Tim Cavanaugh at Reason, observes that the peak of the dot-dom bubble was reached ten years ago today. The dot-com bubble and other technology bubbles are often held out as examples of the irrational nature of market economies by those who think they could do a better job of running the planetary economy than the rest of us can.
This is myth. Booms and busts represent two equal and necessary phases of technological development. A bust looks ugly but so does the birth of child. The busts are every bit as necessary as the booms and every bit as good for the general society and economy.
I am a student of technological history and the dot-com boom/bust followed a pattern that has reoccurred since at the least the beginning of the Industrial Revolution.
(1) When a new technology reaches a certain level of development, it becomes universally recognized as a game changer (e.g., trains circa 1850, cars circa 1920, aircraft circa 1930, plastics circa 1955, computers circa 1985, the Internet circa 1998).
(2) A boom happens as venture capitalists and established businesses pile into the new technology like the Three Stooges trying to get through a door at the same time. In the great aircraft boom of the late-1920s to 1939, everyone from shipwrights to car makers to furniture makers tried their hands at building aircraft. Ford was the largest single producer of aircraft in America till the end of WWII.
(3) This period results in an explosion of diverse variations on the central technology. The majority of them are in hindsight just plain silly. Look at a Byte Magazine circa 1984 and just see how many hundreds of computer hardware platforms there were. Now we have two with a few variations.
(4) After the boom there comes a bust. The bust is caused by the results of market selection winnowing down all the variations to a handful of optimal forms. Most of the companies in the market go out of business or are absorbed by larger and more successful companies.
(5) We all get treated to endless moralizing by everyone from ministers to economists about how the bust demonstrates human folly and how we all need either God or the government to save us from ourselves.
(6) While the moralizing goes on, the supposedly busted technology sector becomes a dominant economic player of such magnitude that no one can image the world without it.
(7) Some new tech comes along and the cycle repeats itself. Right now, I would say we’re just at the Three Stooges-versus-the-door stage of the mobile computing device boom.
Far from being a moralistic tale of human greed and economic hubris, the boom and bust of new technologies is part of creative evolution. As much as it pains our egos to admit it, the only way that we even know is something will work or not is to try it and see. Technology booms are the economic version of the scientific method. We should no more sneer at failed investors, businessmen and inventors than we sneer at scientists who test and destroy their own hypotheses.
Most dot-coms failed because they were experimental and most experiments will fail. If they didn’t, we wouldn’t call them experiments, we would call them, let’s-do-that-thing-we-already-knows-works-iments.
We should venerate all those idiots at Pets.com, Flooze.com, Koop.com et al as the sacred fools of an empirical market economy. Thanks to them, we know what does and does not work.
No boom, no bust, no progress.