TECH NOLOGY GOVERNANCE

Working Papers in Technology Governance and Economic Dynamics no. 20
the other canon foundation, Norway
Tallinn University of Technology, Tallinn
CONTACT: Rainer Kattel, kattel@staff.ttu.ee; Wolfgang Drechsler, drechsler@staff.ttu.ee; Erik S. Reinert, reinert@staff.ttu.ee

Technological revolutions andtechno-eeconomic paradigms
Carlota Perez1

January 2009

1 Technological University of Tallinn, Estonia and Universitites of Cambridge and Sussex, U.K.
www.carlotaperez.org

Abstract
This paper locates the notion of technological revolutions in the NeoSchumpeterian effort to understand innovation and to identify the regularities, continuities and discontinuities in the process of innovation. It looks at
the micro- and meso-foundations of the patterns observed in the evolutionof technical change and the interrelations with the context that shape therhythm and direction of innovation. On this basis, it defines technologicalrevolutions, examines their structure and the role that they play in rejuvenating the whole economy through the application of the accompanying
techno-economic paradigm. This over-arching meta-paradigm or sharedbest practice ‘common sense’ is in turn defined and analysed in its components and its impact, including the influence it exercises on institutional andsocial change.

Contents
Innovation as the dynamic space for the study of technical change

3

The regularities of technical change: innovation trajectories

4

New technology systems and their interactions

6

Technological revolutions and techno-economic paradigms

8

The structure of technological revolutions

10

The emergence of a techno-economic paradigm

13

The changes in the cost structure

15

The perception of opportunity spaces

16

New organisational models

16

Diffusion, resistance and assimilation of successive techno-economic
paradigms

19

Putting it together: Regularities, continuities and discontinuities intechnical change

20

References

22

2

The growing impact of the Information Revolution and the visibly increasing importance of innovation and entrepreneurship has resulted in a resurging interest in Schumpeterian ideas. Brad De Long suggested in his reviewof McCraw’s biography of Schumpeter that the late 20th and early 21stCentury should be as much a Schumpeterian reign as the mid 20th Century
was Keynesian.2
Indeed, Schumpeter is among the few modern economists to put technicalchange and entrepreneurship at the root of economic growth.3 Yet, strangely enough, he saw technology as exogenous and –together with institutions
and social organisations– “outside the domain of economic theory”4. His
focus was the entrepreneur and his goal was to explain the role of innovation in economic growth and on the cyclicality of the system.
It is the Neo-Schumpeterians who have endeavoured to analyse technicalchange and innovation as such, with their regularities and evolution; whohave delved into the characteristics and dynamics of innovation, from individual technical changes through clusters and systems to technological revolutions. This task has been performed by looking at technology, engineering and business organisation from the perspective of the economist andthe social scientist, identifying the common features in the processes of
evolution, in the interrelations and in the breakthroughs that occur in themost diverse technical areas. These regularities then inform an understanding of the relationship between technical and organisational change,
between these and economic performance as well as the mutual relationships between technology, the economy and the institutional context.
This paper will concentrate on technological revolutions and techno-economic paradigms, their definition, the causal mechanisms that bring them
about, their impact on the economy and institutions and their relevance for
economic analysis. Yet, since these macro phenomena are deeply rooted in
the micro-foundations of technical change, the following section will refer tosome of the basic theoretical advances made at the micro and meso levels.

Innovation as the dynamic space for the study of technical change
Schumpeter strongly distinguished innovation, seen as the commercial
introduction of a new product or a “new combination”, from invention,

2 De Long (2007)
3 Schumpeter (1911 and 1939) In earlier times from Serra (1613) in Renaissance Italy toFriedrich List (1841) in pre-unified Germany, the importance of technology and skills in economic growth was recognised as obvious. See Reinert (2007)
4 Schumpeter (1911:1926:1961) p.11

3

which belongs to the realm of science and technology.5 Indeed, the spaceof the technologically possible is much greater than that of the economically profitable and socially acceptable. It is with profit in mind that entrepreneurs and managers are constantly turning inventions into innovations;
technical possibilities and discoveries into economic realities. In turn,through their investment and funding decisions, they can also steer the
research effort in particular directions.
Those decision processes are not random. They are shaped by the context,
including relative prices, regulatory and other institutional factors and obviously, their perceived market potential. They are also path-dependent,
because market potential often depends on what the market has alreadyaccepted and because the incorporation of technical change requires thecoming together of several pre-existing explicit and tacit knowledge bases
and various sources of practical experience.
Thus, the meaningful space where technical change needs to be studied isthat of innovation, at the convergence of technology, the economy and thesocio-institutional context. That space is essentially dynamic and, in it, thebasic concept is that of a trajectory or paradigm,6 which represents therhythm and the direction of change in a given technology.

The regularities of technical change: innovation trajectories
Radical individual innovations are introduced in a relatively primitive version
and, once market acceptance is achieved, they are subjected to a series ofincremental innovations following the changing rhythm of a logistic curve(See figure 1). Changes occur slowly at first, while producers, designers,
distributors and consumers engage in feedback learning processes; rapidly
and intensively once a dominant design7 is established in the market andslowly once again when maturity is reached and Wolf’s8 law of diminishingreturns to investment in innovation sets in.

5 Schumpeter (1911:1926:1961) pp. 132-6. See a discussion in Nelson and Winter (1982)
pp. 263-6
6 Dosi (1982)
7 Arthur (1988)
8 Wolf (1912)4Figure 1.The trajectory of an individual technology
Degreeofmaturity
anddeploymentof potential

Maturity
Clear direction
for accelerated
improvements
and successivemodelsExploratory
improvements(design open)

Time
Radicalinnovation

Trajectory
defined(and dominant
design)Trajectory
constricted

Source: Based on Nelson and Winter, Dosi, Metcalfe, Wolf, Utterback and Abernathy, Arthur, etc.

