In Praise of Bubbles

For a provocative, counter-intuitive take on financial bubbles in American economic history, check out Pop! Why Bubbles are Great for the Economy, a new book from Slate's "Moneybox" columnist Daniel Gross.

Dan's basic claim is that for all the personal, financial, and emotional wreckage bubbles leave behind, they produce something more durable and economically useful. Here are the key paragraphs from a summary essay at Slate:

Looking back through the last 150 years, a familiar pattern emerges. A wonderful new technology or economic idea arrives. A few good years of solid growth help engender a sense that things are different and that new rules apply. Hype and rosy projections—from Irving Fisher's 1929 prediction of a "permanently high plateau" to Dow 36,000­—justify investing at stratospheric levels. The trend, previously confined to the business community, crosses over into popular culture. Everyone's buying stock, investing venture capital, refinancing a mortgage, installing compact fluorescent light bulbs. And then, pop! The bubble bursts, heroes become goats, and bankruptcies spread. As corruption and venality are exposed, self-loathing and recriminations rule the day. (See: subprime lending, spring 2007.) And that's when all the moralizing narratives about the tragedy of bubbles get written.

But this is only half the story! After all, the process of growth and innovation doesn't end when a bubble bursts. The Internet wasn't unplugged and shut down in 2002. In fact, once you gain a little historical distance from bubbles, it is clear that some bubbles—some, not all—leave behind something that is a little bit boring but extremely useful: infrastructure. The bubbles that have left behind commercial infrastructure have been incredibly important contributors to America's remarkable long-term economic performance.

For more, check out the short version at Slate or pick up a copy of the book here.