

The Economist: How Property Bubbles Help us - jonas_b
http://www.economist.com/finance/displaystory.cfm?story_id=12792903

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anewaccountname
>"The most obvious spillover effect of the telecoms boom was that the
oversupply sent the price of internet traffic plunging. That made the
economics of bandwidth-gobbling services, such as internet video, much more
attractive. The rapid rise of companies such as YouTube would not have been
possible without all that extra cable."

I thought extensive edge caching is what really enabled this. The backbone
never had a chance, even if much more of it were lit up. However, it probably
did help youtube when they were small, and it certainly helped things like
Justin.tv (though I believe they now have their own caching solution; youtube
live announced they were using Akamai).

>"The second thing that a bubble can do is to make a more profound impression
on the public mind than a more conservative period of economic development can
manage. The 1920s land boom implanted the idea of Florida as a glamorous
holiday destination that has lasted to this day. Fisher, who displayed an
unending genius for promotion, can take much of the credit."

Why does he give, "implanted the idea of Florida as a glamorous holiday
destination," as a positive effect _on its own_. I was expecting him to list
some positive outcome of this, like say, "This was a good thing because
Florida actually _is_ a glamorous holiday destination, and people really had
mistaken ideas about this that were really cleared up when he implanted this
idea. Plus [insert some convoluted means, along the lines of the rest of the
article] it helped Florida farmers grow more oranges." All he did was show
that this specific outcome of the bubble was good for Florida, not that it was
a good outcome overall.

>"He reckons that the introduction of general limited liability in Britain in
1856 was hastened by the experience of limited liability for authorised
railway schemes during the boom."

Just my opinion, general limited liability nets out to be a terrible, very un-
free market invention. Reasonable people can disagree, and it is somewhat made
up for by the voluntary corporate tax that investors take on when they choose
to be an LLC. Though Reagonites see this as a "double tax", it really isn't
(because those investors are free to remain a private partnership and avoid
the tax entirely). Corporate income taxes are completely voluntary payments
made in exchange for some very lucrative benefits. Anyway, I'm not convinced
at all by his arguments. Bubbles leave behind remnants and have side effects
that can be beneficial, be they are ultimately misallocations of capital and
human labor due to incorrect speculation on the future. When and if we find
out a bubble was helpful and better than alternatives, we generally revise our
history and no longer call it a bubble. It's sort of a definitional thing--
there isn't much way around it. Perhaps the author would have been better
changing his thesis into an argument in favor of such a revision for the
specific case of Florida and the telecoms.

"Dubai's developers similarly fashioned a city out of the desert."

Time will tell whether those resources could have been better spent elsewhere.
What could Dubai have achieved if they had invested even half of all of that
sovereign cash directly into education and general welfare for the migrant
near-slave-laborers who built the place, rather than rely on some sort of
exercise in trickle down theory involving indoor ski slopes in the desert?

~~~
fauigerzigerk
> "When and if we find out a bubble was helpful and better than alternatives,
> we generally revise our history and no longer call it a bubble. It's sort of
> a definitional thing--there isn't much way around it. Perhaps the author
> would have been better changing his thesis into an argument in favor of such
> a revision for the specific case of Florida and the telecoms."

I don't agree. What do you call a situation where the original investors go
bust because most of the benefits accrue not directly from their investments
but from spillover effects? Calling it helpful effects of a bubble is not a
bad way to describe it, I think.

But even so, this doesn't answer the question of whether the bubble had a
positive overall effect. The author of the article isn't mentioning the
dampening effect of busts on the willingness to take on risks down the road.
It's not just the wasteful use of resources during the bubble that has a
negative macro economic effect. On the other hand, the feeling that you can
get rich in a bubble if you get out in time increases the hunger for risk.
Maybe not for the right kind of risk though.

Anyway, it's very hard to make macro economic calculations like this. There
are so many more factors that haven't been mentioned and surely there are some
of those unknown unknowns lurking somewhere as well :-)

~~~
TheWama
> it's very hard to make macro economic calculations like this. There are so
> many more factors that haven't been mentioned and surely there are some of
> those unknown unknowns lurking somewhere as well :-)

Right, in which case we should evaluate it some other way. I think a good
analogy can be illuminating.

Say we have an island population which consumes umbrellas (for shade) and
coconuts (for food). If there's a bubble in umbrellas, that means the island
society built too many of them, falsely thinking it would be worthwhile to do
so. Since there's a glut of umbrellas, all the builder takes a loss, and
probably lays off some or all of his newly-hired umbrella-building workforce.

But the umbrellas don't disappear, so it's not all bad, right? Over time, the
umbrellas will wear out and those in storage can be used. That seems to be the
gist of the article.

But this argument falls apart if you realize that the goal of any economic
system, and particularly the free market system, is the _efficient_ allocation
of capital. The most efficient arrangement on our hypothetical island would
have been to make only umbrellas as are needed, when they're needed, built by
a consistent, maintainable workforce, and leaving others free to do as they
will.

This is true of infrastructure as well; businesses and societies flourish when
the find the most efficient ways of doing things, and businesses found out a
long time ago that holding excess stock is wasteful (see
<http://en.wikipedia.org/wiki/Just_in_time_manufacturing>). We should accept
this and not try to paint a pretty face on waste.

They say that:

> Luxury riverside developments that now dot the banks of the Thames in London
> may be empty for the moment but will find occupiers eventually

but they fail to mention that by over-allocating goods and labor to large,
luxury apartments they've reduced access to other things. For example, more
modest, economically sustainable apartments could have been built in the place
of these, which would have meant more efficient, denser land-use.

Anyway, IMO this is all hogwash. Of course it's not all for naught, but that
doesn't means it's any good.

~~~
fauigerzigerk
I see your point and I agree that inefficient resource allocation doesn't
suddenly turn into a benefit just because not everything that has come out of
a bubble is completely worthless. It's less efficient than it could have been.

But the question is whether some of the good things that are created
inefficiently in a bubble would have been created at all without a bubble.
Some things might never have happened without bubbles because only competely
reckless behaviour could lead to the kind of massive momentum needed for some
kinds of changes.

Would web applications be mainstream today without the .com bubble? Or would
we have this debate inside Microsoft Outlook?

What about revolutions in general? Can every revolution be replaced by
evolution?