But, together with rhythm, a trajectory also involves directionality within apossibility space. That is what Dosi emphasized when, with the Kuhnianparallel in mind,9 he introduced the term technical paradigm to represent thetacit agreement of the agents involved as to what is a valid search direction and what will be considered an improvement or a superior version of a
product, service or technology. A paradigm is then a collectively sharedlogic at the convergence of technological potential, relative costs, market
acceptance, functional coherence and other factors. Microprocessors (andthe products based on them) are expected to become faster, smaller, more
powerful, more versatile, relatively cheaper and so on. By contrast, automobiles and airplanes in the 1950s and 1960s were supposed to become
bigger and bigger and, though they were also expected to be faster, versatility was not among the goals.
Thus the notions of trajectory or paradigm highlight the importance of incremental innovations in the growth path following each radical innovation.
Though it is true that major innovations have a central role in determining
new investment and economic growth, expansion depends on incremental
innovation10. The numerous minor innovations in product enhancement and9 Kuhn (1962:1970) on scientific paradigms
10 Enos (1962)5

process improvement that follow the introduction of any new product havean important impact on productivity increases and market growth. It has
been shown that, some time after the take-off, both the number and theimportance of incremental process innovations tend to overtake productchanges.11 As production volume and productivity become crucial for market expansion, process innovations drive most of the scaling-up investment.
As will be discussed below, what holds for individual technologies in termsof regularities in the dynamism and direction of technical change occurs
also at the meso level, in relation to the evolution of all the products in anindustry and to that of whole sets of interrelated industries.
Of course these notions and observations represent only the general patterns that characterise the standard dynamics of technical change and there
are multiple deviations and exceptions in specific cases.

New technology systems and their interactions
The emergence of individual innovations is not random. Technologies interconnect and tend to appear in the neighbourhood of other innovations.12
Neither does their evolution take place in isolation. Innovation is a collective
process that increasingly involves other agents of change: suppliers, distributors and many others, including consumers. The Schumpeterian clusters are the result of techno-economic and social interactions between producers and users within complex dynamic networks. Furthermore, majorinnovations are inductors of further innovations; they demand complementary ones upstream and downstream and facilitate similar ones, including
competing alternatives.
A sufficiently radical innovation such as, for example, television stimulated
the emergence of the industries that manufacture receiving and broadcasting equipment and of multiple specialized supplier industries. TV spurred thetransformation of the producing and advertising industries as well as thefilm, music and other creative sectors, plus new maintenance and distribution activities and so on.
This dynamic interrelatedness has led to the notion of a technology system
studied by Freeman13 to describe how the Schumpeterian clusters areformed and evolve. At this meso level of analysis, it is found that the

11 Utterback and Abernathy (1975)
12 Schumpeter (1939) p. 167
13 Freeman (1992) p. 81 and (1994)6

process of diffusion also follows a logistic shape (as figure 1). The incremental innovations along the trajectory, rather than simple improvements
are successive new products, services and even whole industries, building
upon the innovative space inaugurated by the initial radical innovation andwidened by the followers.
Each new technology system not only modifies the business space but also
the institutional context and even the culture (as disposable plastics did in
the past and Internet does now). New rules and regulations are likely to berequired, as well as specialized training and other institutional facilitators(sometimes replacing the established ones). These have in turn strong feedback shaping effects upon the technologies.
Maturity will be reached when the innovative possibilities of the whole system begin to wane and the corresponding markets to saturate. Thus, individual technologies are not introduced in isolation. They enter into a changing context that strongly influences their potential and is already shaped by
the previous innovations in the system.
A new product appearing in the early phase of a new system has a more
dynamic market life ahead than one introduced at its maturity phase. This
happens for two main reasons. One is the exhaustion of the opportunity
space of that particular system, so that the last innovations are likely to bevery minor. For example, the long series of home electrical appliances in theearly 20th Century began with the refrigerator and the washing machine andpetered out with the electric can-opener and the electric carving knife. The
other reason for decreasing market dynamism is the intense learning that
occurs within the system and the externalities that result from it. These
tend to reduce the time to market and to ease user acceptance thus shortening the product life-cycle and cutting down the time for profitability. For
instance, it took 24 years, from 1954, to incorporate air conditioning as an
improvement in 90% of the automobiles produced in the US, whereas radial tyres, introduced in 1970, took less than 8 years to reach 90% of themarket.14
The complex and changing network of interactions and cooperation among
the many agents that contribute to innovations –researchers, engineers,
suppliers, producers, users and institutions– as a technology systemevolves has been conceptualized as a national system of innovation15 evoking Friedrich List’s national system of political economy16. This has natural-

14 Cited by Grübler (1990) p. 155
15 Freeman (1987 and 1995), Lundvall (1988)
16 List (1841)7

ly led other researchers to the study of regional and sectoral systems ofinnovation.17 The interrelatedness of technologies and of the knowledge
and experience bases that underlie their development, together with theinfrastructures and service networks that complement them and the multiple learning processes that accompany them, provide externalities for allparticipants and advantages for the society in which they are embedded.

