The August 1926 edition of Radio Broadcast magazine, three years before the 1929 crash. Scan courtesy of Americanradiohistory.com
Market booms and busts might be irrational, but we can understand why they happen – and what to do to mitigate the damage
Last year, Ross Gerber, a corporate investment manager, Tweeted a warning about Tesla. Gerber wanted investors to know that Tesla’s success would put other industries ‘at risk’. Which ones? Just oil, internal combustion engine automobiles, car dealers, railroads, auto parts, automobile services, and gas stations. ‘Did I forget some?’ he asked, implying yes, he did. Gerber included hashtags referencing Uber and Netflix as comparable ‘disruptors’. This is why, Gerber implied, there was so much ‘FUD’ (fear, uncertainty and doubt) in the media about Tesla. Gerber suggests a compelling storyline: the underdog hero, Tesla, is up against the evil incumbent forces that will play dirty to defeat it, but Tesla will overcome – just as Netflix and, presumptively, Uber have done.
The Tweet does not substantiate any of this. It doesn’t say why Tesla’s business case is like Netflix’s or Uber’s. It doesn’t say why all the purportedly threatened industries share the same interests here. It doesn’t have to – the human brain does that on its own without any help. As the US literary scholar Jonathan Gottschall has shown in his book The Storytelling Animal (2012), even the faintest sketch of a plotline is enough to prompt our minds to fill in the details. Gerber’s story outline is a familiar enough sketch of David taking on not just one but several Goliaths. It’s a good story outline. But it also ignores many important parts that do not fit with the plucky underdog narrative. It implies that all these alleged Goliaths have the same interest. It’s fiction, fantastically so.
The space between fiction and reality is where economic bubbles take shape. Froth fills that space. Gerber’s vaguely imagined world – one without oil companies, internal combustion engines, rail transportation, auto-service shops, parts makers, car dealers and gas stations – implies a radically different transportation infrastructure. But this future is just one of many possible ones, and storytellers have considered other potentially disruptive forces such as autonomous vehicles, new and different battery technology, or the micro-mobility revolution. How these potentialities play out, and Tesla’s role in them, is not just unknown but unknowable. As the late economic historian Nathan Rosenberg said to one of us: ‘The only thing certain about the future is that it is uncertain.’ Gerber’s Tesla story is fiction – and it is a fiction that relies on many unpredictable and uncontrollableconvergent technological forces. To the extent that Tesla’s stock price reflects Gerber’s story, Tesla is a bubble.
As the Dutch Tulipmania of the 17th century and the South Sea Bubble of the 18th century attest, speculative bubbles have been with us since the early days of corporations and market capitalism. Instant mass communication, in the form of the radio, was an amazing invention of the 1920s. Almost 700 new radio stations – the United States’ entire current AM broadcast infrastructure – were established in 1922. But nobody had identified a successful business model for radio broadcast. That March, a small investor, Mrs W C B, sent a letter to the market columnist of the New-York Tribune seeking stock advice:
Question: I am a daily reader of your valued column in the Tribune, and your knowledge on investments has commended itself to me. The great impulse given to wireless telegraphy by the wireless concerts given daily at Newark and elsewhere suggest to me the advisability of making a modest investment in some wireless equipment stock that has potentialities. Could you name a few such stocks that I might invest in with reasonable assurance of large returns later on? What do you think of Radio common?…
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aeon.co/essays/economic-bubbles-are-irrational-but-we-can-understand-them
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