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The five centuries that span the years 1440 to 1939 were among the most dynamic in all of history. Many technological advances surfaced during that time, but three inventions stand above the rest as turning points in the direction of technology that led to decisive social change. The invention of the printing press by Johannes Gutenburg in 1440 spurred the arrival of the Information Revolution that spread the Renaissance throughout Europe. In 1609, Galileo Galilei’s telescope ushered in the Scientific Revolution and the Age of Reason. The Industrial Revolution and Marxism arrived shortly after James Watt unveiled his steam engine in 1769.

In 1939, a fourth technological revolution began. In that year, John Atanasoff invented the electronic digital computer and unwittingly with it the Second Information Revolution. A little more than a half century later, we find ourselves in a record setting stock market boom. What possible connection could there be between these seemingly unrelated events and what does history suggest to us may be lurking in our not too distant future?

By focusing in on a single technological revolution, the Industrial Revolution, a pattern of serial industry domination can be observed. As we shall see, the cotton spinning-frame, the steam locomotive, and the automobile each developed into dominating consumer industries that provided an abundance of jobs for workers and a bounty of products for consumers. An innovation that climbs to such heights is categorized as a growth innovation.

The growth innovation curve of Figure 1 shows a typical life cycle of a growth innovation. Following the introduction of an important invention it takes about 28 years for it to become commercially successful and achieve mass-market appeal. This process of adaptation takes the growth innovation to center stage in the economy and launches a period of rapid growth that will last approximately 55 to 56 years on average.

Figure 1. Growth Innovation Curve

By the end of this dynamic period, the growth innovation has produced a consumer industry with peripheral supporting sectors that clearly dominates the economy. When this dominant growth industry sneezes, the economy catches cold. For instance, in the 1960s when the automobile was at the zenith of its growth industry status, it was frequently said that "as General Motors goes, so goes the economy." Once an industry reaches dominant status, growth suddenly slows as market saturation approaches and consumers are anxious for a new growth innovation to appear. Approximately 112 years after its invention, the growth innovation reaches full penetration of the economy. From that point forward, industry growth can only come with increasing population. Let us examine how this actually unfolded in past cycles.

The cotton spinning-frame factory was invented in the town of Cromford, England. It was too large to be operated by hand and so its inventor, Richard Arkwright, had to find another method of driving his machine. After experimenting with horses, Arkwright settled on the power of the water wheel. In 1771 he housed dozens of his new water wheels in history ’ s first cotton-spinning mill and in doing so invented the factory system. Then in 1789 Edmund Cartwright harnessed the power of the steam engine to drive his power looms, but the factory he built was not commercially successful. It was not until 1800, the same year Watt ’ s patent expired, that someone successfully mated the steam engine with a textile spinning machine in England. Twenty-nine years after the first cotton spinning factory arrived on the scene the steam engine turned textiles into the Industrial Revolution ’ s first growth industry.

The textile industry powered Britain’s economy for a quarter of a century before the Stockton & Darlington railroad became the first common carrier to successfully experiment with steam locomotives. Steam powered passenger rail service was a reality in England by 1830. That same year in the United States, the Baltimore & Ohio Railroad began running passengers between Baltimore and Ellicott City, a fourteen mile stretch. In 1853, twenty-eight years after the passenger railroad was first invented, the B&O line completed its goal of linking Chicago and other points west with the east coast. Passenger railroad growth had overtaken textiles, now in their 82^nd year, to become the Industrial Revolution’s second growth industry.

The automobile gave rise to the third and final growth industry of this period. In 1886, Karl Benz was awarded credit for the first internal combustion powered four-wheel vehicle by the German patent office. For many years, however, the motorcar was a plaything of the rich. Then in 1913 Henry Ford introduced the assembly line to the auto industry which propelled it into the dominant consumer growth industry in the US while growth in the 83-year-old passenger rail industry slowed. The elapsed time from the invention of the automobile to Ford ’ s assembly line production method was twenty-seven years. By 1936, over 50 percent of families in the US owned cars. By its 83rd birthday celebration in 1969, the automobile was undeniably king of the economy.