Technological revolutions and techno-economic paradigms
Just as individual innovations are interconnected in technology systems,
these are in turn interconnected in technological revolutions. Thus, on a first
approximation a technological revolution (TR) can be defined as a set ofinterrelated radical breakthroughs, forming a major constellation of interdependent technologies; a cluster of clusters or a system of systems.
The current information technology revolution, for example, opened a first
technology system around microprocessors (and other integrated semi-conductors), their specialized suppliers and their initial uses in calculators,
games, civil and military miniaturizing and digitalizing of control instruments
and others. After that there was an overlapping sequence of minicomputers and personal computers, software, telecoms and Internet that haveeach opened new systems trajectories, while being strongly inter-related
and inter-dependent. As they appeared, these systems interconnected andcontinued expanding together with intense feedback loops in both technologies and markets.
A similar stylized description can be made of each of the previous constellations.
Five such meta-systems can be identified since the initial “Industrial
Revolution” in England. Each can be seen as inaugurated by an important
technological breakthrough acting as the big-bang that opens a new universe of opportunity for profitable innovation. Such was the case of theIntel microprocessor, or computer on a chip, initiating the information revolution. Table 1 indicates the five revolutions, their corresponding big-bangs
and the core country where the revolution originally takes shape and fromwhich it spreads across the world (sometimes even concentrated in a particular region: Manchester was as much the cradle and the symbol of theAge of Steam as Silicon Valley has been for the microelectronics revolution)

17 Malerba (2002); Arocena and Sutz (2000); Howells (1999)

8

Table 1. Five successive technological revolutions, 1770s to 2000s
Technologica
l revolution

Popular name for theperiodFIRST

The ‘Industrial
Revolution ’

SECOND

Core country or countries

Big-bang initiating the revolution

Year

BritainArkwright’s mill opens in Cromford

1771

Age of Steam andRailways

Britain (spreading to Continentand USA)

Test of the ‘Rocket’ steam engine
for the Liverpool -Manchester
railway

1829

THIRD

Age of Steel,Electricity and Heavy
Engineering

USA and Germany forging
ahead and overtaking Britain

The Carnegie Bessemer steel
plant opens in Pittsburgh,
Pennsylvania

1875

FOURTHAge of Oil, theAutomobile and Mass
Production

USA (with Germany at firstvying for world leadership),later spreading to Europe

First Model -T comes out of theFord plant in Detroit, Michigan

1908

FIFTH

Age of Information
andTelecommunications

USA (spreading to Europe andAsia)

The Intel microprocessor isannounced in Santa Clara,
California

1971

Source: Perez (2002)

What distinguishes a TR from a random collection of technology systems
and justifies conceptualizing it as a revolution are two basic features.
1. The strong interconnectedness and interdependence of the participating systems in their technologies and markets.
2. The capacity to transform profoundly the rest of the economy (andeventually society).

The first is the most visible and defines what is popularly understood as“the revolution”; but it is the second that makes it really warrant the term.
That capacity to transform other industries and activities results from theinfluence of its associated techno-economic paradigm18, a best practicemodel for the most effective use of the new technologies within andbeyond the new industries. The new industries of the revolution expand to
become the engines of growth, for a long period while the techno-economic paradigm drives a vast reorganisation and a widespread rise in productivity across the economy.
Thus, a technological revolution can more generally be defined as a major
upheaval of the wealth-creating potential of the economy, opening a vastinnovation opportunity space and providing a new set of associated generictechnologies, infrastructures and organisational principles that can significantly increase the efficiency and effectiveness of all industries and activities.
18 The term was introduced by Perez (1984) –replacing the previous (1983) technologicalstyle– in order to connect with Dosi’s (1982) concept of technical paradigms

9

The processes of diffusion of each technological revolution and its technoeconomic paradigm –together with their assimilation by the economy andsociety as well as the resulting increases in productivity and expansion–
constitute successive great surges of development.19
It should be noted that this concept represents a break with both
Kondratiev’s and Schumpeter’s notion of long waves.20 For them, the focus
is on the upswings and downswings in economic growth. Although
Schumpeter clearly ascribes such waves to technological revolutions while
Kondratiev does not commit himself to any particular causal factor, they areboth trying to explain long-term variations in GDP and other economic
aggregates. The author has suggested focusing instead on explaining theprocess of diffusion of each technological revolution and on its transformative effects on all aspects of the economy and society, including among
them the impact on rhythms of economic growth. This has resulted on different dating of the surges (as opposed to those of the traditional longwaves) and on identifying a different set of regularities in the patterns ofdiffusion which are the object of the discussion that follows.21

The structure of technological revolutions
The interconnection of the technologies of a revolution takes place at several levels.
a. They stem from the same areas of knowledge in science and technology and use similar engineering principles.
b . They require similar skills for design and operation –quite often newones.
c. They stimulate the upstream development of a common network ofsuppliers of inputs and services as well as interdependent distribution outlets.
d. Their dynamism is mutually driven through very strong interlinkages,
often being the main market for each other (the more growth andinnovation there is in computers, the more growth and innovation
there will be in semiconductors and vice versa).
e. Their diffusion generates coherent patterns of consumption and use

19 Perez (2002) pp. 20-21
20 Schumpeter (1939), Kondratiev (1935). For a selection of the main authors (both from evolutionary economics and from other schools of thought) see Freeman ed. (1996) and for the
more statistical treatment of the same Louca and Reijnders eds. (1999)
21 For a critique of the use of the term long waves in economic growth and an explanation of
the switch to using great surges of development see Perez (2002), Ch. 6. See also Perez(2007) pp. 783-6

10

so that the learning in one system facilitates the learning in the next
and the installation of conditions for the use of one set of products
becomes an externality for the next (once electricity comes to thehome for lighting and refrigeration, it facilitates the adoption ofradios and vacuum cleaners).

