In praise of speculators and bubbles
Yesterday I had the pleasure of responding to a talk by Bill Janeway at the IPPR. Janeway, remarkably, has combined a career as a legendary venture capitalist with a sideline as an economist of innovation*.
He was giving the talk to promote his new(ish) book, Doing Capitalism in the Innovation Economy, which is self-recommending, as Tyler Cowen would say**.
Janeway's book argues that innovation depends on speculation. We can't expect real progress and investment in breakthrough technologies like railways, electricity or IT unless, in the immortal words of Seal, we get a little bit cra-a-a-azy. Canals, railways, power stations, semiconductors: all of them relied on speculative investors, and caused bubbles that burst and left many investors broke. But consumers and new businesses benefit, and technology marches on.
All this rings very true to me. A case in point: the technology I'd most like to be able to buy today is the Google Fiber service. If you haven't heard of it, it's broadband on speed - for a little less than £50 a month, you get 1Gbps connectivity to your home.
The catch is, you have to live in Kansas City, which would make for a tricky commute for me. If you want this service from BT, or a mainstream US carrier for that matter, you can buy a costly business connection, or you can go whistle***. They (legitimately) say there's no proven customer demand for the service, so it's not worth their while to lay the expensive fibre-optic cables to your door. So how can Google make this investment? Well, their $100bn cash pile helps. But it's not just that.
Google has for some time been buying up so called "dark fibre" - fibre optic cables that have been laid but not used. And this is where my own experience comes in. When I worked in Silicon Valley years ago, an office-mate had stock in a company called Level 3. Those with long memories may remember that it was one of the biggest investors in fibre optic networks, which it installed along railway lines. This was in 2000, when everyone knew that the future was online, and that connectivity was vital. Of course, the dot-com crash was followed by a telecoms crash and Level 3 went under, along with Worldcom and other hopefuls. But the glut of dark fibre remained, and on the back of it, Google eventually decided to build its own tentative fibre-to-the-home service.
So if bubbles are essential to innovation, how should we feel about the economic state the world is in today. After all, it's the result of the mother of all bubbles, an unholy mix of condos in Nevada and apartments in Spain and toxic securities in London and New York. Janeway observes that not all bubbles are equal. In fact, he warmed the cockles of my McKinsey-ite heart with a two-by-two matrix that explained his take on bubbles.
Photo by Jared Zammit through a Creative Commons license
Essentially, a bubble that involves people investing through shares and bonds (or VC...) into productive, innovative assets, is a thing of beauty. Individual investors may lose out in the short run, but in the long term, society will benefit. A bubble that involves the whole financial system staking itself on unproductive assets is another business entirely. It's a lesson we're all learning to our cost right now.
* Hyman Minsky, with whom he collaborated, called him a theorist-practitioner. Having seen one too many examples of governments adopting daft policies because they're promoted by people with \"practical experience\", it's a delight to see a contribution to the debate by someone who has both been-there-and-done that and who has thought about it deeply and rigorously.
** Speaking of Tyler Cowen, you should also read Janeway's superb demolition of the idea that we are in a period of technological stagnation, which has been argued recently by Tyler, Robert Gordon and Peter Thiel, and has won over the likes of Martin Wolf who really should know better. Janeway argues that Robert Gordon is jumping the gun in saying that the current ICT revolution won't deliver similar benefits to the industrial revolutions of the C18th and C19th. He gives a nice example. The IT revolution began about 45 years ago. If we count off 45 years since the US began building its first railway, we get to 1873. This was 20 years before Sears Roebuck was founded, revolutionising US retail and consumer goods manufacturing with the Sears Catalogue, an innovation as reliant on the railways (which allowed rapid shipping) as email is on the Internet. Who knows what revolutionary outcomes the IT revolution will have delivered by 2033?
***Although I have to add that if you happen to live in a couple of Lancashire villages, you can avail yourself of the awesome 1Gbps broadband network laid by the heroes of B4RN. We need more ventures like them!