Daniel Gross has an interesting piece up at Wired called 'In Praise of Bubbles", arguing that bubbles, though often ending painfully, almost always spur some type of innovations and economic progress:
Financial bubbles get a bum rap. People focus on the sob stories (think of the grandmothers who invested in Pets.com) and the tales of financial chicanery (think WorldCom). But bubbles - those sudden, excessive, and seemingly irrational investment stampedes - aren't all bad. Sure, they tend to follow a painful cycle of boom, bust, hand-wringing, and abject humiliation. But there's often another step at the end: innovation. Over the past 150 years, many bursting bubbles have paved the way for economic and cultural progress.
First of all, he's mainly talking about technological bubbles. I don't think the Florida Real Estate Bubble, or the Tulip Bubble did much to improve the long-term health of their respective economies. If anything, they probably hindered advance for some time, by souring people towards investment. Other bubbles also have the consequence of inducing unfortunate regulation.
That being said, it's clear that the economy's ups and downs are not mere unfortunate side effects, as many make them to be, but crucial to the very nature of the economy as a dynamic system. Consider anything else--with our great habitable climate here on earth, we get ravaging storms that would be unheard of on the moon. A living being must face sickness many times. An open internet has security and virus threats as part of its nature. The idea of eliminating cycles, or even bubbles, would demonstrate as much hubris as trying to tame the weather.
Speaking of hubris, bubbles, and trying to tame them, Eddy Elfenbein found an old letter to the editor of the NY Times from a young Objectivist named Alan Greenspan (1957):
To the Editor:
Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Mr. Hicks suspiciously wonders "about a person who sustains such a mood through the writing of 1,168 pages and some fourteen years of work." This reader wonders about a person who finds unrelenting justice personally disturbing.
Alan Greenspan, NY
Sic transit, oh wise one.
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