A technological revolution basically introduces whole new sections in the
input output table which gradually become the most dynamic (and end up
modifying the rest).
In terms of structure, each revolution includes a significant number of interrelated new products and production technologies, giving rise to important
new industries. Among them there tends to be a core all-pervasive low-cost
input, often a source of energy, sometimes a crucial material, plus one ormore new infrastructures. The latter usually change the frontier and conditions of transportation networks –for products, people, energy and information– extending their reach and increasing their speed and reliability
while drastically reducing their cost.
Table 2 indicates the main industries and infrastructures of each of the fivetechnological revolutions that took place since the “Industrial Revolution” atthe end of the 18th Century

11

Table 2. Five Technological Revolutions: Main industries and infrastructures
Technologicalrevolution

2. New technologies andnew or redefined industries

3. New orredefined infrastructures

FIRST:The 'Industrial
Revolution'

Mechanized cotton industry
Wrought iron
Machinery

Canals and waterways
Turnpike roads
Water power (highly improved water
wheels)SECOND:
Age of Steam andRailways

Steam engines and machinery(made in iron; fueled by coal)
Iron and coal mining (now playing
a central role in growth)*
Railway construction
Rolling stock production
Steam power for manyindustries(including textiles)

Railways (Use of steam engine)
Universal postal service
Telegraph (mainly nationally along
railway lines)
Great ports, great depots and worldwide sailing ships
City gas

THIRD:
Age of Steel,Electricity andHeavy Engineering

Cheap steel (especially Bessemer)
Full development of steam engine
for steel ships
Heavy chemistry and civil engineering
Electrical equipment industry
Copper and cables
Canned and bottled foodPaper and packaging

Worldwide shipping in rapid steel
steamships (use of Suez Canal)
Transcontinental railways (use ofcheap steel rails and bolts in standard sizes).
Great bridges and tunnels
Worldwide Telegraph
Telephone (mainly nationally)
Electrical networks (for illuminationand industrial use)

FOURTH:Age of Oil, theAutomobile andMass Production

Mass-produced automobiles
Cheap oil and oil fuels
Petrochemicals (synthetics)
Internal combustion engine for
automobiles, transport, tractors,
airplanes, war tanks and electricity
Home electrical appliances
Refrigerated and frozen foods

Networks of roads, highways, ports
and airports
Networks of oil ducts
Universal electricity (industry andhomes)
Worldwide analog telecommunications (telephone, telex and cablegram) wire and wireless

FIFTH:
Age of Information
and Telecommunications

The information revolution:
Cheap microelectronics.
Computers, software
Telecommunications
Control instruments
Computer-aided biotechnology andnew materials

World digital telecommunications(cable, fiber optics, radio and satellite)
Internet/ Electronic mail and othere-services
Multiple source, flexible use, electricity networks
High-speed multi-modal physicaltransport links (by land, air andwater)

Note:* These traditional industries acquire a new role and a new dynamism when serving as thematerial and the fuel of the world of railways and machinery
Source: Based on Perez (2002) p. 14

12

From the point of view of the role they play in driving change, the coreindustries of each revolution can be ranged into three main categories:22
1. The motive branches which produce the cheap inputs with pervasive
applicability: Semiconductors today, oil and plastics in the previous
surge, cheap steel in the third, coal in the second and water wheels
in the first.23
2. The carrier branches which are the most visible and active users of
the inputs and represent the paradigmatic products of the revolution,
carrying the “word” about the new opportunities: Computers, software and mobile phones today, automobiles and electrical appliancesin the fourth, steel steam ships in the third, iron steam engines in thesecond and textile machinery in the first.
3. The infrastructures which are part of the revolution in terms of technology and whose impact is felt in shaping and extending the market boundaries for all industries: Internet today, roads and electricity in the fourth, the world transport network in the third (transcontinental railways and steamship routes and ports), national railways
in the second and canals in the first.

A fourth category of induced branches may be added to encompass a setof industries that are not necessarily revolutionary in technological terms
but that may be seen as indispensable to facilitate the maximum diffusionof the core industries. They may have existed before but they are modernised and take on a different role. Such was the case of the constructionindustry that made suburbanization possible during the mass production
surge. The multiplication of housing at the edges of cities constantly
expanded the market for automobiles and electrical appliances and created
a whole technology system of standardised building materials and several
other suppliers of goods and services for suburban construction and living.
In the current world of globalised trade and internet shopping, a similar roleis being played by the courier services –and all the other systems of transport of goods– that have experienced explosive growth and profound transformations to facilitate complex global and local logistics.

The emergence of a techno-economic paradigm
No matter how important and dynamic a set of new technologies may be,
it only merits the term revolution if it has the power to bring about a transformation across the board. It is the techno-economic paradigm (TEP),

22 Perez (1983 and 1984)
23 For a discussion of the role of water wheels in the industrial revolution, see Tylecote (1992)

13

evolving as the new technologies diffuse, that multiplies their impact acrossthe economy and eventually also modifies the socio-institutional structures.
Such a meta-paradigm24 is the set of the most successful and profitable
practices in terms of choice of inputs, methods and technologies and interms of organisational structures, business models and strategies. Thosemutually compatible principles and criteria develop in the process of using
the new technologies, overcoming obstacles and finding more adequate
procedures, routines and structures. The emerging heuristic routines andapproaches are gradually internalized by engineers and managers, investors
and bankers, sales and advertising people, entrepreneurs and consumers. In
time, a shared logic is established; a new “common sense” is accepted forinvestment decisions as well as for consumer choice. The old ideas areunlearned and the new ones become “normal”.
The extraordinarily efficient pyramidal structures with clearly defined roles
and tasks that handled growth and innovation in the mass production paradigm of the 1950s are seen as bureaucratic dinosaurs next to the dynamic global networks digitally interconnected with multi-skilled personnel andhigh levels of autonomy of the flexible production paradigm of the current
Information Technology revolution. The marvel of the cabled telephone fortalking at a distance becomes a museum piece when consumers can normally expect wireless multipurpose devices for all communication, information and entertainment needs.
The construction of a techno-economic paradigm occurs simultaneously inthree main areas of practice and perception:
1. In the dynamics of the relative cost structure of inputs to production
where new low- and decreasing-cost elements appear and become
the most attractive choice for profitable innovation and investment
2. In the perceived spaces for innovation, where the entrepreneurial
opportunities are increasingly mapped for the further development of
the new technologies or for using them advantageously in the existing sectors, and3. In the organisational criteria and principles, where practice keeps
showing the superior performance of particular methods and structures when it comes to taking advantage of the power of the newtechnologies for maximum efficiency and profits.

