In Praise of Bubbles
Financial bubbles get a bum rap. People focus on the sob stories (think of the grandmothers who invested in Pets.com) and the tales of financial chicanery (think WorldCom). But bubbles – those sudden, excessive, and seemingly irrational investment stampedes – aren’t all bad. Sure, they tend to follow a painful cycle of boom, bust, hand-wringing, and abject humiliation. But there’s often another step at the end: innovation. Over the past 150 years, many bursting bubbles have paved the way for economic and cultural progress.Consider the early dot-dash era. Between 1848 and 1852, the number of telegraph miles in the US jumped from 2,000 to 23,000. These efforts were largely the result of what historian Robert Luther Thompson has dubbed “methodless enthusiasm.” Few entrepreneurs proved more methodless than Henry O’Rielly, who in 1845 strung a line across the sparsely populated Pennsylvania Alleghenies and dubbed it the Atlantic & Ohio Telegraph Company. Its weekly revenue in February 1846: $4.50. Then there’s Cyrus Field, who was lionized when he built the first transatlantic cable in 1858 but vilified when the first line failed a few weeks after its completion – leading The Boston Courier to speculate that the whole project had been an elaborate hoax. Many of the companies that built the industry’s original infrastructure had collapsed by the early 1860s.
Photo by Clearly Ambiguous.
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