work. Technology, society, and economy constitute a complex system whose elements are fundamentally inseparable (Rosenberg, 1982), linked together by two-way causality (Lechman, 2015). They are inherently highly interdependent, reciprocally forging a complex system characterised by dynamism and the ability to change (Grubler, 1998). This ‘socioeconomic-technological system’ is usually prone to external shocks that upset its internal equilibrium. This system demonstrates a certain reactivity when it is thrown off balance, moving towards a new equilibrium. These unique, balanced systems evolve the trajectory of change subject to the external environment, the legal and institutional framework, religion, the current state of economic development, and many other factors, which are often proved to be hard to identify or capture (Mowery & Rosenberg, 1991; Gr€ ubler, 2003). Undoubtedly, technology makes societies and economies progress, move ahead, and climb up the development ladder. But societies obviously remain complex systems, encompassing individuals sharing common values, norms, and attitudes (Krohn, Layton Jr., & Weingart, 2012). An ‘open-minded society’ appears to be a fundamental prerequisite for making technology actually work to produce economic well-being. Only societies that are internally flexible, adaptable to a changing environment, and willing to assimilate new ideas and knowledge can truly convert technological progress into wealth for their members (Castells, 1997; MacKenzie & Wajcman, 1999). As Section 2.1 notes, technology encompasses technological progress, different methods, and knowledge of how things work (Comin et al., 2006; Lechman, 2015). In Fagerberg, Srholec, and Verspagen (2010) we read that technology constitutes a knowledge set that if put to work maximises economic efficiency and the productivity of capital and labour. The fundamental works of such scholars as Layton Jr. (1974), Rosenberg (1972, 1976, 1982), Stoneman (2001), Gomulka (2006), Pavitt (1999), and Stoneman and Battisti (2010) make it clear that knowledge, hence technology, constitutes an important element of socio-economic systems.

The fifth technological revolution: context and background

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In the same vein we read in Perez and Soete (1988) that technological progress is a disruptive process that alters social and economic structures and stimulates the emergence of a new status quo. Technology and technological change do not just bring change or inventions to economy and society; they enrich and shape socio-economic systems, enhancing their responsiveness and adaptability to further technological change. This demonstrates the interrelatedness of society, economy, and technology, driving home the point that none of these elements exists in isolation. Although intuitively we know that society, economy, and technology are linked by multidirectional causality, the literature is often dominated by the view that it is technology that drives change in societies and economies; that technology itself, having the power to change things, is what shifts societies, and hence economies, into higher states of development. Such a way of thinking and defining the role of technology in society and economy can also be found in Schumpeter, who contended that technology and technological change are at the centre of modern economic growth (Schumpeter, 1934, 1939). Schumpeter’s pioneering works supported the hypothesis that technology and technological progress as such should be treated as exogenous factors of economic growth and development. His thesis of parallel changes in the state of development of technology and in economic activity added up to the observation that long-run economic expansion has coincided with periods of wide diffusion of innovations. Schumpeter associated these two elements with the emergence, due to technological change, of novel, market-leading products and services, or even entire industries and essential infrastructures, which inevitably led to structural changes in the economy. Schumpeter’s original view was later modified and endogenised by the neo-Schumpeterian school, for which technological change becomes an essential but endogenous factor in economic growth and development (Magnusson, 1994; Hanusch & Pyka, 2006). A core factor in the importance of technological change as a driver of socio-economic shifts is the process of technology diffusion. Technology diffusion is dynamic, time-related, involving the transfer of knowledge, information, innovations, new ideas, and concepts through large, usually heterogonous societies and economies (Gray, 1973; Lechman, 2015; Rogers, 2010). Stoneman (2001) suggests that the diffusion of technology introduces economic innovations that are gradually adopted and put into use by individuals and companies. Saviotti (1996a, 1996b, 2002) holds that the spread of a new technology brings desirable new solutions to the market, which if utilised widely enough can generate profound structural shifts in

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production, consumption, and more. This thesis is supported by Keller (2004) and Ward and Pede (2013), who make the point that individuals and whole societies make decisions either to adopt or to reject new technological solutions first under uncertainty and then through cost-benefit analysis. And if even risk-averse people decide in favour of an innovation, this can happen only on the condition that the new solution is expected to bring greater benefits than the existing technology. If the group of innovators and early adopters (Rogers, 2010) likes new, more than old, technologies and so favours replacing current with innovative technology, a ‘domino effect’ (Abrahamson & Rosenkopf, 1993; Valente, 1996) may set in, effectively perpetuating a further rapid spread of innovations. Conceptually, the ‘domino effect’ is closely related to the notion of positive network externalities, or the ‘network effect’ (Katz & Shapiro, 1985, 1986)—that is, the demonstrable benefits generated by the growing number of users. This ‘bandwagon effect’ (Katz & Shapiro, 1994) significantly strengthens the process of technology diffusion in heterogeneous societies, which is associated with specific behaviour by consumers, permanent status-seeking regarding access to technological novelties (Lechman, 2017). Cabral (2006) writes that ‘network effects, that is, the case when adoption benefits are increasing in the number of adopters, (…) suppose that each potential user derives a benefit from communicating with (…) others. Such benefits can only be gained if the other users are also hooked up in the network’ (p. 2). If positive externalities are triggered, the diffusion of technology accelerates; sometimes the process is marked by uncertainty and random fluctuation, but usually it generates disorder in well-established social and economic systems. However, while technology diffusion may be marked by discontinuities, abrupt ups-and-downs (Ehrnberg, 1995), over a longer period, the spread of technology is fairly well approximated by the sigmoid (S-shaped) pattern (Kwasnicki, 2013; Nakicenovic, 1991; Rogers, 2010). This technology diffusion curve represents a quite simple account of several phases in diffusion (see Fig. 2.3). The process of diffusion is slow at first, the rate of technology adoption barely detectable and easily reversible. However, once a critical threshold, saturation is reached (Marwell & Oliver, 1993; Marwell, Oliver, & Prahl, 1988), the process speeds up radically, growth now going exponential. During the second stage of diffusion, the number of people adopting the new technology increases massively, and the saturation rate soars. Finally, as saturation becomes nearly complete in the phase of maturity, diffusion diminishes to a final stage of slowing diffusion as the society heads towards full saturation.

