Bubbles are good

Ingenuism Weekly 3

“[T]he greatest tool we have for tackling our grand challenges is the human mind.” –Peter H. Diamandis and Steven Kotler, Abundance: The Future is Better than You Think

INSIGHT

Bubbles are good

Robert Hendershott

Is Bitcoin a bubble? Tesla? Zoom? Everyone has an opinion, but nobody knows for sure. What we all know for sure is that bubbles are bad, right? Wrong.

Bubbles are good.

Yes, bubbles contain speculative excess. But they also reflect passion and enthusiasm for potentially transformative technologies and firms. They provide resources to jump start these new technologies. Bubbles are a harbinger of beneficial, if often disruptive, change. And change is part of progress.

Bubbles produce results that are easy to mock. The current enthusiasm for anything electric will inevitably produce some terrible investments. But it will also produce some transformative technologies and business models (arguably, it already has).

We can’t evaluate bubbles by looking at a single outcome in isolation (i.e., that they eventually pop, and some people lose money). We have to look at all of the outcomes.

I did this for the first internet boom in a paper published in the Journal of Corporate Finance back in 2004. At the time, dot-coms were being derided as dot-bombs. The bubble had burst, and Silicon Valley was littered with fallen angels.

But this is always the case. Most ambitious new companies fail. The key is whether there are enough big winners to offset the mass of shutdowns. I set out to measure this in 2002. I tabulated all of the capital absorbed by 441 venture-backed dot-coms (online retailers and information portals), a total of $21 billion, and compared this to the observable liquid value of these 441 as of 12/31/2001—almost $39 billion! The return on invested equity for the entire group over the entire bubble was 19% per year! Dot-bomb?  Only when you focus on Pets.com and not Amazon.com.

Of course, there was plenty of failure. Only 5% of the 441 could be categorized as long-term winners. But these 22 companies more than made up for the 419 loses. And this was after the bubble had burst but before the subsequent tech rebound and boom. Amazon represents $4 billion of liquid value in 2002; today Amazon is worth over 400 times as much, $1.7 trillion. Google was still private, so it represents nothing in 2002 (worth $1.5 trillion today). Rather than bombing, the first internet boom laid the foundation for the miracle of the 21st Century.

Bubbles attract money and talent to hot new sectors, the ones with the greatest potential impact going forward. The gains to entrepreneurs and investors are concentrated among the few winners, but the gains to customers and society as a whole are enormous and widespread. This was true back in the late 1990s and it will prove true today.

Bubbles are not perfect, but they are good. And it is a terrible idea to let the perfect be the enemy of the good.

QUICK TAKES

New and improved…mosquitos?

The bad news is that mosquitos aren’t just annoying—they’re dangerous. The really bad news is that conventional methods of mosquito control are starting to fail. Just as antibiotics have bred so-called superbugs, insecticides have bred literal superbugs: today’s mosquitos are increasingly resistant to them. 

Here’s the really good news:

This spring, the biotechnology company Oxitec plans to release genetically modified (GM) mosquitoes in the Florida Keys. Oxitec says its technology will combat dengue fever, a potentially life-threatening disease, and other mosquito-borne viruses—such as Zika—mainly transmitted by the Aedes aegypti mosquito. . . .

Oxitec’s mosquitoes, for instance, are genetically altered to pass what the company calls “self-limiting” genes to their offspring; when released GM males breed with wild female mosquitoes, the resulting generation does not survive into adulthood, reducing the overall population.

The virtue of trying everything at once

Ingenuists believe that the solutions to most problems can’t be predicted in advance. And that means that instead of a top-down industrial policy that forces all of society to fund whatever the experts believe are the best technologies, we should leave the road open to exploration and experimentation.

Exhibit A: the search for a COVID-19 vaccine. Here’s how Sarah Zhang puts it in The Atlantic:

A year ago, when the United States decided to go big on vaccines, it bet on nearly every horse, investing in a spectrum of technologies. The safest bets, in a way, repurposed the technology behind existing vaccines, such as protein-based ones for tetanus or hepatitis B. The medium bets were on vaccines made by Johnson & Johnson and AstraZeneca, which use adenovirus vectors, a technology that had been tested before but not deployed on a large scale. The long shots were based on the use of mRNA, the newest and most unproven technology.

It turns out, the long-shot solution was more safe and effective than the more promising solutions.

