Ever since Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds, investment bubbles have gotten a bad rap. Gross comes to their defense and convincingly argues that investment bubbles should be recognized as very positive for the economy. They allocate capital quickly, if not accurately. Plus, when the bubble eventually bursts, prices plunge and there’s tons of excess capacity for the second wave of businesses to make the new technology work. This happened with telegraphs, railroads and now with Web 2.0.
Gross also includes a fascinating observation. Through the years, government has not been an innocent bystander. In fact, its hand has been quite visible. Government has often been a willing participant in the development of new technologies. In 1843, Congress approved $30,000 for telegraph testing and in the 1850s, taxpayers provided one-fourth of all railroad financing.
It’s easy to dismiss bubbles as some kind of mass hysteria, but in reality, they do a lot of good.