‘What has been will be again, what has been done will be done again; there is nothing new under the sun.” Ecclesiastes 1:9
In 1868, Edward Thornton, then the British ambassador to the US, took to his feet at a banquet in honour of Samuel Morse.
Morse was then one of the most famous men in the world, known as the inventor of the telegraph and the man who gave his name to the famous dot-dot-dash code that transmitted messages along the telegraph wire.
His invention had changed the world, and the world was feverishly excited about it.
The connection of an undersea telegraphic, for example – just three years before Thornton’s speech – had inspired a parade in New York city.
One newspaper said it was “next only in importance to the Crucifixion”.
So Thornton was merely reflecting the mood when he stood up at the banquet and announced that not only was the telegraph the technological innovation of its age, but that it had the power to make war virtually impossible.
“What can be more likely to effect [peace] than a constant and complete intercourse between all nations and individuals in the world?” Thornton asked the audience.
“Steam [power] was the first olive branch offered to us by science,” he said, referring to the rise of transatlantic ships. “Then came a still more effective olive branch – this wonderful electric telegraph.”
The technological advances were real: the telegraph shrank the world and dissolved the oceans, connecting people and nations and giving them the ability to send messages across the Atlantic in minutes where before it had taken days.
What Thornton didn’t know was that he was in the middle of a bubble.
Within two years of Thornton’s speech, the Franco-Prussian war was roiling Europe in its most significant conflict for generations.
Three years later, a financial crisis thumped the markets that had invested in both telegraphs and the railroads. Reality had punctured the euphoria.
If there is a lesson to be learned from the telegraph, it’s that bubbles aren’t a solely financial phenomenon – they are about the human reaction. It’s a lesson that’s acutely relevant today.
Carlota Pérez is a Venezuelan economist who has studied 250 years of technology bubbles – from the industrial revolution through canal mania, and including the rise of globalisation through development of the railroad, shipping and the telegraph.
Pérez knows that while technology changes, human behaviour doesn’t. And for her, we’re in the midst of just such a technology bubble.
In a paper she wrote in 2009, she laid out her reasons. The patterns broadly repeat regardless of the technology or the financial markets, she said. What is consistent is human behaviour.
What matters is how human beings absorb new technological revolutions. Whether it’s the lure of a new form of technology, or the availability of easy money, the consequence is hype and “the illusion that there are high profits to be had with very low risk”.
In short, a bubble.
Like all bubbles, it is characterised by resistance to the very idea that it’s a bubble, Pérez said.
“Every time, the notion of a new economy seems to take hold, to spread and be held by serious people.”
If you doubt it, consider the reaction to Pokémon Go. It is a child’s game in which a smartphone can be used to find the locations of “hidden” digital characters within the game. But when it was launched earlier this year, it generated a scarcely believable response.
Everyone will remember the human stampedes of players attempting to collect these tiny digital characters, swarming across crowded streets in huge global cities such as Tokyo and New York with no regard for traffic lights or personal safety. They trampled over sacred monuments and disregarded the sensitivities of Holocaust memorials.
Two men fell off a cliff playing the game in the US and one man died in Dublin when he fell off the South Wall while absorbed in the game.
But it was the effect on the share price of Japanese company Nintendo that was most telling.
Through the month of July, Nintendo’s share price rocketed by nearly $8 billion when the news of people’s obsession with the game began to dominate news cycles, before it fell nearly 20 per cent – or almost $7 billion – after investors realised that the company would earn only a tiny amount of money from the game.
The entire swing hinged on froth and sentiment, and on the belief that there’s a new economy with different fundamentals – that this time it’s different.
It’s what anthropologists call magical thinking.
Daniel Miller is a Professor of Anthropology at University College, London.
According to Miller, Pokémon Go might be the technological equivalent of mood rings or cabbage patch dolls or pet rocks, but the magical thinking has a much greater reach.
“There’s a lot in the news about recent political events that not everyone is particularly happy about,” he says, referring to Brexit and Donald Trump’s election.
“I think it’s fair to say that every day you’ll read at least some version of the story that it’s because of social media.
“Every day you’re hearing amazing claims made. Someone will say, ‘Young people don’t know what friends are [any more]’ or ‘Our cognitive abilities have changed’ [because of the internet].
