Why Bubbles Aren’t All That Bad
Just hear me out…
Yesterday a friend of mine was on Dan Gray’s Odin Research podcast talking about how we may be in an AI bubble today, and that a space bubble is next.
This could be true. But the reality is that any new technology deployment cycle will always oscillate between the euphoria that drives massive amounts of capital behind it and the disappointment when it fails to achieve the massive expectations behind it.
The remedy, however, is not to ban bubbles. In fact, there’s good evidence that bubbles are a feature of the innovation economy. My friend Tobias Huber wrote an entire book on the idea, titled “Boom: Bubbles and the End of Stagnation.” Highly recommend a read!
To quote Tobias’ book preview:
“In a series of case studies tracking some of the most significant breakthroughs of the past 100 years—from the Manhattan Project and the Apollo program to fracking and Bitcoin—they reverse-engineer how transformative progress arises from small groups with a unified vision, vast funding, and surprisingly poor accountability. They conclude that financial bubbles, while often maligned as destructive and destabilizing forces, have in fact been the engine of past breakthroughs and will drive future advances.”
In other words: Bubbles aren’t all bad. :)
Another good quote from Boom: Bubbles and the End of Stagnation:
"The absence of techno-scientific progress, coupled with an abundance of capital enabled by experimental monetary policies and a general scarcity of vision, has fueled many of the bubbles we’ve witnessed in the past few decades. But, as we’ll show, these bubbles, which are largely driven by financialization, low yields, and the lack of productive investment opportunities, need to be distinguished from innovation-accelerating bubbles."
And another, from Technological Revolutions and Financial Capital, by Carlota Perez, on the "questionable innovations" which occur alongside technological revolutions::
"Table 13.1 proposes a typology of financial innovations, classifying them according to their main purposes and ranking them from the most useful for the 'real' economy to the least useful. The top ones provide the life-blood for entrepreneurship and production; the lowest ones take blood out of the economy through manipulating paper wealth."
The case to be made is not that bubbles are necessarily and strictly negative, because clearly they often help drive capital in the right direction, but that they may sometimes end up being a net-negative for the majority of investors due to opportunism and rent-seeking behavior.
So it's not necessarily a binary question of 'are bubbles good or bad', but rather 'should LPs in general be happy about an increasingly cyclical market?'.