Stock market bubbles and busts are a natural and essential part of the market process that policymakers should not seek to control, argues author Robert Miller in a new study, railway.com* published by the IEA.
Miller's research involves a comparative analysis of the 19th century railway and late 20th century information and communications technology (ICT) revolutions. He argues that new technological discoveries give rise to great uncertainty when applied in business ventures. Some ventures will fail and some succeed. The stock market boom, leading to the substantial over valuation of some ventures is part of the process of discovering the best business ventures, technologies and applications. Capital will be allocated to ventures that fail but we do not know, until they are tried, which those will be. Without the investment in ventures that ultimately fail, we would not know which technologies and businesses would add most value in the long term. The process of stock market boom and bust is an indication that the period of experimentation is being concentrated into a short time period this is no bad thing, argues Miller.The technology revolutions mainly benefit consumers - not the owners of capital. The investment in ventures using new technologies, some of which fail, gives rise to intense competition, better products and lower prices.
There are other lessons from Miller's study:
- Sometimes it is many decades before we can measure economic growth generated by technology revolutions. Official figures can seriously understate economic growth and therefore overstate inflation.
- The market's ability to co-ordinate complex processes is astounding. With little government intervention Victorian railways developed "through ticketing" and even standardised time across the country it did not need a "fat controller" in Whitehall. There has been a similar success in the market co-ordination of the world wide web. Where governments have interfered (such as in the development of the 3G spectrum) they have made matters worse rather than better.
- There is no problem of "technical lock in". Rather than inferior technical standards becoming "locked in", the process of competition between competing standards raises quality across the board this is notable in the competition between Microsoft and Apple.