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The Necessity of Bubbles

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Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions, and failed commercial ventures. In between, the innovations that have repeatedly transformed the architecture of the market economy, from railroads to the internet, have required massive investments to construct networks whose value in use could not be imagined at the outset of deployment. And so, at each stage, the Innovation Economy depends on sources of funding that are decoupled from concern for economic return. Historically we can observe two such sources: states motivated by national purposes, defence or development; and financial speculation – bubbles. Bubbles are ubiquitous wherever assets are traded: from tulip bulbs to cryptocurrencies. But not all bubbles are the same. Occasionally, the focus of speculation is one of those transformational technologies which, when, which when deployed at scale, actually does create a ‘new economy’.

This talk is part of the Core Seminar in Economic and Social History series.

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