“By media accounts, the most common argument is that people are now very siloed, that they only hear the people they agree with, that we went from a more open politics to this kind of narrow form of things circulating among friends that they agree with and therefore that’s been bad for politics,” he says.
Some of it is unjustified. In Miller’s native England, he grew up hearing people described as Guardian readers or Telegraph readers, as if they were separate species.
They represented siloes of political opinion in a media that already had strong – and strongly articulated – opinions.
That’s not to say that this technological revolution hasn’t wrought changes, Miller says. Some of those are good – such as the usefulness of social media platforms such as YouTube in educating people in poor countries, or in strict Muslim societies the facility through social media for teenagers to foster relationships that they never would have in person under their parents’ watchful eyes – but some are most definitely negative.
“When it comes to the impact on the newspaper industry, I think it is devastating. It’s radical, and if you want the place where I share the anxiety, it’s with newspapers,” he says.
“I’d actually be quite pessimistic about it because [it] seems to get worse and worse by the year.”
He’s not alone in that view. Mary Gray is a senior researcher at Microsoft’s research lab and a fellow at Harvard University’s Berkman Klein Center for Internet and Society.
For Gray, the concern is that people are increasingly comfortable indulging in that magical thinking and – temporarily lured by the belief that things have changed forever – ignoring the consequences of their decisions.
“It’s a deep irony about tech innovation in social media: we experience it as something completely magical that just happens,” she says.
“That’s part of what’s being sold to us, and that’s part of the technology company’s job, is to make it feel as though we’re getting this bit of information [through magical means].”
People – the serious people Pérez described – seem happy to ignore those basic fundamentals, consumed by the notion that everything has been turned on its head. They read news stories without thinking about how journalists get paid; they buy e-books without considering the work that is required to produce one; they book taxis without querying the business model of that company and its effects on the world around them.
“I have the privilege of using those [taxi-hailing] services that I’m often using because my public transportation options are breaking down,” Gray concedes.
But other people may not have that option, and it means that her use of companies such as Hailo or Uber is “contributing to a collective destruction of the publicly-available resources that we all need and that I want my fellow citizens to have”.
And what about the drivers, who often work for companies which don’t regard themselves as taxi firms but as software companies?
“Anyone getting out of being held accountable as an employer, I’m looking really closely at,” Gray says. “We are going to have to learn a whole new set of practices as consumers of being aware [of] where our goods and services come from.”
Mimi Ito, a cultural anthropologist at the University of California, Irvine, agrees. The technologies will last, but the financial implications and the cultural effects are far less certain.
“I am less worried about [investors] losing money than about the bigger societal effects that get much less attention,” Ito tells the Magazine.
“We haven’t grasped how these platforms are contributing to inequality, to cultural conflict, loss of privacy, and the erosion of our public and political institutions.”
If the cultural and social impacts of a bubble are hard to discern, surely the markets – with their focus on cold, hard numbers – can provide clarity.
But there, too, opinions diverge.
Andreessen Horowitz is a venture capital firm based in San Francisco, California. Founded by Marc Andreessen and Ben Horowitz, it has become one of the biggest and best-known technology investment firms in the world.
Within the tech world, it is known by its nickname a16z, and it has famously invested in Facebook, Groupon, Twitter, Airbnb, Skype, Instagram and a lot more.
If anyone would know whether there’s a bubble, surely it’s a16z?
In June of last year, a16z made its case against a bubble in technology.
For starters, it said, real earnings among tech companies were still growing. Tech companies aren’t dominating stock markets with their valuations like they did before 2001.
Market flotations are not as common, meaning the public isn’t buying in at inflated values only to get stung. People are spending real money online this time. And that market looks set to grow because the internet has real reach now, compared to 2000. And mobile!
It’s a compelling argument, and yet the headline figures – as A16z conceded – look scary.
We are going to have to learn a whole new set of practices as consumers
There are more than 200 so-called unicorn companies, that is technology companies with valuations of more than $1 billion.
And while three quarters of the largest venture capital investments for technology firms have been raised in the last five years, the rate of fundraising had slowed dramatically through 2016.