27

The fifth technological revolution: context and background

Carrying capacity (k)

S a t u r a t i o n

Technological take-off (somewhere here)

Threshold saturation

Length of pre-take-off stage

Critical mass (somewhere here) – one year ahead of the technological take-off

Pre-take-off stage Technological take-off

Post-take-off stage

Time (t)

Fig. 2.3 Sigmoid technology diffusion curve. Conceptualisation. (Adapted from Lechman, E. (2017). The diffusion of information and communication technologies. Routledge.)

As Fig. 2.3 illustrates, technology diffusion is non-linear. As Arnulf Gr€ ubler (2003) observes, ‘the patterns of temporal diffusion do not vary across countries, cultures, and artifacts; slow growth at the beginning, followed by accelerating and then decelerating growth, culminating in saturation or a full niche’ (p. 14). Yet while the sigmoid pattern appears to be the rule, so the basic diffusion curve is largely invariant, the timing and the pace of diffusion may vary greatly depending on the individual society, economy, and technology involved (Comin et al., 2006). As noted at the beginning of this section, technological change is not a merely technical phenomenon but rather is deeply involved in complex socio-economic systems. Moreover, path-breaking technological solutions do not emerge randomly or in isolation from existing technologies; they are path-dependent and emerge in specific social, institutional, and economic environments. Contextualising the process of technological change is crucial to understanding an array of changes and shifts that are usually both society- and economy-wide. Extensive exploration and conceptualisation of the interaction between the emergence of a new technological solution and the established pattern of socio-economic development is undeniably needed. By its very nature, new technology tends to be disruptive, bringing Schumpeterian ‘creative destruction’ (Schumpeter, 1962) to societies and

28

ICT-driven economic and financial development

economies. Whether the process of substitution of new for old technological solutions is smooth or instead marked by abrupt shifts and surges, it has farreaching socio-economic implications. Major society- and economy-wide transformations, as long-run effects of technological change, may take the form of radical shifts, restructuring, and reorientation in a whole range of fields. Developed in the 1970s and 1980s, the intellectual concepts of technological and techno-economic paradigms made a fresh, stimulating contribution to the debate on the interdependency between technology, society, and economy. These concepts significantly influenced the theoretical frameworks for analysing the relationships between technology and socio-economic systems, paving the way to the transition from static to dynamic analysis (Von Tunzelmann, Malerba, Nightingale, & Metcalfe, 2008). Even more importantly, the concept of techno-economic paradigm combines formal economic modelling with historical inquiry; it links various ideas and notions and provides a broad perspective and context, allowing for more profound and insightful interpretation of past and present events. Techno-economic paradigms capture the multidimensionality and interconnectedness of technological revolution, society, and economy. They are an elegant way of conceptualising the array of interactions between the process of technological change and social and economic development. These paradigms can be also seen as a unique idea for exploring the intimate interdependence and causal relationships among elements of a given system; they offer a conceptual framework for analysing the relationships between technological change and socio-economic development. The concept of techno-economic paradigm, initially proposed by Carlota Perez (1986) and then enhanced and modified by Freeman (1986), Freeman and Perez (1988), and Perez (2003, 2009), is closely related to the idea of technological paradigms developed by Dosi (1982). Fundamentally, both technological and techno-economic paradigms rely on Kuhn’s concept of scientific paradigm (Kuhn, 1962), which denotes how the world is perceived and defines the key problems to be solved. Kuhn’s thesis is that an old paradigm will be superseded by a new one when it no longer appears to offer adequate solutions to the problems encountered. He further argues that a paradigm shift reflects radical changes in current concepts and ways of perceiving and explaining reality.a Dosi (1982, 1988) argues that, as proposed by Kuhn, a

The Kuhnian concept of paradigms has been extensively used in social science, especially sociology and economics; see, for instance, Blaug (1975), Folbre (1986), Ramstad (1989), Argyrous (1992), Palley (2005) and Coates (2005), to cite just a few.

