Tech Booms and Busts: The Recurring Rhythms of Tech Triumphs
No, this time is NOT different
"The Wealth of Nations and the steam-engine...destroyed the old world and built a new one."
- Arnold Toynbee
Financial bubbles trace their history as far back as the Roman Empire in 33AD.
The Mississippi Company(France) and South Sea Bubbles (England) of 1720 were triggered and sustained by similar experiments in money printing coupled with fear and greed.
But it was only after the advent of the Industrial Revolution that the world experienced its first “technology” bubble- that is, a financial mania driven by the promise of endless riches thanks to a new technology that would change the world.
Canals in the 1780s, railroads in the 1840s, radio, airplanes, automobiles in the 1920s, and the internet in the 1990s all fit this bill.
All technology bubbles promise to change the world and offer riches to those who get in on the game early.
In the 1890s, it was the bicycle boom that both made and lost investors fortune.
Today, it is investors in NVIDIA and other AI stocks that offer the promise of untold riches.
Most investors believe it is unlocking the secrets of cutting-edge technology that will help generate big returns.
But they are wrong.
Instead, it is history that offers the key insights.
And it is understanding how technology booms and busts played out in the past that will give you an edge in profiting from today’s AI revolution.
The First Technology Revolution
Today, we apply the term "revolution" to everything from the latest cosmetics to AI.
However, it was only the Industrial Revolution that was the first non-political upheaval to be called a “revolution.”
Coined by historian Arnold Toynbee in 1884, the term “industrial revolution” describes the profound economic, technological, and social transformation that started in 18th-century England.
And the industrial revolution would eventually sweep across most parts of the world.
England as the Leading Light
Up until the late 1700s, most people in England spent their lives working as farmers or craftsmen in small villages.
Life expectancy stood at 40 years. Annual income was about $2,700 in today's dollars.
The class structure was fixed, and upward mobility was limited. Recurring wars and epidemics meant that most people focused on survival.
By the late 18th century, the country was about to embark on a period of rapid growth. Technologically driven growth exploded. Productivity soared. The standard of living rocketed.
Personal income had risen almost 60 percent to over $6,000 in today's dollars.
By 1900, life expectancy had risen 14 percent.
The population of Britain- stable at around five million since 1660, reached 11 million by 1821, 21 million by 1871, and 30 million by 1901.
Manchester tripled its population between 1801 and 1841, from 75,000 to 235,000.
By the time of the 1851 census, England was the first country in recorded history to have half of its population living in towns.
The rising population provided both a labor force and a consumer base for the goods produced by factories.
Newly founded factories did more than just produce goods.
They created methods of production and distribution and financial and organizational structures to manage the businesses.
Workers were no longer held hostage to the weather and agricultural work with irregular cash flows. They now worked indoors in factories with fixed hours and a more regular paycheck.
As Toynbee put it:
"The old relations between masters and men disappeared, and a 'cash nexus' was substituted for the human tie."
In just 100 years, England was transformed from a farming to a manufacturing economy, from a rural to an urban society.
Explaining the Causes
Give credit to the confluence of a wide range of factors.
· Political stability gave businessmen the confidence to take risks.
· Global trade brought in capital, which could be invested in new businesses.
· The establishment of banks and insurance companies greased the wheels of commerce.
· Agricultural improvements increased crop yields, allowing workers to leave farms for factory jobs in the cities.
· Vaccines eradicated epidemics and many diseases by 1850.
Perhaps most importantly, the industrial revolution ushered in a new era of innovation.
It started around the 1760s with the development of steam engines and spinning machines.
This, in turn, opened a floodgate of life-changing technologies.
The steamboat, the railway, the photograph, the telegraph, reinforced concrete, the sewing machine, the internal combustion engine, dynamite, the typewriter, the telephone, the phonograph, the light bulb, and aspirin quickly followed.
Innovation and technology also ushered in an era of booms and busts.
In doing so, new technology enabled the original episode of what the economist Joseph Schumpeter would later call creative destruction.
Horses were replaced by canals…. which were then replaced by railroads… which were then replaced by automobiles…which were then superseded in different realms by bicycles, airplanes, rockets, and even the internet.
The emergence of stock markets by the turn of the 20th century marked the first time that small investors could bet on the direction of the technology of choice- whether railroads, steel companies, bicycles, or radios.
Thus began the endless cycle of boom and bust technology investing.
And we’ll be exploring these in more detail in the weeks to come.
Great summary