The Economist: How Property Bubbles Help us(economist.com)
economist.com
The Economist: How Property Bubbles Help us
http://www.economist.com/finance/displaystory.cfm?story_id=12792903
1 comments
> "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 :-)
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 :-)
> 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.
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.
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?
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?
"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."
There was a recent study (also posted here somewhere) showing this "greater fool theory" is pretty much hard-wired into human nature.
There was a recent study (also posted here somewhere) showing this "greater fool theory" is pretty much hard-wired into human nature.
I think I can agree about LLC. However the way things are currently structured one would be very foolish to conduct business without the protection of at least an LLC.
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?