The fifth technological revolution: context and background

29

a scientific paradigm may be ‘approximately defined as an “outlook” which defines the relevant problems, a “model” and a “pattern” of inquiry’ (p. 152). In this vein, Dosi defines the ‘technological paradigm as “model” and a “pattern” of solution of selected technological problems based on selected principles derived from natural sciences and on selected material technologies’ (1982, p. 152).b In Dosi and Nelson (1994) and Dosi, Teece, and Chytry (1998), we read that technological paradigms are strictly related to knowledge for problem-solving in specific fields. Before Dosi, Johnston (1970) gave a different definition of technological paradigm as a bundle of principles that are widely accepted on certain technological grounds. In the same vein, Gibbons and Johnston (1974) suggest that technological development is periodical in nature, which to some extent coincides with Kuhn’s vision of the revolutionary nature of science, and hence technology. Arguably, technological paradigms define a set of needs that can be served in a given techno-economic context, and in this sense, technological change and economic development are linked and condition each other. As is argued in Van den Ende and Dolfsma (2005) and Sinclair-Desgagne (2000), new technological paradigms arise from the advance of science and the accumulation of technological knowledge. These authors in fact advocate the very radical hypothesis that technological knowledge is the main if not the only factor in the emergence of new technological paradigms. This coincides with the view of Dosi (1988) that fundamental advances in science and in closely related ‘general’ technologies form a solid background for new technological paradigms. Technological paradigms may also be seen as homogenous spheres of technology, which are socially and economically contextualised, demarcating certain fields of research aimed at invention. By convention, a technological paradigm provides a unique framework for research, and when it materialises, research often provokes severe discontinuities along the technological trajectory.c Those discontinuities, caused by novel technological paradigms, are usually associated with radical innovations to the socio-economic system and profound economy-wide change. The process of change is driven exclusively by the diffusion of inventions developed within the new technological paradigm, but it may also stem from b

In Nelson and Winter (1977a, 1977b, 1982) we find the term ‘technological regime’, which, however, coincides with Dosi’s ‘technological paradigm’. c A technological trajectory is defined as a pattern of problem-solving within a given technological paradigm (Dosi, 1982). Dosi (1988) also defines the technological trajectory, initially proposed by Nelson and Winter (1977a, 1977b), as development along the specific paths of the current technological paradigm.

30

ICT-driven economic and financial development

a gradual switchover from one technology to another. Such changes, if implemented effectively, will enhance productivity and generate benefits in both social and economic terms, but they may also provoke temporary turbulence, instability, and uncertainty. The concept of techno-economic paradigm proposed by Perez (1986), while fundamentally related to Dosi’s idea of technological paradigm, is at a higher level of generality. Whereas the technological paradigm in its generic sense is quite narrowly defined, the techno-economic paradigm (or meta-paradigm) is a ‘synthetic definition of macro-level systems of production, innovation, governance and social relations’ as suggested by Freeman and Perez (1988) and endorsed by Cimoli and Dosi (1995, p. 255). Freeman and Perez (1988) also propose to label change in the techno-economic paradigm as ‘technological revolution’, which encompasses both radical and incremental innovations. Perez (1983) argues that technology and economy are inseparably connected, so the two phenomena must not be explored separately. Technology shapes the economy and vice versa, so the techno-economic paradigm constitutes a perfectly integrated approach to the analysis and comprehension of the relationship between economy and technological change. Techno-economic paradigms allow generalisation but also contextualisation of the process of technological change, which is usually strongly dynamic and highly pervasive. These pervasive effects then become perceptible throughout the economy and society, and all the easier to identify and quantify as new technologies are diffused in a country. A series of works by Perez (1983, 2002, 2003, 2007) make it clear that the concept of techno-economic paradigm goes far beyond the purely technical perception of technological change to emphasise that technology reshapes economic systems, economic and social structures, norms, and attitudes. Along these lines, Green, Hull, McMeekin, and Walsh (1999) define the quantum leap in potential productivity as a key inherent feature of the concept of techno-economic paradigm. Broadly conceived, a techno-economic paradigm unveils the interaction between technological change and socio-economic development. Such a paradigm is a ‘set of best practice principles for efficiency (…) applicable to all (…) industries and serving to overcome maturity and increase productivity across the whole economy through more efficient equipment, better organisational models and much wider market reach’ (Perez, 2009, p. 781). The techno-economic paradigm is ‘a quantum jump in potential productivity’ and ‘an overarching logic for the technology system of a period’ (Perez, 2007, p. 229).