The protein-based vaccines have moved too slowly to matter so far. J&J’s and AstraZeneca’s vaccines are effective at preventing COVID-19—but a small number of recipients have developed a rare type of blood clot that appears to be linked to the adenovirus technology and may ultimately limit those shots’ use. Meanwhile, with more than 180 million doses administered in the U.S, the mRNA vaccines have proved astonishingly effective and extremely safe. The unusual blood clots have not appeared with Pfizer’s or Moderna’s mRNA technology. A year later, the risky bet definitely looks like a good one.

This is just one of many lessons about innovation that can be learned from the COVID-19 pandemic. (Hint, hint!)

Turn down the sun!

Whatever your views of global warming, there’s no question that the ability to control the earth’s climate would be a huge boon to human flourishing. But when it comes to geoengineering, expect to see huge barriers to progress. In fact, we’re already seeing them.

The Swedish Space Corporation canceled a test flight that was part of a Harvard geoengineering research program called Scopex. According to the New York Times, the flight is being called off “following objections from environmentalists, scientists and Indigenous groups there.”

Solar geoengineering has long been a subject of intense debate among scientists and policymakers, often seen as a desperate, potentially dangerous measure that could have unintended consequences for regional climates. Even conducting research on the subject has been viewed as harmful in that it could distract society from the goal of reducing emissions of planet-warming gases to avoid the worst effects of climate change.

Concerns over unintended consequences of geoengineering are understandable. Saying we shouldn’t try to expand our climate toolkit because it will “distract society” is not. But none of these concerns make sense when you consider this:

The planned first flight would not have involved injecting anything into the atmosphere. Instead, it would have tested the experimental setup, which includes large fans to create a short wake in the upper atmosphere. Such disturbed areas would be where injection experiments would take place in future flights.

Knowledge is power. Calling a halt to what, in this case, amounts to riskless knowledge means disempowering mankind.

Why some people hate the greatest chart of all-time

In our inaugural essay, we shared this celebrated chart, which shows the long-term trend in GDP per capita.

But as James Pethokoukis notes, not everyone likes the “greatest chart of all time.”

Rather than celebrate this vast improvement in human welfare, some recoil. Perhaps they worry concession means ignoring the work yet to be done. Or concession means accepting the importance of economic growth at the expense of the environment. Or perhaps concession also means conceding the benefits of market capitalism.

Most prominently, economic anthropologist Jason Hickel has argued that the standard view—that extreme poverty around the globe has fallen from 36% in 1990 to less than 10% today—is a myth.

That would be bad! Thankfully, left-leaning economist Noah Smith runs the numbers and finds that, no, actually, a lot of people are a lot less poor. (Smith’s own assessment of why world poverty has declined is less convincing.)

INCREASE YOUR INGENUITY

Creativity comes from asking better questions. The best questions are ones that challenge your assumptions and make you fear you’ll never find the answer. That’s why most people don’t ask them.

RECOMMENDATION

Mastery by Robert Greene

We often think about innovation at the company or cultural level. But innovation starts at the individual level. Few books do as good a job exploring the source of individual ingenuity and creativity as Robert Greene’s Mastery.

Mastery, according to Greene, is “a form of power and intelligence that represents the high point of human potential. It is the source of the greatest achievements and discoveries in history. . . . This power brings to those who possess it the kind of connection to reality and the ability to alter the world that the mystics and magicians of the past could only dream of.”

Greene sees the foundation of mastery as choosing a vocation and then building a rich foundation of knowledge through apprenticeship. Much of his advice focuses on finding mentors, though he warns, “Once you have internalized their knowledge, you must move on and never remain in their shadow.”

The most distinctive material, however, comes in Part V, where Greene discusses how to cultivate creative thinking. For example, he observes that “whenever we work hard at a problem or idea, our minds naturally narrow their focus because of the strain and effort involved. This means that the further we progress on our creative task, the fewer alternative possibilities or viewpoints we tend to consider.”

What’s the solution? To cultivate what he calls “negative capability”: “Truly creative people . . . simply experience what they are seeing without the need to assert a judgment, for as long as possible. They are more than ready to find their most cherished opinions contradicted by reality.” To achieve this, “You consider and even momentarily entertain viewpoints oppose to your own, seeing how they feel. . . . You seek out what is unfamiliar—for instance, reading books from unfamiliar writers in unrelated fields or from different schools of thought. You do anything to break up your normal train of thinking and your sense that you already know the truth.”

Though Mastery is intended as a guide to help you be more creative, successful, and fulfilled, it also serves as a foundation for understanding the larger forces that shape progress. If we do not understand individual ingenuity, we can never hope to understand what rules, norms, incentives, and institutions will promote ingenuity.

Until next time,
Don Watkins

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