Expounding on and contextualizing the post immediately below, "World economy has exited the ‘boom and bust’ cycle, BlackRock says".
This topic is pretty basic history of finance stuff that our readers already know but I wanted this piece on the blog because Janeway is sharp and brings a non-geek perspective to some geeky stuff. From our intro to "The Rise of Mesoeconomics" - William H. Janeway:
In our last visit with Bill Janeway, "The Forgotten Origins of Silicon Valley" - William H. Janeway, I didn't mention that he is not your typical pointy-headed academic. Here's his mini-bio at Cambridge Uni.:
Ambassador for Cambridge Judge Business School
Senior Advisor & Managing Director, Warburg PincusDr William H Janeway is a Senior Advisor and Managing Director of Warburg Pincus. He joined Warburg Pincus in 1988 and was responsible for building the information technology investment practice. Previously, he was Executive Vice President and Director at Eberstadt Fleming. Dr Janeway is a director of Magnet Systems, Nuance Communications, O’Reilly Media, and a member of the Board of Managers of Roubini Global Economics. He is a Visiting Lecturer in Economics at the University of Cambridge and Princeton University.....
And from Noema, July 27, 2021:
Occasionally, financial speculation fastens onto transformational technologies that have the potential to create a genuinely new economy.
The persistent recurrence of speculative excess is a defining feature of financial capitalism wherever and whenever investors have the opportunity to trade assets. For the last 500 years, from tulip bulbs in the 1630s to cryptocurrencies today, the prices of assets have been subject to waves of herding behavior and momentum investing, with prices decoupling from any relationship to past, present and prospective cash flow. The economic historian Charles Kindleberger and the economist Robert Aliber summarized the phenomenon in their book on financial crises:
Investors have speculated in commodity exports, commodity imports, agricultural land at home and abroad, urban building sites, railroads, new banks, discount houses, stocks, bonds (both foreign and domestic), glamor stocks, conglomerates, condominiums, shopping centers and office buildings.
At the extreme, such speculation has come to be characterized as a bubble, a term associated with the iconic South Sea Bubble in London in 1720. As has often been the case, speculation in the shares of the newly chartered South Sea Company began with a plausible story: the opportunity for British merchants to take over the lucrative returns generated by trade with the new world from the fading Spanish Empire.
None other than Isaac Newton joined the fray, having transformed himself from the progenitor of mathematical physics in Cambridge to the wealthy master of the Royal Mint. Newton bought in early and cashed out for a healthy profit — but then as the bubble accelerated he could not stand it and reinvested at the top, shortly to lose everything. He is supposed to have remarked: “I can calculate the motions of the planets, but I cannot calculate the madness of men.”
Bubbles are ubiquitous. In his history of the city of London since the end of the Napoleonic Wars, David Kynaston chronicles a speculative “bull run” in every decade up to World War I. When New York then emerged as London’s successor, the great bull market of the Roaring Twenties followed. A long generation of “financial repression” followed the Great Depression and World War II, but then came the “money game” years of the 1960s. And stagflation in the 1970s yielded to a generation-long “super-bubble,” as George Soros characterized it, which peaked first with the dot-com bubble of the later 1990s and then in the derivatives-fueled credit bubble that exploded in the global financial crisis of 2007-8.
But not all bubbles are the same. When financial speculation is limited to the relatively unleveraged equity markets, the consequences of the inevitable bust are limited. But when speculation is fueled by credit and infects the core banking system, the consequences are likely to be devastating, as in the recession that followed 2008.
Occasionally, financial speculation fastens on to a transformational general purpose technology (GPT) that has the potential to create a genuinely new economy. Call it a productive bubble. The British railway manias of the 1830s and 1840s — when the GPT of steam power was applied to locomotion — were the first fully documented productive bubbles. The railways were built by newly created companies, endowed by Parliament with special privileges: Eminent domain enabled them to take land for their rights of way in return for fair compensation, while limited liability protected investors from losses beyond their actual investment.
“Not all bubbles are the same.”....
The British Railway Mania has so many lessons for investors that I'll have to devote a couple posts to the subject.
I did mention the Mania in last year's "UPDATED: Visualizing Bubbles":
...The 1845 British railway bubble is also problematic. I don't know of any index that the chartmeisters could use to derive the 100% figure from and individual issues exceeded that degree of movement, some increasing 500 or 600%.
Also, a lot of the railway issues were subscriptions which meant that the 'scrip' traded (not legally) prior to the issuance of the stock....
In "Early Victorian observers would have found our financial markets familiar, but would likely expect a crash" I commented:
We've visited the author of this piece, Professor Andrew Odlyzko a few times, he is something of a polymath. An MIT trained mathematician with an interest in financial history....That was understating the case.
In addition to his work on the valuation of networks, which gave a much higher (IEEE Spectrum) figure for say, Facebook, and thus saved his followers from embarrassment and loss in contemplated short-sales (ahem) he may be the, or at any rate one of the top experts on the minutiae of the British railway manias (there were two)....
From the introduction to a 2021 link to the Boston Review:
"Neoliberalism’s Bailout Problem"
We used to link to the Boston Review with some regularity until last December when they published and we linked to "To Save the Climate, Give Up the Demand for Constant Electricity" which not only dismissed one of the most attractive features of current {!} electrical systems and grids: being available when you want it, but was also a bit boring in its lack of creativity in addressing the intermittency problem with renewable sources o'leccy.
However
The article before us raises the very interesting point that the Western economies could use a whole lot more of Schumpeter's creative destruction and a whole lot less of the politico-corporatism exemplified by the first inductee into the Climateer Hall of Fame:
As Adam Smith put it in his book on the 'sixties bull market, The Money Game:
“Now you know and I know that one day the orchestra will stop playing and the
wind will rattle through the broken window panes, and the anticipation of this
freezes us. All of these kids but one will be broke, and that one will be the multi-
millionaire, the Arthur Rock of the new generation. There is always one, and
maybe we will find him.”
—Last seen in February 2024's "JPMorgan's Jamie Dimon On The Business Case For AI: "This Is Not Hype" (JPM)"