The fifth technological revolution: context and background

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The key to laying down solid foundations for understanding the concept of techno-economic paradigms is to know how they arise and how technoeconomic systems are shaped and evolve. Technological change depends heavily on the emergence of innovations. As already noted, this is not a random process but is shaped and predetermined by the entire context, including the institutional and economic environment, laws and regulations, social norms, attitudes towards innovation, and, most importantly, the technological solutions already in being. All these factors create a set of interactions, expressing the relationships between technology, society, and economy. Schumpeter (1939) calls them ‘clusters’; Freeman (1982, 1992) and Freeman and Soete (1997) contend that this type of interconnectedness creates a ‘technology system’. New ‘technology systems’, once they have appeared within the ‘techno-economic space’, have a powerful, long-term impact on ways of doing business, shaping a given country’s social and economic contours. The initial concept of ‘technology system’ has been broadened and further conceptualised by such scholars as Freeman (1987, 1995) and Lundvall (1988, 2007), as ‘national system of innovation’. Lundvall proposes to define the ‘national system of innovation’ in revolutionary terms, insofar as this concept would allow the identification of systems that ‘create diversity, reproduce routines and select firms, products and routines’ (Lundvall, 2007, p. 14). In the same vein, Lundvall and Johnson (1994) claim that national systems of innovation transform the structure of production, technology, and institutions, generating significant externalities and competitive advantages for all agents. Just as single innovations gradually accrete to form systems of innovation, national systems of innovation eventually interconnect to form a single system and give rise to a technological revolution. Along these lines, Perez writes that ‘on first approximation a technological revolution can be defined as a set of interrelated radical breakthroughs, forming a major constellation of interdependent technologies’ (2009, p. 5). Technological revolution is reinforced by radical innovations,d which spread and overwhelm the society and the economy. Radical innovations initiate new paths in technology; they are embodied in truly new products and processes. Radical innovations may arise at any point in time; as a rule they supplant an ‘old’ technology and give birth to a new industry. Grinin d

By contrast, incremental innovations are improvements and adjustments to existing products and/or processes. Although they do generate productivity shifts and thus contribute positively to economic growth, they do not provoke the kind of radical and revolutionary changes that radical innovation does.

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ICT-driven economic and financial development

and Korotayev (2015) consider the industrial revolution as ‘a process of active development of technology, especially designed to save labor in different areas’ (p. 52). Undeniably, technological revolution provides a positive impulse to the creation of wealth throughout an economy; it provides a wide array of new infrastructure; it allows for organisational improvements and thus enforces productivity shifts. Technological breakthroughs do not bring only strictly technical solutions, meaning that their influence is not purely technological. Technological revolutions may also entail organisational innovation, possibly inducing significant social, economic, and institutional change. Technological revolutions are gradually assimilated by the economic and social system, generating surges of development that are followed by transformation in the social, institutional, and economic spheres. Technological revolutions spread; they extend across societies and economies to trigger ‘great surges of development’ (Perez, 2002). ‘Each (…) revolution has driven a great surge of development that takes a half century or more to spread unevenly across the economy’ (Perez, 2007). Every such ‘great surge’, as a time-related process, shows certain regularities and encompasses two consecutive periods (phases): installation and deployment. The first phase (installation) is sometimes likened to Schumpeter’s ‘creative destruction’, which simply means the battle between new and old ideas and concepts (technologies). Schumpeter describes ‘the process of industrial mutation (…) that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one’ (Schumpeter, 1943, p. 83). To some extent installation constitutes an experimental period, during which new technologies try to invade the market and are either accepted or rejected. These times of creative destruction are extremely turbulent, unstable periods during which the old regime is gradually expelled from the market, while the new regime and the new technology break abruptly in, pervasively invading the social, organisational, financial, and institutional frameworks. The installation period is marked by a rapid diffusion of innovation, its assimilation, and then adoption by a constantly growing number of new users. During this phase, new industrial processes, new modes of production and infrastructure, new ways of doing business, even new products and inputs are widely articulated. The installation period creates a new common sense throughout the society and the economy; it also most often generates huge inequalities both within and between societies and nations. In other words, the world becomes more highly differentiated and polarised owing to sequentially emerging technological revolutions.

The fifth technological revolution: context and background

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The installation period is followed by the deployment phase, which historians call a ‘golden age’. The deployment period is an age of prosperity, with a massive utilisation of country-wide innovations introduced during the installation phase. The deployment phase is the period that fully unveils the gains and benefits offered by the new socio-economic paradigm, and the enormous inequalities of the previous phase are at least partially reduced. This phase also brings significant gains in productivity, and it can be argued that this is when the full potential of certain technological revolutions is successfully converted into individual wealth. The growth of wealth is thus enhanced by the technological revolution, in the course of which social, economic, and institutional innovations have been ‘installed’ and assimilated. Carlota Perez (see, e.g. Perez, 2003, 2007, and Perez, 2010) associates technological revolution with what she calls a ‘great surge of development’, which stretches over at least 50 years and consists of two distinct phases: the installation period and the deployment period. She sees the installation period as the time during which the new infrastructure develops, thanks to technological change and is installed (albeit unevenly) within and across countries. The subsequent deployment period unleashes the full potential of the newly installed technologies and gives rise to synergy between old and new industries, which inevitably leads to productivity jumps, material gains, and the establishment of a new techno-economic regime—a new paradigm. The deployment period is the time of full synergy among the society, economy, and technology, when positive externalities arise. Eventually, once the market is almost saturated by innovations, the stage of maturity is reached. These long economic cycles or waves usually last for around 50–60 years (see Grinin & Grinin, 2016; Grinin, Grinin, & Korotayev, 2017; Linstone & Devezas, 2012), up until a full exploitation of the potential of new technology, with its conversion into increasing total factor productivity and increasing socio-economic well-being.e So far, scholars (Freeman & Soete, 1997; Perez, 2010) have identified five major techno-economic paradigms, corresponding to the five technological revolutions in the world’s economy since the early 18th century (see Table 2.2). e

