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A productive economic bubble is my wish for 2020

SINCE it's the end of the year, I'd like to share with readers my wish for 2020 - a productive economic bubble.

That may sound like an oxymoron, in part because bubbles don't seem productive but also because I've railed against so many of them - from the 2008 United States housing bubble to ballooning corporate debt, to what looks like a high-tech "unicorn" bubble today.

But recently, venture capitalist and Cambridge university economist William Janeway reminded me that not all bubbles are created alike. As he lays out in Doing Capitalism in the Innovation Economy, there are both productive and unproductive bubbles. The latter category would include the speculative real estate bubble that unpinned the 2008 financial crisis, as well as today's cryptocurrency bubble. Unproductive bubbles destroy value, especially when spread via the banking system, and they don't leave much use in their wake.

But there are also productive bubbles - like the dotcom bubble of 1998 to 2000. That led to the liquidation of trillions of value in stocks and junk bonds.

But it also spurred the laying of millions of miles of broadband fibre optic cable, the network on which a new economy would run. The 1920s stock bubble, which created even greater pain, also helped fund and fuel the spread of radio, telephone, aviation, and electricity.

Speculation, according to Mr Janeway, is a natural part of the process of innovation. But the seeds of productive bubbles are often laid not by private market actors, but by the state, which has the ability to provide funding that is decoupled from a need for immediate economic results. This is a point that has been made frequently by economists including Mariana Mazzucato as well as historians such as Margaret O'Mara.


Such state investment is often driven by a national mission to boost development or security. Think of the British and American railway booms, fuelled by the needs of the military, or the creation of the interstate highway system that linked the US for the automotive age, or the digital economy itself, much of which came out of the US Department of Defence's Darpa division (which pioneered the Internet, GPS, and touchscreen technology).

It is a great irony that private sector wealth that comes from such investment can, when taken to extremes, create a populist backlash against governments that cannot - or will not - deal with the negative side-effects.

But the state can counter such discontent by mitigating the effect of financial crises on average people, for example, or buffering job losses and inequality that can result from the first stages of big, technology-led disruptions.

The digital revolution has created "the most productive collaboration in human history between state investment and financial speculation", as Mr Janeway puts it. And yet, we are still only in the first stages of it (the "killer app" of the railroad boom, the mail-order catalogue business, didn't take off until about 50 years after the railways were created).

Some aspects of the digital revolution, such as the Internet of Things, could help solve the productivity puzzle. Other bets, including the ability of artificial intelligence to displace human thinking, may be oversold. Companies like WeWork, fuelled by low interest rates and valuations untethered from the real world, now look like a bust.


But the bigger question is whether the state itself - or, at least, liberal democracies in the West - will survive the era of innovation they created. Governments seem to have lost the ability to control the most powerful supranational corporations, Google and Facebook. These companies are undermining the process of democracy itself, becoming facilitators of political disinformation, influencing the political system and disrupting labour and capital markets in ways that make it difficult for nation states to cope.

This brings to mind the economist Dani Rodrik's "inescapable trilemma of the world economy". According to this theory, it is possible to have only two out of three of the following things: deep economic and financial integration, democratic politics, and autonomous states. Cross-border companies that have more users than the population of the world's largest countries could be incompatible with liberal democracy.

The US state created the last productive bubble. China aims to create the next one through funding green tech, including solar and wind power and renewable batteries. Autocratic China cannot by definition solve the trilemma of the world economy. But could it lay the foundations for the next productive bubble?

I hope so, but the jury is still out. Top-down control in a digital surveillance state (whether exerted by companies or governments) is incompatible with democratic politics and individual free will. And it may not support innovation. Productive bubbles can be seeded by the state, but also require smaller companies and individuals acting in a decentralised environment to commercialise new technologies. It's unclear whether President Xi Jinping's China can do both.

Like Mr Janeway, what I really wish for is a transatlantic Green New Deal in which the US and Europe together invest in solving the international security issue of climate change. It is encouraging that there is a crop of young politicians on both sides of the Atlantic who would love the same. FT