The following is largely based on Carlota Perez theory of the Great Surges of development, exposed in Technological Revolutions and Financial Capital[1]. It evidences the connection between technological change and capital markets, and suggests paths to rejuvenate the productive economy.
Finance and technology
The need to boost the real economy through capital markets is admitted, but nobody seems to know how to do it. Central banks money is cheaper than ever for banks, but they curb lending to productive firms. Long term economic cycles help to understand this. Since capitalism became connected with technology during the first industrial revolution, rich countries’ economies have followed a three-fold cycle[2].
It all starts with a major innovation, like the Ford Model T (1908) and mass production techniques, the first public railway (1829), or the microprocessor (1971). First, few investors risk on uncertain yields. The famous banker JP Morgan did not believe in Ford and Steve Jobs struggled to fund his first computers, before increasing gains generate mass imitation. After a while, any investment in the innovation is a sure move towards profit: 1920’s investors’ most urgent desire was to invest in any mass production industry.
This works until production capacities cannot match the available money, for instance when ten factories are invested in, whereas the real demand is for one. Financial intermediaries start inventing derivatives to keep the yields going. The financial bubble finally crashes, like in 1929, 2000 and 2008, with two interlinked stages in the latter case. The same occurred after the British canal or railway “manias” (1790s and 1840s). Next comes an abrupt credit crunch: the mere idea of lending is seen through the last crash. Scarce investment generates recession, unemployment, poverty, inequalities… as before 1848 upheavals or the 1930s. More recently, it has produced political entrepreneurs who understood how populism and xenophobia could bring them to power.
More stable times may eventually occur. In industrialised countries, the post-war dynamism and low unemployment leaned on the generalisation of individual cars or home electrical appliances, from TVs to washing machines. It derived from the mass production model shaped 40 years before. This “deployment” stage, as Perez coined it, is embedded in a “techno-economic paradigm”: a whole set of products, social habits, infrastructures, suppliers, skills… A pervasive version of “installation”.
Overcoming the current crisis
The new emergency is the advent of a period that could lean on the information-based “installation”. What is our next bright techno-economic paradigm?
Green growth is very strong case for it[3]. Beyond possibly saving our existence on this planet, it can spur robust, durable, job rich, and (this time) clean growth. It will deal with renewable energies, circular and peer-to-peer economy, energy efficiency, frugal and healthy life-styles. For more information, see transparent solar windows, driverless and zero emission cars, drones transportation, self-alimented electrical goods… All are being backed up by information technologies: see the internet of things, dematerialization, nanotechnologies, smart cities, citizen data collection, green computing…
These technologies are within reach but only research and innovation will lead to their generalisation. Innovation adds value to goods and services and raises firms’ income. Green innovation can create millions of “green collar jobs”, stimulate synergies across economic sectors and self-aliment this virtuous circle.
In fact, the seeds for durable green growth are already in the air. We still lack 1) the means to scale-up green innovations, and 2) a clear direction designed to create synergies and self-enforce the trend.
The proposal: a green multilateral bank founded by the European states
A European Green Innovation Bank could channel capital markets into the productive economy through green innovation and technological change. In this state-owned multilateral bank, open also to non-European countries, the shareholders’ guarantee will lower borrowing rates on capital markets. Lending rates will consequently decrease for companies or long-term innovation projects that risk-averse banks neglect. It will identify the safest projects and offset riskier ones, thus guaranteeing sufficient yields to investors. It will build synergies between sectors and along value chains, making green investments safe and attractive.
EIB[4] green bonds provided 4.3 billion in 2014 and delivered 55 projects in 2007-2013, whilst the EBRD[5] also committed to climate finance. We need a clearer and bolder signal – a unique institution will provide the critical mass and consistency that green growth so requires.
It will include participative crowd-funding for any citizen willing to play a part – from modest incomes to billionaires. Meanwhile, accountability mechanisms will enhance the global democratic engagement toward green transition and the current rise of climate awareness. This will confer on the new Bank strong legitimacy, voice and ambition.
Making it happen
We need to step back and understand the world of today. We need political courage to shed short-term and domestic contingencies. This is a call to humility regarding an economic sequence that occurred five times already, and a call to confidence and boldness: societies succeeded four times before. The period has never been more favourable and (green) cooperation has gained momentum: think SDGs, COP21, OECD corporate tax initiative, the displayed political will of the European Commission…
There are two choices ahead: Europe can remain economically doomed and sink into extremism and political violence. It could also lead the next technological paradigm. Leaning on the major progress achieved by the ‘greenest’ members-states, it can invigorate the desire for European cooperation. 70 years ago, Europe had to go through World War II before quieter times returned. For now, we can still make it gently to safer days.
By Aurelien Leblay
[1] Perez, Carlota (2002) Technological Revolutions and Financial Capital: The Dynamics of bubbles and Golden Ages, Cheltenham, Elgar
[2] Shorter versions of this theory are available: https://www.youtube.com/watch?v=rhxMYhICKbw and http://www.cfap.jbs.cam.ac.uk/publications/downloads/wp14.pdf
[3] As suggested Mazzucato and Perez in 2014 (http://marianamazzucato.com/wp-content/uploads/2014/07/SPRU-WP-Mazzucato-Perez.pdf)
[4] European Investment Bank: http://www.eib.org/investor_relations/cab/index.htm?lang=en
[5] European Bank for Reconstruction and Development: http://www.ebrd.com/news/2015/ebrd-steps-up-green-financing-in-build-up-to-paris-climate-conference.html