24 To avoid unpleasant repetitiveness, TEP and meta-paradigm will be used as synonyms oftechno-economic paradigm.

14

On all three areas, the emergence of the paradigm is a function of therhythm of diffusion of the revolutionary products, technologies and infrastructures. At first the impact is localized and minor, with time it is widespread and all-encompassing. The changes occur in the economy and in the
territory, in behaviours and in ideas. The paradigm and its new common
sense criteria become ingrained and act as inductors and filters for the pursuit of technical, organisational and strategic innovations as well as for business and consumer decisions. The process is self-reinforced as the further
propagation and adoption of the new technologies confirm in practice thewisdom of the shared principles
The changes in the cost structure

The new dynamics introduced in the relative cost structure is an importantdriver of the emergence of the new techno-economic paradigm (TEP). In
fact, a crucial element in the articulation of a revolutionary constellation isthe appearance of a key input25 that is (i) obviously cheap and getting
cheaper, (ii) inexhaustible in the foreseeable future, (iii) all-pervasive in its
applications and (iv) capable of increasing the power and decreasing thecost of capital and labour.26
Such was cheap water power for the mills and canals in the first revolution;
cheap coal for the steam powered railways and mills of the second; cheap
steel for the worldwide steamships, railways, the giant bridges and structures and the major chemical and electrical equipment of the third; cheap
oil for the internal combustion engines of automobiles, trucks, airplanes andships as well as for the production of electricity and, finally, cheap microprocessors for the computers and telecom equipment of the current fifth.
The general price profile is also radically modified by the growing costadvantage of the new infrastructure. This happens in two main ways:
directly through decreasing prices (as operational volume decreases the unit
cost of transport) and indirectly through increasing the market reach ofusers and therefore allowing greater economies of scale in production anddistribution. So the preferred direction of innovation is already suggested by
the relative cost profile of inputs and transport, which become a part of themeta-paradigm.
Wedgwood pottery could not go far without breaking on the backs of mules
along uneven turnpike roads; it could reach the world going from river tocanal and from canal to river and on to the wide seas.
25 Originally termed “key factor” in Perez (1983, 1984 and 1985)
26 Perez (1984)

15

The perception of opportunity spaces

The second way in which the meta-paradigm signals the best direction forinvestment and innovation is by the perception of the profitable opportunity spaces. These are ever more clearly defined as the new technologies
propagate and multiply. Such spaces are of two main types: those of the
producers of the new technologies and those of the users.
At the core of the revolution are the basic scientific and engineering principles that opened the whole new universe of possibilities. The dynamism ofinnovation in those opportunity spaces is internally driven and the contributing industries are mutually-reinforced. However, their evolution is constantly creating new spaces for innovation in the rest of the economy due
to the generic technologies of ample applicability that each revolution provides. The new infrastructures are the most obvious all-pervasive generictechnologies; the others are the new sorts of materials and equipment thatpenetrate the operational context of every other industry.
In terms of infrastructures, the current role of Internet in the major reshaping of structures and behaviours in finance and trade needs no reminder. In
the fourth surge, the networks of roads and electricity to the home madewidespread suburban living possible.
Equipment such as the steam engine, in the second, liberated industry fromthe need to be near a source of water power. The individual electric motor,
in the third, allowed industry to do away with the forest of belts and thesimultaneous operation of all machines; it also allowed small scale poweredindustry.
In materials, the molecular “lego” trajectory of innovation in the petrochemical technology system opened a wider and wider range of application
opportunities across the economy, from successive plastics for packaging
or structures, through textile fibres and fertilizers to detergents and pharmaceuticals during the fourth surge.
New organisational models

Finally, the meta-paradigm incorporates the criteria for best organisational
practice. As the new technologies transform work and consumption patterns, they also transform the way work and businesses are organised.
Regular practice in the use of these technologies and in relating to the newconditions in the market contributes to the establishment of new principles
of organisation that prove superior to the previous and become part of the
new common sense for efficiency and effectiveness.

16

The penny post, telegraph and national railways in the second surgechanged, for instance, the structure of the banking industry from isolated
local institutions to national networks of local branches. The railways themselves became very large business structures requiring what were then themost advanced organisational and logistics innovations for the managementof complex systems.
Following Ford’s example, the assembly line with Taylorist principles generalised in the fourth surge and deeply transformed the organization of fabricated products. The clear separation between blue and white collar workers, between the thinking and the executing, had consequences that went
far beyond the factory. And so did the much greater productivity achieved
with that organization. Ford’s reduction of the work force and more thandoubling the average wage together with his claim that cars would becheap enough for his workers to buy were a foretaste of the social transformation to come.
In each case, the change in organisational and business logic becomes wide
ranging and modifies business models and strategies so that the ones thatare more compatible with the general logic of the paradigm prove to be
more successful, become highly visible and are increasingly imitated. Thus
the TEP is further enriched and the process is self-reinforced.
Table 3 gives a few of the most salient and general innovation principles
that have characterized each of the successive techno-economic paradigms.27

27 By the fourth surge, the transmission of the full model with all its principles and practices

had become the professional activity of hundreds of consultants in Scientific Management(Taylorism). In the current surge it has blossomed into a full-fledged economic sector and has
been transforming deeply the contents of the MBA courses developed under the previous paradigm.

