The upshot of bubbles

Financial bubbles get a bad rap. They’re actually perfectly normal and drive innovation

🫧 Economics | The good side of financial bubbles

When discussing losing money after the tech bubble popped, Stanley Druckenmiller, a fund manager, said, "I didn't learn anything. I already knew that I wasn't supposed to do that." Mr Druckenmiller had invested $6bn in tech stocks during the boom. Six weeks later, he'd lost half of it and his job.

Stories like this reveal the destructive power of financial bubbles. I covered ten of history's biggest busts in my book, “The Little Book of Big Bubbles”. But economists and investors, including this rag, often only focus on bubbles' downsides. We ignore the upside. While you can lose lots of money investing in a bubble, they hold the potential to rapidly improve our living standards. Bubbles, in fact, are excellent for society because they accelerate competition and innovation. This innovation holds the promise of making us more prosperous and leaving us better off than we would have been otherwise.

One way bubbles spur competition is by reduc…