Bubbles are a natural aspect of capitalism

Speculative bubbles have been around as long as capitalism has existed.  We look back at things like Tulip Mania of the 17th century with wonder.  But bubbles have continued to emerge in diferent forms ever since.  Each tie the prevailing feeling among speculators is, “this time it’s diferent”.

Two recent articles in The Atlantic explore the reasons for bubbles in some detail.   Exercises in “experimental economics” have shown that even under carefully controlled conditions, traders will behave in a way that creates speculative bubbles.  It rather comes down to a game in which the players place bets based on what they know and what they think the others in the game know (or don’t know).  It seems a little like poker.  See Virginia Postrel in the December 2008 issue.

In the same issue Henry Blodget discusses how the financial bubble grew and what lessons can be learned from it.  He feels that bubbles are to be expected as a natural partof a system as dynamic as capitalism.  A web of relationships, fears and expectations connecting Wall Street banks and you and me created and fed the financial bubble.  Although bubbles destroy a lot of wealth they also create it, and allow for the financing of new technological innovations, such as the rapid growth of the Internet.

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