To a certain extent, this view coincides with Kondratiev’s concept of long waves and its Schumpeterian interpretation on the role of technological progress in long-term growth. Both Kondratiev and Schumpeter attribute long economic cycles of 50–60 years to the diffusion of technological progress. As successive technologies spread out along logistic patterns, they gradually realize their potential for productivity growth, but this potential is not fully exhibited until they are broadly adopted by society, which allows for significant gains in per capita income. A similar approach is taken by G€ oransson and S€ oderberg (2005).

Historical period

Conventional name of surge

Major invention/sectors of influence

Deployment Installation period— period—‘Golden ‘Gilded Age’ Bubbles Ages’

‘Canal mania’ ‘Railway mania’

‘London-funded global market infrastructure build-up’ ‘The roaring twenties’

‘Great British leap’ ‘The Victorian Boom’

‘Belle Epoque’ in Europe, ‘Progressive Era’ in USA ‘Post-War Golden Age’

‘Emerging markets, ‘Sustainable Global dotcom and Knowledge Internet mania’ Society Age’?

Adapted from Freeman, C., & Soete, L. (1997). The economics of industrial revolution. London: Pinter; Perez, C. (2010). Technological revolutions and techno-economic paradigms. Cambridge Journal of Economics, 34(1), 185–202.

ICT-driven economic and financial development

1770s–1840s Early mechanisation/ Turnpike roads, canals, textiles/small and local Industrial Revolution enterprises, increases in individual wealth 1830s–1890s Steam power and railway/ Steam engine, railway transportation networks, worldwide shipping/emergence of small-firm age of steam and competition, emergence of large firms and joint railways stock companies Electrical engineering, chemical industries, steel 1880s–1940s Electrical and heavy shipping, heavy armament/emergence of giant engineering/age of companies, cartels, trusts, aggressive mergers steel and heavy and acquisitions, enforcement of anti-trust law engineering 1930s–1980s Fordist mass production/ Automobile and aircraft transportation, synthetic materials, development of consumer durable/ age of oil, autos and emergence of oligopolistic competition and mass production multinationals, boost in foreign direct investment, trade and production integration Development of computers, software, 1970s to …? Information and telecommunication, digital technologies/ communication emergence of large communication and technologies/The ICT production networks, technology-based Revolution entrepreneurial wave, regional ICT clusters

34

Table 2.2 Technological revolutions and great surges of development. Historical perspective

The fifth technological revolution: context and background

35

The Fifth Technological Revolution—the ICT Revolution —began in the 1970s, when Intel’s first microprocessor was produced in Santa Clara, California. This path-breaking invention ushered in the Digital Era and created a new techno-economic paradigm, which for nearly half a century now has been continuously transforming the way societies and economies are organised and work.

2.3 ICT as GPT In any given ‘era’ there typically exist a handful of technologies that play a farreaching role in fostering technical change in a wide range of user sectors (…) bringing about sustained and pervasive productivity gains. The steam engine during the first industrial revolution, electricity in the early part of this century and microelectronics in the past two decades are widely thought to have played such a role. —Elhanan Helpman and Manuel Trajrenberg

At the outset, we can observe that general purpose technologies (GPTs) are distinguished by three fundamental elements: scope for improvement—these are technologies for which the process of technological change and diffusion is associated with time, space, and function in the society and economy; range and variety of use—they are widely used for a significant number of different purposes; and spillovers—these technologies bring a whole series of unprecedented opportunities for profitable investment in a large set of products and services, organisations, and processes (Lipsey, Carlaw, & Bekar, 2005). Some non-GPT technologies have some of these features, but only general purpose technologies have them all. GPTs are path-breaking innovations, one of the fundamental factors in long-run technological progress and deep-going structural and qualitative shifts in economies and societies (Bresnahan, 2010; Coccia, 2017; Sahal, 1981). Rosenberg and Trajtenberg (2004) call them ‘epochal innovations’, which came in the course of our successive technological revolutions and demonstrated their capacity to radically reshape the contours of the world economy. As Helpman (1998) observes, general purpose technologies induce overwhelming changes in various sectors of the economy and foster the creation and marketing of new products, services, and processes. GPTs are characterised by pervasiveness, i.e. their ability to generate structural transformations throughout the entire society and economy. Freeman and

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ICT-driven economic and financial development