17

Table 3. The five great surges of development and their techno-economic paradigms
Great surg e of development
Core country

Techno-econ omic parad igm‘Common -sense’ innovation principles

F IRST : From 1771
T he ‘Industrial Revolution ’
Britain

Factory production
Mechanization
Productiv ity/ time keeping and time saving
Fluidity of mov ement (as ideal for machines with water -power andfor transport through canals and other waterway s)
Local networks

SECOND: F rom 1829
Age of Steam and Railways
In Britain and spreading toContinent and USA

Economies of agglomeration/ Indus trial cities/ National markets
Power centres with national networks
Scale as progressStandard parts/ mac hine -made machines
Energy where needed (steam)Interdependent mov ement (of mac hines and of means of transport)

T HIRD: From 1875
Age of Steel, Electricity andHeavy Engineering
USA and Germany overtaking
Britain

Giant structures (steel)
Economies of s cale of plant/ vertical integration
Distributed power for industry (elec tricity )Science as a productive force
Worldwide networks and empires (including cartels)
Univers al standardisation
Cost ac counting for control and effic iency
Great sc ale for world mark et power/ ‘ small’ is suc cess ful, if local

F OURTH: F rom 1908
Age of Oil, the Automobile andMass Production
In USA and spreading to Europe

Mass production/mass markets
Economies of s cale (product and market v olume)/ horizontal
integration
Standardisation of products
Energy intensity (oil based)
Synthetic materials
Functional specialisation/ hierarchical pyramids
Centralisation/ metropolitan centres –suburbanisation
National powers, world agreements and confrontations

F IFT H: From 1971
Age of Information andT elecommunications
In USA, spreading to Europe andAsia

Information -intensity (microelec tronic s -based ICT)
Decentralised integration/ network structures
Knowledge as capital / intangible value added
Heterogeneity , diversity , adaptability
Segmentation of markets/ proliferation of niches
Economies of s cope and s pecialisation combined with scale
Globalisation/ interaction between the global and the local
Inward and outward c ooperation/ clusters
Ins tant contact and ac tion / instant global communic ations

Source: Based on Perez (2002) p. 18

A techno-economic paradigm is then the result of a complex collective
learning process articulated in a dynamic mental model of the best economic, technological and organisational practice for the period in which a
specific technological revolution is being adopted and assimilated by the
economic and social system. Each TEP combines shared perceptions,shared practices and shared directions of change. Its adoption facilitates theachievement of the maximum efficiency and profitability and its diffusion
provides a common understanding among the different agents that participate in the economy, from producers to consumers.

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Diffusion, resistance and assimilation of successive
techno-economic paradigms
It is to be noted that some of the principles indicated in table 3 extend
beyond the economy into the social and institutional. Suburbanisation –listed in the fourth– and globalisation –in the fifth– are two such instances.
In fact, the common sense principles of organisation for maximum efficiency and effectiveness embodied in the techno-economic paradigm gradually
spread out of the business world and into government and other non profit
institutions. The operations manuals and hierarchical structures of government ministries in the 1960s were fundamentally similar to those of a big
mass production corporation. Yet, at present, these two sorts of institutions
are very different. The changes that have been occurring in company structures and organisations since the irruption of the information revolution in
the 1970s have radically changed them into what are now the flexible networked (increasingly global) corporations. But the processes of incorporating those more effective patterns into public institutions have been slow andare far from fully developed. This is not surprising. Organisational inertia isa well known phenomenon of human and social resistance to change. In themarket economy, however, inertia is overcome by competition, which byshowing the direction of success serves as a guide to best practice and as
a survival threat to the laggards. That type of pressure and directionality is
not present in most public institutions. Historically, then, these have lagged
considerably (typically as much as twenty to thirty years) and have only imitated the paradigmatic principles developed in firms when forced to respondto political pressures for effectiveness.
Even in the economy, under the pressure of competition, the profound andwide-ranging changes made possible by each technological revolution andits techno-economic paradigm are not easily assimilated; they give rise tointense resistance and require bringing forth even stronger change-inducing
mechanisms.
Eventually, the new TEP becomes the shared, established and unquestioned‘common sense’ both in the economy and in the socio-institutional framework creating a clearly biased context in favour of the trajectories of thetechnologies of the revolution and their use across the economy. This adaptation generates externalities that operate as an inclusion-exclusion mechanism to encourage compatible innovations and discourage incompatible
ones. This is an important part of the explanation of why change occurs by
revolutions. Thus, techno-economic paradigms act as context shapers infavour of one revolution and –through over-adaptation– as hindrance andobstacle for the next.

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Hence, each great surge of development involves a turbulent process of diffusion and assimilation. The major incumbent industries are replaced asengines of growth by new emerging ones; the established technologies andthe prevailing paradigm are made obsolete and transformed by the newones; many of the working and management skills that had been successful in the past become outdated and inefficient demanding unlearning, learning and relearning processes. Such changes in the economy are very disturbing of the social status-quo and have each time accompanied the explosive growth of new wealth with strong polarising trends in the income distribution. These and other imbalances and tensions, including a major financial bubble and its collapse, result from the technological upheaval and end
up creating conditions that require an equally deep transformation of thewhole institutional framework. It is only when this is achieved and theenabling context is in place that the full wealth creating potential of eachrevolution can be deployed.28

Putting it together: Regularities, continuities and discontinuities intechnical change
Within the neo-Schumpeterian lines of inquiry, innovation occupies animportant space, including its dynamics, its clustering and interrelations.
Studies of innovation have shown that the introduction of technical change
is not random but path dependent and interdependent with other innovations clustered in systems, which are in turn interconnected in revolutions.
Although innovation is constant in the market economy, it is not always
continuous. There are changes in rhythm that tend to follow a logistic curveand are influenced by the cycle of the technology system in which they areembedded. There are discontinuities often stimulated by the exhaustion of
possibilities along a particular trajectory, where productivity and markets
are approaching exhaustion.
The technology systems, grouped in a technological revolution, overlap andgenerate externalities and markets for each other, thus influencing thedirection of further innovation.
Technological revolutions are clusters of interrelated technology systems
that only merit the term ‘revolution’ because they extend far beyond theboundaries of the new industries they introduce. Such surges of change
eventually transform the rest of the economy, elevate the expected level of
28 See Perez (2002) for an extended discussion of the processes of diffusion and assimilationof technological revolutions and TEPs as well as for the crucial role of the two complementary
agents of innovation and growth -financial and production capital.