The computer industry, the first growth industry of the Second Information Revolution, is following a similar pattern. John Atanasoff invented the first electronic digital computer in 1939. When Intel invented the microprocessor thirty years later, the computer quickly overtook the automobile as the leading growth product. By 1994 computers had been transformed from expensive technological marvels to affordable consumer commodities with half of all US households boasting at least one microcomputer. Using history as guide, we can expect computers to dominate the consumer market until about 2025. Figure 2 below visually summarizes the life cycles of the last four growth innovations.

Figure 2. Two Centuries of Growth Innovations

When the 1960s came to a close, automobiles had been dominant for more than half a century. During the 1970s, however, the motorcar’s exalted status came under attack. Computer sales rocketed as the microprocessor brought prices easily within the eager grasp of businesses. While David battled Goliath, limited resources strained the economy and drove up prices in the least price-elastic goods. The most indispensable of all was petroleum, the lifeblood of the auto industry. By mid decade, oil prices exploded and both the stock market and the economy headed for cover.

The slide in stocks that accompanied this inflation is apparent in the chart below, a presentation of annual averages of the S&P 500 index dating back to 1828. The index is adjusted for inflation using the Consumer Price Index and divided by the US population each year. The chart shows a similar inflation era peak 56 years earlier in 1909, when the automobile was wresting dominion from the passenger railroad. Fifty-six years before that, as the economy was shifting from textiles to railroads, stocks once again declined in response to an inflationary economy in 1853.

Figure 3.

Data Source: Standard & Poor’s Security Price Record; Historical Statistics of the United States, Colonial Times to 1970;
data prior to 1870 are estimates from "The Record 1789-1987" (Securities Research Company).

Midway between these inflation stock market peaks, and trailing by precisely 28 years, are three depression peaks. These all occur just as the respective growth industry is changing from a research and development orientation to a commodity business. Commodity products are easier to reproduce and lure in new manufacturers hoping to cash in on mushrooming sales. The rush for gold brings on rapidly dropping prices, thinning margins, and falling share prices. Since a commodity business requires fewer innovations, in each case inventive genius turns its attention to the next growth innovation.

The 1993 depression peak coincided with a worldwide oversupply of semiconductor chips that five years later still had Asian economies reeling. Breaking pattern with earlier cycles, however, the US stock market first dipped and then raced uncontrollably upward. Twice before we can find similar eruptions in the chart, tagged with the label "mania", that do not fall into the 28 year growth innovation pattern.

It is not obvious just what is behind these euphoric reactions, but this much is known. Each began with a wave of optimism and ended when "new era" thinking was sweeping through the investment community. They were all marked by speculation in promising "high-tech" industries (canals, railroads, and turnpikes in the 1830s, autos, steel, radio in the 1920s, semiconductors and the Internet in the 1990s) . Each was characterized by falling interest rates, low inflation, and the absence of military threat. And, finally, all three occurred while an influential generation was reaching middle age and society was rife with risky undertakings. This last point needs further explaining.

The authors William Strauss & Neil Howe in their book Generations were able to organize four centuries of US history into a succession of generational groups. Their claim is that each generation belongs to one of four types, and that these types recur in a fixed sequence. The lead generation in the Strauss & Howe cyclical model is called "idealist". Idealists are the cycle ’ s change agents who always see room for improvement in the world. As youngsters, they rebel against the sins of established institutions. In midlife, they gradually reshape institutions around their moral principles during a highly individualistic and risk-prone period.

Between 1724 and 1981, Strauss & Howe count twelve generations. On average, then, the "length" of a single generation group is about 21 years and a cycle of four generations typically spans 84 years. If we add together two generation cycles, we define a period lasting 168 years. That is about the same length of time it takes to complete a single technological revolution, leaving little doubt that the generation cycle is at its root.

Over time, technological achievement accounts for most if not all the advances in the human economic condition. Progress, though it seems, comes at the expense of stability. It has always been one step backward for every two forward, and we should expect nothing different in the future.

The Baby Boom generation is the current cycle ’ s idealists. They find themselves at the center of today ’ s technology bubble, which is already in its sixth year. The 1828 and 1921 manias lasted on average seven years before imploding into depressionary panics. Life delivers few guarantees, and those that it does are often unwelcome. As sure as death follows life bust will follow boom.

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