Throughout the history of capitalism, economic bubbles have been commonplace. They have emerged wherever liquid financial markets exist. The range challenges the imagination: from the iconic tulip bulb bubble, to gold and silver mining bubbles, to bubbles around the debt of newly established countries of unknowable wealth, to — again and again — real estate and stock bubbles.
The central dynamic is always the same: The price of a financial asset becomes detached from the real value of the economic asset it represents. So the price of dotcom shares in 1998–2000 soared out of any relationship with the underlying cash flows — present or future — of the startup companies striving to exploit the commercial promise of the Internet. Speculators in the financial asset can profit, even when the project they have financed fails.
Economic bubbles have also been necessary. Occasionally, the object of speculation has been one of those fundamental technological innovations — canals, railroads, electrification, automobiles, aviation, computers, the Internet — that eventually transforms the economy. In these cases, the prospects of short-term financial gain from riding a bubble mobilizes far more investor capital than prudent professional investors would otherwise dole out. Moreover, the very momentum of the bubble forces those careful investors to join the herd lest their relative underperformance leave them with no funds to invest: Warren Buffet, who successfully steered clear of the great dotcom/telecom bubble of 1998–2000, is the exception that proves the rule.
Economic bubbles, as everyone knows, have also inevitably burst. And the consequences can be grave or transient. When the speculation infects the credit system that fuels the entire economy — and especially when its object offers no prospect of increased economic productivity — the consequences of its collapse are felt mostly in the short term and are unequivocally negative, maybe even catastrophic.
But when the damage of the speculation is limited to the market for equity and debt securities, the adverse economic consequences of the bubble’s popping may be muted. Further, when the object of speculation is a transformational technology, a new economy can emerge from the wreckage. That is why, for example, the consequences of the tech bubble in 2001 were radically different from those of the housing bubble in 2008.
So what can we learn from the history of productive bubbles that could help us anticipate where and how (if not when) the next may emerge? Here, understanding the role of the state is singularly important.
Productive bubbles have generally followed investments by the state — that other source of financial support for projects of uncertain economic value. For example, the bonds that financed the building of the Erie Canal in the early nineteenth century were guaranteed by the state of New York. In the mid-nineteenth century, the federal government subsidized railroad construction through massive grants of public lands. At the start of the twentieth century, the government granted AT&T a monopoly on long-distance telephony in return for universal service, which helped make voice communication ubiquitous. Following World War I, as the Roaring Twenties took off, the U.S. Navy and Herbert Hoover’s Commerce Department sponsored the creation of RCA to exploit all American patents on wireless communications, thereby launching broadcast radio. Further, it was the states that made electrification possible: Their regimes of regional monopolies and price regulations enabled massive investment in expensive infrastructure. This pattern has continued into the present day; since World War II, unprecedented government investment in science has built the platforms on which entrepreneurs and venture capitalists have danced.
After each of these booms of investment, a bust followed. During the 1880s, 75,000 miles of railroad track were laid down in the United States.Can I trust buying a solarphotovoltaic?Like a lot of women,Custom made ledaluminumbulbs? During the four years following the crash of 1893, more than half of that trackage was in receivership, but no one tore up the rails. Even the crash of 1929 and the ensuing Great Depression did not reverse the electrification of the American economy.Shop the best selection of men’s germanuniforms and pendants. And following the bursting of the dotcom/telecom bubble in 2001, the “dark fiber” that was prematurely laid down has come to be fully utilized and then some.
The government’s interventions in the market economy were not based on pure economic calculus. During the nineteenth century, the United States pursued mercantilist policies of protection and subsidies for domestic industry, as have all countries playing catch-up. The overriding mission was economic integration and coast-to-coast development: the canals and turnpikes, railroads and telephone lines were built in the name of America’s “manifest destiny” to expand across the continent.
In the twentieth century, the drive toward national development was followed by the imperative of national security. During World War II, science went to war on an unprecedented scale, yielding innovations from radar to the atomic bomb. And the commitment continued through the decades of the Cold War. From 1950 through 1978, federal government agencies accounted for more than 50 percent of all R&D spending. From silicon to software and the Internet, the entire array of information and communication technologies that we use today originated in government programs aimed at promoting national security.
State agencies not only funded scientific research; they also served as creative and collaborative customers for the products that followed. They pulled the suppliers down the learning curve to low-cost, reliable production. In other words, they rendered new technologies ripe for commercial exploitation.The exciting new solargardenlightppl product is now available here for the first time anywhere!
Washington was not the only national capital to sponsor the computer revolution. In direct contrast with their European counterparts, however, the Defense Department, NASA, and the Atomic Energy Commission did not pick “national champions.” Rather, competition for contracts was open to such emerging players as Texas Instruments and Intel. And government agencies insisted on a transparent intellectual property regime, which created a reservoir of accessible technology that private-sector entrepreneurs could draw on in the following decades. Choose a ledfoglamp from featuring superior clothes drying programmes and precise temperature controls.
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