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productivity across the board, rejuvenate mature industries and open new
innovation trajectories, not only within the new technologies, but also
through their application to rejuvenate all the other industries and activities.
The vehicle of this wide-ranging transformation is the techno-economic paradigm, which is a best practice model gradually emerging from practice inorder to make optimal use of the new innovative potential offered by eachrevolution. Each techno-economic paradigm serves as an envelope encompassing and shaping the trajectories of individual technologies. Its influenceextends from the business sphere to institutions and society so that as the
adoption of the new TEP advances along the diffusion curve of each technological revolution (or along each great surge of development), it gradually becomes the shared common sense for decision making in management,
engineering, finance and trade. This new logic and its capacity to increase
effectiveness and efficiency eventually also shape institutional and socialorganisations, expectations and behaviour.
This mutual adaptation of technology and society through the meta-paradigm enables reaping the maximum benefit from the wealth creating potential brought by each great surge. But, when this potential is exhausted anda new revolution begins to take shape, it acts as a powerful inertial force.
This understanding of the influence of technical change on long term economic growth is one of the key contributions of evolutionary economics tothe understanding of macroeconomics as dynamic and historically shaped.
It is no longer possible to ignore the technological revolution being diffusedand its stage of deployment.
The level of abstraction at which growth processes are studied need not–and indeed should not– ignore the nature of the specific technologies
being propagated. Neither suburbanization nor globalization would havebeen possible without mass production and the switch to the automobile asmeans of transport in the former or without transoceanic fibre optics, satellites and internet in the latter.
The concepts of long run equilibrium and continuous progress are profoundly questioned in favour of more complex processes of overcoming disequilibria originated in massive innovation, in internal differentiation within
and between sectors, of creative destruction, assimilation, learning andunlearning successive technological spaces and best practice models and ofreaching and overcoming maturity through successive surges of change.
The changing rhythms of growth and the processes of structural change
and productivity increase in the economy can now be understood as driven by technical change and as shaped by the diffusion of successive technological revolutions.
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Taken together, the micro, meso and macro view of how technologies
evolve shows that it is possible to recognize the nature of technology, its
forms of evolution and its interrelations as an object for social science
analysis and as a way of embedding economic theory in the dynamics of
its interaction with technology and institutions in a changing historical context.
Ignoring the potent role and influence of technical and institutional change
in shaping the economy reduces the analytic capacity of economics.
Incorporating them in a historically dynamic approach is an important task
in order to enhance the explanatory and predictive power of economic science. Evolutionary economists and neo-Schumpeterians have pioneered in
exploring and mapping that new territory.

References
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et al. (eds.), pp. 590–607
Arocena, Rodrigo and Judith Sutz (2000) “Looking at national systems ofinnovation from the South”, Industry and Innovation, Vol. 7, No. 1,
pp. 55-75
De Long, J. Bradford (2007) ‘Creative Destruction’s Reconstruction:
Joseph Schumpeter Revisited’, The Chronicle of Higher Education,
December 7
Dosi, Giovanni (1982), ‘Technical Paradigms and TechnologicalTrajectories: A Suggested Interpretation of the Determinants ofTechnical Change’, Research Policy, Vol. 2, No. 3, pp. 147–62
Dosi, Giovanni, Christopher Freeman, Richard Nelson, Gerald Silverberg
and Luc Soete (eds.) (1988) Technical Change and Economic
Theory, London and New York: Columbia University Press andPinterEnos, J.L. (1962) “Invention and innovation in the petroleum refining industry” in NBER The Rate and Direction of Inventive Activity, Princeton:
Princeton University Press
Freeman, Christopher (1974), The Economics of Industrial Innovation,
Harmondsworth, Middlesex: Penguin Books- (1987), Technology Policy and Economic Performance: Lessons
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Grübler, Arnulf (1990) The Rise and Fall of Infrastructures, Heidelberg and
new York: Physica-Verlag
Kondratiev, Nikolai D. (1935) ‘The Long Waves in Economic Life’, Review
of Economic Statistics, No. 17, pp. 105-15
Kuhn, Thomas (1962:1970), The Structure of Scientific Revolutions, (2ndedition, enlarged), Chicago: University of Chicago Press
Louca, Francisco and Jan Reijnders (eds.) (1999) The Foundations of Long
Wave Theory: Models and methodology, ILCWE No. 104,
Cheltenham: Elgar.
Lundvall, Bengt Ake (1988), “Innovation as an interactive process: fromuser-producer interaction to the national system of innovation”, Ch.
17 in Dosi et al. (eds.)
Nelson Richard and Sydney Winter (1977) ‘In search of a useful theory ofinnovation’ in Research Policy,
Malerba, Franco (2002) “Sectoral systems of innovation and production”,
Research Policy, Vol 31, No. 2, pp. 247-64
List, Frederick (1841), The National System of Political Economy, English
edition 1904, London: Longman
Metcalfe, Stanley J. (2001) ‘Restless capitalism: increasing returns andgrowth in enterprise economies,’ in Industrial Structure andInnovation Dynamics, Edward Elgar
Perez, Carlota (1983), ‘Structural Change and the Assimilation of New
Technologies in the Economic and Social Systems’, Futures, Vol.
15, No. 5, pp. 357–75- (1984), “”Las Nuevas Tecnologías: Una Visión de Conjunto”(1986), in C. Ominami ed., La Tercera Revolución Industrial:
Impactos Internacionales del Actual Viraje Tecnológico, Grupo
Editor Latinoamericano, Buenos Aires, 1986, pp. 44-89. English version: The New Technologies: An Integrated View, The Other Canon and
Tallinn University of Technology Working Papers in Technology
Governance and Economic Dynamics, 19.
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Development, Vol. 13, Nº 3, pp. 441-463- (2002) Technological Revolutions and Financial Capital: theDynamics of Bubbles and Golden Ages, Cheltenham: Elgar- (2007) “Finance and technical change: a long-term view” inHanusch, Horst and Andreas Pyka (eds.) Elgar companion to NeoSchumpeterian Economics, Cheltenham: Elgar, Ch. 49, pp. 775-99
Tylecote, Andrew (1992) The Long Wave in the World Economy,
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Utterback, James M. and William J Abernathy. (1975), ‘A Dynamic Modelof Process and Product Innovation,’ Omega, Vol. 3, No. 6, pp. 63956
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Reinert, Erik (2007) How Rich Countries Got Rich… and Why Poor
Countries Stay Poor, New York: Carroll and Graf
Schumpeter, Joseph A. (1911:1961) The theory of Economic
Development, New York: Oxford University Press (1939:1982),
Business Cycles, 2 vols., Philadelphia: Porcupine Press
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Scorrigio
Wolf, J. (1912), Die Volkswirtschaft der Gegenwart und Zukunft, Leipzig:
A. Deichert