Soete (1987) argue that these special technologies have the power to force change even in the socio-economic paradigm, thus supporting economic growth and development (Bresnahan & Trajtenberg, 1995; Helpman, 1998; Ruttan, 2008). Conceptually, GPTs can be defined as revolutionary transformations of the patterns (trajectories) of technological change (Bresnahan, 2010). In Calvano (2007) we read that GPTs as path-breaking inventions often drive ‘destructive creation’, bringing in technology that matters for societies and economies currently and making the products of ‘past technological revolutions’ outdated, obsolete. As Lipsey, Bekar, and Carlaw (1998) and Coccia (2005, 2010) observe, GPTs are introduced widely throughout the society and economy and impact pervasively various forms of economic activity and ways of doing business. That is, they generate overwhelming, permanent change in economic structures. Coccia (2005) emphasises that by comparison with non-GPTs, these technologies have a much more powerful, intensive impact on the society and economy, going far beyond that of more ‘standard’ innovations, useful as the latter may be. Just to repeat, ‘GPTs are characterized by pervasiveness, inherent potential for technical improvements, and “innovational complementarities”, giving rise to increasing returns-to-scale, such as steam engine, the electric motor, and semiconductors’ (Coccia, 2017, p. 292). Like Lipsey et al. (2005), Jovanovic and Rousseau identify three key characteristics of GPTs, namely, pervasiveness—the impact spreads over all the sectors of the economy and the innovations are assimilated by a significant portion of social and economic agents; improvements— GPTs are continuously improved, drastically lowering the costs of adoption and use; and innovation spawning—widespread adoption facilitates the invention and production of new products and processes (Bresnahan & Trajtenberg, 1995). As is underlined in Helpman and Trajtenberg (1994), in the long run, the adoption of GPTs results in faster economic output growth. GPTs are the ‘engine of growth’. These authors note that ‘as [a] better GPT becomes available, it gets adopted by an increasing number of user sectors and it fosters complementary advances that raise the attractiveness of its adoption’ (Helpman & Trajtenberg, 1994, p. 1). This concords with the thesis of Lipsey et al. (2005) that the emergence of GPTs generates unique externalities that make the new technologies still more attractive and thus enhance economic transformation. The emergence of such externalities is strictly bound up with, or dependent on, the broad diffusion of technological innovations, their adoption by individual market actors, and their effective deployment in the economy. Importantly, in the case of GPTs, these

The fifth technological revolution: context and background

37

externalities are usually dynamic. Dynamic externalities (Boldrin, 1992; Henderson, 1997) may arise when the continuous adaptation of a given technology by market agents generates further technological progress, which in the long run increases the total utility of that technology, i.e. the economic and social benefits that it brings. Effective adoption of a new technology, which is obviously the precondition for dynamic externalities, is a multistage process, and especially in its early stages, it is marked by great uncertainty. In other words, uncertainty is inherent in the diffusion of any new technology, especially in the initial stages. Stoneman and Battisti (2010) point out that the areas of uncertainty are multiple, involving such matters as the legal framework, which may impede the diffusion of innovations, the cost of adoption, and the sunk cost of existing technology. Other major sources of uncertainty cited by scholars as possible impediments to innovation are limited access to information and the inherent slowness of interpersonal communication channels (Rogers, 2010); social attitudes toward risk-taking; and social ability to assimilate innovations, agents’ decision-making process under uncertainty, and risk aversion (there is clearly a trade-off between risk and potential benefits). Whenever the process of introducing new technology begins, in order to be effective, it must be pervasive and overwhelming, driven by low cost and readily available inputs. If this is the case, then diffusion is reinforced and generates scale economies, hence additional opportunities for the adoption of the new solution, which, in effect, further accelerates the diffusion of technology. This view on the broad adaptability and usefulness of GPTs coincides with that of other authors (Bresnahan & Trajtenberg, 1995; Coccia, 2015; Gambardella & McGahan, 2010; Jovanovic & Rousseau, 2005) who underscore that as GPTs spread throughout the society and economy they significantly impact economic growth and development. However, as Helpman and Trajtenberg (1994, 1996) note, there is a ‘time to sow’ and a ‘time to reap’; that is, productivity jumps, increases in GDP, real wages, and personal wealth do not come immediately upon the arrival of a new technology. An analogous position is that of Stearns (2018), namely that during the early stages, the economic effects of technological revolutions may be hard to perceive, appreciate, and measure. To see whether technological advances engender solid and profound social and economic transformations, the long timeframe is indispensable. Technology as such, with all its embedded knowledge, unquestionably gives society the chance to climb the development ladder, even though the tangible effects are sometimes hard to

