The key to techno-scientific progress? “Bubbles”

If our age is defined by stagnation and stasis, which results from a generalized form of risk intolerance that permeates all of society, how can we break free and reach escape velocity for accelerated technological and scientific progress? In a word: bubbles. This might seem counterintuitive at first, since bubbles have funded all kinds of gadgets, fads, and technologies that faded into irrelevance after they burst. But bubbles are among the most powerful mechanisms we have to boost risk tolerance. They foster precisely the kinds of futuristic and optimistic visions we need in order to arrest and reverse stasis and decline. Under the right conditions, they are ideal exit ramps from the Great Stagnation.

Historically, bubbles are recurrent phenomena. From tulips to Bitcoin, they’ve formed in a multitude of markets. Yet this familiarity has gained them little favor. Bubbles, and their subsequent busts, are often described as destabilizing, inefficient, and socially destructive. And it’s easy to see why. Almost $6 trillion evaporated after the dot-com collapse in the early 2000s, and the global economic system crashed when the housing bubble burst in 2008.

The standard view in economics and finance holds that speculative financial bubbles form when unrealistic expectations about future cash flows decouple prices temporarily from fundamental valuations. In this view, popularized by a 19th-century study on crowd psychology, bubbles are the result of “popular delusions,” the “madness of crowds,” or “irrational exuberance.” Fueled by self-reinforcing feedback loops of imitation and herding behavior, prices rise until a crash drives them back to the underlying fundamentals.

Yet not all bubbles destroy wealth and value. Some can be understood as important catalysts for techno-scientific progress. Most novel technology doesn’t just appear ex nihilo, entering the world fully formed and all at once. Rather, it builds on previous false starts, failures, iterations, and historical path dependencies. Bubbles create opportunities to deploy the capital necessary to fund and speed up such large-scale experimentation—which includes lots of trial and error done in parallel—thereby accelerating the rate of potentially disruptive technologies and breakthroughs.

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By generating positive feedback cycles of enthusiasm and investment, bubbles can be net beneficial. Optimism can be a self-fulfilling prophecy. Speculation provides the massive financing needed to fund highly risky and exploratory projects; what appears in the short term to be excessive enthusiasm or just bad investing turns out to be essential for bootstrapping social and technological innovations. If we examine how progress has unfolded over the course of the past century, we find that in both hardware and software, from the Apollo program to Bitcoin, some of our greatest technological achievements are the product of bubbles.

At the core of an innovation-accelerating bubble is a definite vision of the future that drives extreme commitment from investors and other participants. A bubble can be a collective delusion, but it can also be an expression of collective vision. That vision becomes a site of coordination for people and capital and for the parallelization of innovation. Instead of happening over time, bursts of progress happen simultaneously across different domains. And with mounting enthusiasm—which, as in the case of Bitcoin, can border on a fanatic belief in the potential of a bubble’s underlying technology—comes increased risk tolerance and strong network effects. The fear of missing out, or FOMO, attracts even more participants, entrepreneurs, and speculators, further reinforcing this positive feedback loop. Like bubbles, FOMO tends to have a bad reputation, but it’s sometimes a healthy instinct. After all, none of us wants to miss out on a once-in-a-lifetime chance to build the future.

This is, admittedly, a counterintuitive way of thinking. After all, “bubble” is a pejorative term. In many cases, it is a term of resentment—investors describe anything that gains value but which they don’t own as some sort of bubble. And bubbles, both famous and infamous, have left a trail of value destruction and financial catastrophe in their wake. But there’s a place for bubble revisionism. In his 2007 book Pop, Daniel Gross runs through a list of historical bubbles, including telegraphs, railroads, dot-coms, and housing, that had undeniable upsides. Even if the earliest investors in transatlantic cable lost their shirts, cables did get laid, and the world grew more connected. Thanks to overbuilding, a quarter of the entire US railroad system was in bankruptcy by 1894, but the tracks were still there, and cheap transportation remained available. To this day, the US has some of the world’s best freight rail infrastructure thanks to what in the 19th century was excess capacity. And since trains are the most cost-effective way to move many goods over land, US consumers and companies continue to benefit from lower prices. Meanwhile, this cheap capacity led to some of the first national brands, and when globalization started accelerating in the 1970s, dominant American brands evolved into dominant global ones. All of this was made possible by a bubble.