Bubbles on the Brain?
Earlier this month, Marc Andreessen, wrote a piece about economic bubbles entitled. "Bubbles on the brain":
"It has become commonplace in Silicon Valley and in the blogosphere to take the position that we are in another bubble -- a Web 2.0 bubble, or a dot com bubble redux.I don't think this is true.
Let's examine the theory of a new bubble from a few different angles.
First, recall that economist Paul Samuelson once quipped, 'Economists have successfully predicted nine of the last five recessions.'
One might paraphrase this for our purposes as 'Technology industry experts have successfully predicted nine of the last five bubbles'... or perhaps more like five of the last one bubbles.
The human psyche seems to have a powerful underlying need to predict doom and gloom."
It is unfortunate that most of what Andreessen has to say is either true but not relevant, or false.
We can ignore the attempt to ground his conclusion in evolutionary pyschology, since predicting doom and gloom is largely irrelevant. We aren't interested whether the forecasters are correct or not, we want to know what are the elements that make up a speculative asset play; how to turn an unviting speculation in to an appealing investment.
And on this ground, Andreessen is completely misinformed. He starts with a misunderstanding of the rarity of asset bubbles.
"If you're going to listen to people who predict bubbles or crashes, you have to be ready to stay completely out of the market -- the stock market, and the technology industry -- almost every year of your life.Second, historically, bubbles are very, very rare.
It's significant that in books and papers that talk about bubbles, there are simply not that many examples over the past 500 years of capitalism.
You've got the South Sea bubble, the Dutch tulip bulb bubble, the bubble in Japanese stocks in the 1980's, the dot com bubble, and a few others.
They just don't happen that often, at least in relatively developed economies."
This is just false; every ponzi fraud that ever had a modicum of real business produced a bubble. Now we can count a lot of these, starting with the Florida land scandals in the 20's and moving right through the 80's and the S&L fraud, right up to Enron. Every one was an asset bubble - and once we start counting, we will soon be in the hundreds of thousands.
Bubbles are common, which is what Andreessen should have predicted if he really thought that our attraction to them was rooted in our evolutionary past.
Andreessen is right when he says that "Third, in the technology industry, lots of startups being funded with some succeeding and many failing does not equal a bubble. It equals status quo. The whole structure of how the technology industry gets funded -- by venture capitalists, angel investors, and Wall Street -- is predicated on the baseball model. Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run. The base hits and the home runs pay for all the strikeouts. If you're going to call a bubble on the basis of lots of bad startups getting funded and failing, then you have to conclude that the industry is in a perpetual bubble, and has been for 40 years."
This is true, but it is not relevant. Yes, the technology portfolio has wide spread of returns -what does this have to do with a speculative asset play? A bubble occurs precisely when what is really a speculative gamble is made up to look like an investment, or at least in the eye of the marks.
It gets worse.
Andreessen goes and concludes "Fourth, getting more specific about Internet businesses -- things have changed a lot since the late 90's. It is far cheaper to start an Internet business today than it was in the late 90's."
Uh, that is a necessary condition for the creation of a bubble -cheap access to a what looks like, but aint', a capital generating opportunity. If the ticket price is too expensive, you cannot get enough of the rubes and marks in to generate the false enthuisasm, the swings of emotion and churn.
Finally, Andreessen states "And then there's Google. These companies aren't pulling in all that revenue via some kind of Ponzi scheme. This is money coming from real advertisers and real users for real services with real value."
If true, again this is irrelevant. Whether or not Google turns out to be a ponzi scheme, selling advertisers on the possibilty of future revenue, which increases the valuation of Google, which allows Google to increase the monopolist's price for its advertising, has nothing to do with whether some Web 2.0 applications, which are speculative gambles, are being dressed up legitimate investments.
I will make a prediction: when web 2.0 applications seek funding via essentially promissory notes, which are traded on a lightly regulated market, the we will see a bubble within 18 months. But the demise of this bubble will be unlikely to affect the credit markets -which is the only thing that policy makers should worry about.