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capture. In this vein, Nagy K. Hanna (2010) contends that ‘economic history, the cumulative learning and transformation process involved in using ICT, and the pace of this wave of technological change suggest that a “wait and see” attitude would keep many developing countries out of a technological revolution no less profound than the last industrial revolution’ (p. 29). A look at history makes it clear that certain general purpose technologies have specific spatial-temporal dynamics. The GPTs already in being first compete with, then supplant ‘old’ technologies and finally are themselves replaced by the emergence of new GPTs. This dynamic, temporal interchangeability relates closely to the wave configuration of technological progress and technological change (Greenwood & Jovanovic, 1999). As was argued in Section 2.1, since the 18th century the world has gone through five technological revolutions, marking turning points in the economic history of the world as a whole and in the relative economic power of certain regions and nations. The onset of the First Technological Wave—the First Industrial Revolution (Deane, 1979)—in Britain gave rise to the mechanisation of the cotton industry, improvements in water mills, and the refinement of turnpike roads and canals (Lechman, 2017). In the 1700s these were radical innovations, powering steady increases in the productivity of labour and capital, rising overall wealth and improved living conditions. There is a good case that some of the innovations made during the First Industrial Wave were GPTs, in that their introduction to the society, organisations, and entire economies was the starting point for the long-term structural transformations that gave rise to the modern economic growth (Akamatsu, 1962; Kuznets, 1973; Mokyr, 2010). The Second Technological Wave beginning in 1829 (Perez, 2010; Wertime, 1962) witnessed the massive development of railways, postal and telegraph services, ports, and sailing ships. All of this was facilitated by new GPTs invading the markets. This new generation of GPTs dramatically increased the importance of networks and communication (Allen, 2009; Mokyr, 1998). The period spanning the years from 1875 to 1908 has been called the Third Technological Revolution, i.e. the third wave of novel GPTs, such as steel and electricity to name just two. The GPTs that emerged during this period, such as global railway and telegraph services (Stearns, 2018) and the ceaseless development of telephone services (Beniger, 2009; Faulhaber, 1995), now described as ‘old information and communication technologies’, were crucial to the way in which societies and economies function, even now in the 21st century. Those inventions came to be of common use, and there is no denying their enormous impact on social and economic life.

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The Fourth Technological Wave came in 1908 (Christopher & Louca, 2001; Coleman, 1956) with additional path-breaking GPTs, allowing for the dynamic development of roads, automobiles (Ford-style assembly line production plants), ports, and airports (Freeman et al., 2001; Stern & Kander, 2012). Their spatial-temporal impact was fundamental, as this wave made people and goods far more ‘movable and transferable’, although a significant amount of time was still required to transport them from place to place. In the early 20th century, a crucial general purpose technology was electricity, which was installed in a steadily increasing number of households, while such means of communication as telephone, telegraph, and telegram were coming into more common use among the general public. These changes sparked a further development of various networks, which since then have become the prime engines of economic development, radically transforming social structures, norms, and attitudes (Rosenberg et al., 2008). Finally, the 1970s saw the birth of the Fifth Technological Wave (Perez, 2010) or ‘Digital Revolution’ (Abdelgawad & Wheeler, 2009; Dreyer, Hirschorn, Thrall, Mehta, & PACS, 2006). This last breakthrough brought such novel GPTs as information and telecommunication tools, microelectronics, computers, software, and various forms of digital communication, including the Internet (Freeman et al., 2001). The Fifth Technological Revolution gave rise to an extraordinary range of path-breaking inventions, resulting in the radical restructuring of economic and social life. The ICT Revolution, or the Information and Communication Age, changed the way people communicate (Cairncross, 2001), interact, do business; and in this sense, it changed the society itself. The new ICTs are digital technologies that can convert the real world of information and knowledge into binary numerical systems (forms). Significantly, the widespread dissemination of ICTs makes possible the progressive transition from analog to digital technology (Toumazou, Hughes, Battersby, & Battersby, 1993). Information and Communication Technologies, broadly defined, represent an extension of the old class of Information Technologies (IT). But with reference to ICTs the primary focus is on the various media that permit interpersonal communication. Going by the definition of the World Bank (2014), ICTs encompass hardware, software, networks, and media for the collection, storage, processing, transmission, and presentation of information (e.g. voice or data) and related services.f Functionally, they f

See the ICT Glossary Guide (100 ICT Concepts) at http://web. worldbank.org (accessed September 2017).

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constitute a unique set of activities that facilitate electronic storage, processing, transmission, retrieval, and display of all sorts of information (Rodriguez & Wilson, 2000). Hargittai (1999) defined ICTs essentially as perceived through the lens of the Internet. His position is that the Internet, i.e. the worldwide network of both computers and users, was a great ‘invention’, enabling people to acquire vast amounts of information as the third millennium was getting under way. In the same vein, Kiiski and Pohjola (2002) claimed that the ICTs have unlimited possibilities for delivering information, regardless of the physical location of agents, and also facilitate interpersonal interactions that forge new networks. In addition, they contend that the Internet makes possible the emergence of a ‘virtual’ market for the sale and purchase of goods and services. In the broad sense, ICTs are technologies that, by electronic means, serve people by sharing, distributing, and storing all sorts of information and knowledge, facilitate market transactions, and allow millions, if not billions, of people to ‘keep in touch’ regardless of geographical barriers. ICTs are often perceived in terms of their functions, applicability, and usability. As a rule, great emphasis is placed on their role in sustaining various spheres of socio-economic activity. As already stated, Information and Communication Technologies are the technologies that gave rise to the Fifth Technological Revolution— the Digital Revolution, which introduced multiple, radical social and economic innovations. The emergence and worldwide diffusion of ICTs gave birth to totally new products and services, entirely new industries, and business models. Additionally, new types of networks materialised and generated disruptive effects, overwhelming societies and economies, institutions, organisations, and entire economic systems. ICTs are disruptive technologies (Latzer, 2009); they deliver radical and transformational change to the markets, modifying the landscape. The effects cut across all sectors of the economy. ICTs are said to be pervasive (ubiquitous) technologies that are permanently accessible and network-connected; they enrich interactions among entities and provide effectiveness, efficiency, and empowerment (Lechman, 2017). This is why ICTs are called general purpose technologies, and as such, they demonstrate enormous and overwhelming potential to impact on organisational and socio-economic systems. As argued by Jovanovic and Rousseau (2005), by bringing cutting-edge technological advancements, ICTs invade societies and economies; hence in the long run, they boost the productivity of capital and labour, which unleashes gains in terms of material wealth. ICTs are endogenously diffused throughout society, and to a large extent, they not only change economic structures but also strengthen economic growth and the dynamics of development.

