How I learned to stop worrying and love the bubble

James Surowiecki has his own take on the United States' innovative power. In his column in the New Yorker he writes about the next investment bubble and why it is good for the US. Positive externalities again (of much heralded American risk-seeking behavior). Though the losers of the dotcom bust may not quite see it that way...

In the early sixties, investors stumbled on a neat trick: if a company had “tron” or “tronics” in its name, its stock was a hit. This was the dawn of the computer age, and a host of businesses straight out of “The Jetsons”—Astron, Transitron, Videotronics—became the darlings of Wall Street. The boom ended badly, as booms so often do. In 1962, the stock market plunged, and the trons and tronics were knocked flat, most of them for good. But investors have short memories. At the end of the decade, they fell for tech stocks again (the magic word this time around was “Silicon”). Later, it was P.C.s, then biotech, and, more recently, dot-coms. Infatuation and disillusionment: it’s the American way. Now investors have found a new crush: nanotechnology.

Even if nanotech does live up to its promise, though, almost all the nanotech companies that are now so hot on Wall Street, not to mention those still dreaming of blockbuster I.P.O.s, will be gone in a decade. That’s how new industries get built in America: a horde of companies rise up, the weak or misguided fall away, and a few good ones thrive. With a general-purpose technology like nanotech or the Internet, the process is even bloodier; because you can do so many things with the technology, you pursue a lot more fruitless notions and reckless schemes before you figure out what really works.

The price of innovation is that you spend money on bad ideas as well as on good ones. Some of the money comes from venture capitalists, who factor the inevitable mistakes into their investments. And some of it comes from government (Washington is spending $3.7 billion on nanotech research over the next four years). But a good chunk comes from all those money managers and retail investors who believe that they will be getting in on the next Xerox, the next Amgen, the next Microsoft. Most of them won’t, of course; in fact, most of them will end up losing money (which is why there’s already been a great deal of finger-wagging over investor interest in nanotech). The paradox is that their losses are often society’s gain. Thanks to investors’ willingness to take a flyer on things like nanotech, companies are able to do more research and development than is economically rational; they experiment with ideas and approaches that, under leaner conditions, would never be tried. It’s a messy process, but it’s the best one we’ve found for inspiring real innovation.

That doesn’t mean that all investor manias are healthy: no one benefitted when Wall Street thought bowling was going to take over America, for instance. But when it comes to transformative technologies, overoptimistic investors are actually working for the common good—even if they don’t know it. We can be glad that investors financed the construction of thousands of miles of track in the middle of the nineteenth century, despite the fact that most of them dropped a bundle doing it. The same goes for overoptimistic investors who poured money into semiconductors thirty years ago, financed undersea fibre-optic cables in the late nineties, and now are poised to lose their shirts in the coming nanobubble. In the dreams of avarice lie the hopes of progress.