Jason Potts has written an interesting article on the benefits of bubbles. As he notes:-
“England was wracked with bubbles in the early 19th century (for example, canal bubbles in the 1810s, railway bubbles in the 1840s, holding-company bubbles in the 1860s, and many others between). But by the end of that century England was the fastest growing industrial economy in the world. The US had railway bubbles in the 1860s, technology bubbles in the 1890s and, by the 1920s, was the new fastest growing economy in the industrial world. Australia had property bubbles in the early 1980s, .nancial bubbles by the late 1980s, and a few years later entered a decade long period of structural transformation and growth that exceeded the OECD average during that same period. The dot.com bubble burst over five years ago, and maybe its real effects are only just being felt. We now know, for example, a lot more about the value of software and new business models and, moreover, about how the internet works as economic infrastructure. The surge of diversity and lessons learnt from what didn’t work, as much as from what did, has cleared up a lot of uncertainties that previously were obstacles to real long-term investment in information technology. “
And thus:-
“A bubble is good for growth because it creates a low cost environment for experimentation. The results of these experiments may continue to fuel the evolving economy for decades to come. Real bubbles cause long run growth in economic systems that can withstand them.” “
This probably doesn’t mean that government should start encouraging bubbles any time soon but rather that they should be wary about pricking them – as the Bank of Japan discovered in the 90’s. Still the article makes the point that a good theory about how “real” bubbles may benefit the real economy is long overdue.
Posted by wardx107 at October 9, 2004 06:36 PM