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ICTs are characterised by technological dynamism, which means constant efforts to increase the efficiency of the new technology. Information and communication technologies, as GPTs, pave the way ahead and foster new opportunities. In Helpman and Trajtenberg (1996) we find the thesis that ‘as GPTs appear (…) there is a spell of growth, with rising output, real wages, and profits’ (p. 4). In another work, Bresnahan and Trajtenberg (1995) isolate several specific features of GPTs, which ICTs evidently share. ICTs as GPTs are described as ‘enabling technologies’, which means that they contribute significantly to the functioning of socio-economic systems and open up new paths for gradual improvements, taking the form of productivity gains. Continuous advances in technological development drive the emergence of innovational complementarities, which further strengthen the productivity gains—a whole series of positive externalities arises. The widespread introduction and deployment of ICTs by individuals but also by whole organisations and countries augments the emergence of novel downstream inventions and innovations, which would not be achieved without those ICTs. Finally, Bresnahan and Trajtenberg (1995) note an interesting feature of GPTs as such—they have no close substitutes, which obviously distinguishes them from other widely used technologies. Meanwhile, Coccia (2010) stresses that various GPTs, including ICTs, have a unique ‘ability’ to remove or overcome barriers to wider technological and economic development, with a major impact on social welfare. As argued earlier, information and communication technologies are recognised as today’s general purpose technologies. They are ‘enabling technologies’ that offer practically unbounded opportunities through their adoption in multiple social, institutional, and economic spheres. The impact of ICTs in reshaping social and economic development is considered pervasive and, in the long-term perspective, likely to induce structural and organisational changes that will result in enormous leaps in productivity. Hanna (2010) calls the information and communication revolution probably the most pervasive in recent human history. He considers that the timing of the Fifth Technological Revolution was due chiefly to decentralisation and integration, network structures, adaptability, knowledge as capital, and economies of scope (Hanna, 2010, p.32). According to Freeman et al. (2001), Perez (2010), and Conceic¸a˜o, Heitor, and Lundvall (2003), the development of ICTs constitutes an emerging techno-economic paradigm, also called the digital or ICT paradigm. It is evident that in many ways the Digital Revolution differs from previous technological revolutions. The prime and most essential element is that revolutionary changes are now incomparably faster and more pervasive than those generated

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by past revolutions. Moreover, technological changes today are generally embodied in goods and services for a mass market.

2.3.1 Final note Any attempt to encapsulate the whole stock of ideas, contexts, and knowledge underpinning a ‘socio-technological system’ in a single ‘box’ is bound to fail. The effort to reduce the complexity of connections between the society and technology is almost certain to result in oversimplification. In examining the nature and characteristic features of this dynamic system, it is essential to bear in mind that technology does not merely bring changes to society as it is. Technology is not passive. Above all, technology shapes the society. On the one hand, it enriches society, while enabling the society to respond actively to change, new ideas, and innovations and so gives the society the power to shape future technological developments, on the other. Today, as noted, ICTs are receiving growing attention; the new information and communication technologies are perceived as tools (enablers) whose unique features foster economic growth and development. Arguably ICTs can help countries around the world to combat underdevelopment and technological backwardness. By improving economic performance and enhancing the ability to compete on global markets, ICTs provide the means for bringing idle labour power into use and increasing social capital (Lipsey et al., 2005). What seems to be of seminal importance is that ICTs create effective and cheap means for the transmission of information, opening up new possibilities for economic activity on a larger scale (Coccia, 2018). The nexus between the deployment of new technology and the attainment of certain ‘development goals’ has been recognised. It is based on shared objectives—namely the efficient, scalable, affordable, and pervasive delivery of goods and services and information flows between people, governments, and firms. And while the exploration of links between technology adoption and economic advancements is not straightforward, and is usually hard to quantify and isolate, there is no denying that ICTs create new ‘windows of opportunity’ (Perez, 2003; Perez & Soete, 1988).

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Further reading Acemoglu, D., Johnson, S., & Robinson, J. (2005). The rise of Europe: Atlantic trade, institutional change, and economic growth. The American Economic Review, 95(3), 546–579. Lechman, E. (2017). The diffusion of information and communication technologies. Routledge. Maddison, A. (1995). Monitoring the world economy, 1820–1992 (p. 238). Paris: Development Centre of the Organisation for Economic Co-operation and Development. Maddison, A. (2001). Monitoring the World economy: A millennial perspective. Paris: OECD. Weber, M. (1981). General economic history. New York: Routledge.