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Working Papers in Technology Governance and Economic Dynamics
The Other Canon Foundation, Norway, and the Technology Governanceprogram at Tallinn University of Technology (TUT), Estonia, have launched
a new working papers series, entitled “Working Papers in Technology
Governance and Economic Dynamics”. In the context denoted by the title
series, it will publish original research papers, both practical and theoretical,
both narrative and analytical, in the area denoted by such concepts as
uneven economic growth, techno-economic paradigms, the history and theory of economic policy, innovation strategies, and the public managementof innovation, but also generally in the wider fields of industrial policy,
development, technology, institutions, finance, public policy, and economic and financial history and theory.
The idea is to offer a venue for quickly presenting interesting papers –scholarly articles, especially as preprints, lectures, essays in a form that
may be developed further later on – in a high-quality, nicely formatted version, free of charge: all working papers are downloadable for free fromhttp://hum.ttu.ee/tg as soon as they appear, and you may also order a freesubscription by e-mail attachment directly from the same website.
The first nine working papers are already available from the website.
They are
1. Erik S. Reinert, Evolutionary Economics, Classical Development
Economics, and the History of Economic Policy: A Plea for
Theorizing by Inclusion.
2. Richard R. Nelson, Economic Development from the Perspectiveof Evolutionary Economic Theory.
3. Erik S. Reinert, Development and Social Goals: Balancing Aid andDevelopment to Prevent ‘Welfare Colonialism’.
4. Jan Kregel and Leonardo Burlamaqui, Finance, Competition,
Instability, and Development Microfoundations and Financial
Scaffolding of the Economy.
5. Erik S. Reinert, European Integration, Innovations and Uneven
Economic Growth: Challenges and Problems of EU 2005.
6. Leonardo Burlamaqui, How Should Competition Policies andIntellectual Property Issues Interact in a Globalised World?
A Schumpeterian Perspective
7. Paolo Crestanello and Giuseppe Tattara, Connections andCompetences in the Governance of the Value Chain. How
Industrial Countries Keep their Competitive Power25

8. Sophus A. Reinert, Darwin and the Body Politic: Schäffle, Veblen,
and the Shift of Biological Metaphor in Economics
9. Antonio Serra, Breve Trattato / A Short Treatise (1613) (available
only in hardcopy and by request).
10. Joseph L. Love, The Latin American Contribution to CenterPeriphery Perspectives: History and Prospect
11. Ronald Dore, Shareholder capitalism comes to Japan
12. Per Högselius, Learning to Destroy. Case studies of creative
destruction management in the new Europe
13. Gabriel Yoguel, Analía Erbes, Verónica Robert, and José Borello,
Diffusion and appropriation of knowledge in different organizational structures
14. Erik S. Reinert and Rainer Kattel, European Eastern Enlargement
as Europe’s Attempted Economic Suicide?
15. Carlota Perez, Great Surges of development and alternative formsof globalization
16. Erik S. Reinert, Iulie Aslaksen, Inger Marie G. Eira, Svein
Mathiesen, Hugo Reinert & Ellen Inga Turi, Adapting to Climate
Change in Reindeer Herding: The Nation-State as Problem andSolution
17. Lawrence King, Patrick Hamm, The Governance Grenade: Mass
Privatization, State Capacity and Economic Development in
Postcommunist and Reforming Communist Societies
18. Reinert, Erik S., Yves Ekoué Amaïzo and Rainer Kattel. The
Economics of Failed, Failing and Fragile States: Productive
Structure as the Missing Link
19. Carlota Perez. The New Technologies: An Integrated View
20. Carlota Perez, Technological revolutions and techno-economic
paradigms

The working paper series is edited by Rainer Kattel (kattel@staff.ttu.ee),
Wolfgang Drechsler (drechsler@staff.ttu.ee), and Erik S. Reinert (reinert@staff.ttu.ee),
who all of them will be happy to receive submissions, suggestions or referrals.

26