Useful Bubbles

Technological revolutions and speculative finance: evidence from the British Bicycle Mania

“…A particularly interesting feature of this mania was the fact that a subset of firms adapted during the crash by moving into the newer technology, especially motor cars. Eatwell (2004) has argued that technology bubbles can have positive effects, as they are linked to high levels of investment in the most innovative sections of the economy; what is arguably 'irrational' from a financial perspective could be more rational than the alternative from the perspective of the public good. This would appear to apply particularly strongly to the cycle mania, which resulted in significant capital flowing to innovative companies without being accompanied by economy-wide instability.…”

Kindleberger Cycles: Method in the madness of crowds?

“…Martin and Ventura (2010), Tanaka (2011), Lansing (2012), and Takao (2017) model bubbles easing financing constraints and promoting investment. Eatwell (2004) describes bubbles allocating capital to profitable investments left unfunded by capital rationing or managerial myopia and to unprofitable investments with large positive externalities.…”

Bubbles in history

“…While bubbles are usually perceived of as episodes which wreak havoc and are extremely destructive, some historical bubbles may have had some positive consequences. Eatwell (2004) has suggested that bubbles can be socially useful, in that although they may not be efficient or optimal, they sometimes bequeath something beneficial upon society. There are at least three ways in which bubbles could be construed as being useful.…”

“…The roaring twenties witnessed the spread of electrification and the development of mass-produced automobiles, airplanes and radio (White, 1990;Nicholas, 2007). The dot-com bubble gave us a network of fibre optic cables (Eatwell, 2004). All of these technologies have ultimately transformed economies, making them more productive and stimulating high economic growth (Gordon, 2016).…”

“…However, not all bubbles have had such negative consequences. Indeed, it has been suggested that some bubbles may actually be socially useful in that they bequeath something of value upon society that otherwise would not have occurred (Eatwell, 2004;Janeway, 2018).…”