The title of the presentation was: this time it’s different, wilfully echoing the fateful words of every investor in every bubble since speculative investing began.
There are many who disagree. Bill Gurley is a partner with Benchmark Capital, which itself has made millions from investments in major technology names such as Dropbox, Twitter, Uber, Snapchat and Instagram.
Gurley has been warning of the inflating tech bubble for years.
Part of the problem, he argues, is that hype. For companies not floating on capital markets, valuation is a little more art than science.
A huge part of the problem, he argued in a nearly six-thousand-word essay he published last year, is that the efforts to fix the last crisis have created an enormous pool of investors looking for financial returns and not getting them from the traditional assets such as bonds, where interest rates are at historic lows.
It means that hype-driven start-ups look highly alluring.
“Never in the history of venture capital have early stage start-ups had access to so much capital,” he wrote. “Back in 1999, if a company raised $30 million before an IPO, that was considered a large historic raise. Today, private companies have raised [ten times] that amount and more.”
It means companies are burning through cash with little scrutiny, and coming back to the markets begging for more – and getting it.
“We had done something in the ecosystem to encourage this type of outlandish promotion, where you feel like you need to use words like ‘trillion’,” he said.
“And I think it’s dangerous.”
For the companies looking for that kind of funding, the goals have shifted, according to those who study technology and bubbles.
Tom Boellstorff – a professor of anthropology at the University of California, Irvine – is no investor, but he knows human behaviour, and what he sees in this market is hype and the creation of a cult of short-term returns.
He calls it start-up culture, in which companies are created not for the goal of creating market share or profits or to make as many sales as possible,
but to be popular in the short term, to get bought out and then go out of existence, and above all to make money for their creators before the bubble bursts.
“If you’re a small start-up where your plan is to go out of business, then a hype tech bubble that gets you bought for a lot of money [means] you’ve succeeded and who cares if the bubble collapses, you’ve made your money and done your thing,” he says, describing what he sees as the mindset behind such companies.
“That’s a different model of company capitalism than you had for railroads or oil companies – railroads never tried to, Union Pacific never tried to lay a hundred km of track and then get bought out by another railroad company.”
Pérez agreed. While Andreessen Horowitz might present the small number of public flotations of companies as evidence of the lack of a bubble, investment behaviour is still out of sync with the fundamentals.
“Some of the most important activities that finance continued to engage in as regards the real economy were precisely M&As, private equity buyouts and restructuring,” she said.
With a number of major companies now full of cash thanks to the current financial market, “the aspiration of small new companies has been to be taken over by Google or Microsoft or Cisco at prices that have at times resembled those of the late 1990s IPOs.”
The hype continues to grow. That frothy start-up culture has produced mass gatherings of technology-obsessed investors such as the Web Summit conference, run by Irishman Paddy Cosgrave.
The web summit is the evangelical Christian mega church of our age. American magazine the Atlantic – in its report on this year’s event – described companies promoting apps offering virtual bartenders, robotic debt collectors, or an app that promises to “boost workplace motivation with a simple employee-recognition software”, all marketed aggressively in special in-group language bleached of meaning beyond the buzzwords used to impress prospective investors.
Those investors, Bill Gurley warned, should know their place in the pecking order.
“For investors who are just now being approached it is the following: it’s not the second inning or even the sixth, it’s the fourteenth inning in a five-hour baseball game.
“You are not being invited to a special dance, you are being approached because you are the lender of last resort,” he wrote.
“Parting with your dollars now would be an extremely risky move. Caveat emptor.”
The Atlantic was more blunt. The Web Summit is “a hyper-concentrated image of our entire world, and the panic and confusion that is to come”, its correspondent Sam Kriss wrote.
“Web Summit is where humanity rushes towards its extinction.”
So what happens next?
No one quite knows, but in 2015, the Center for Long-Term Cybersecurity at the University of California, Berkeley, came up with five different scenarios to describe what could happen to the huge volumes of information being gathered by technology companies.
In one of those scenarios, it outlined what would happen if the bubble burst.
The trigger? Mere sentiment.
The tectonic plates are already shifting, they argued, describing a “brewing ideological disillusionment within the tech community and broader society about the Valley’s product mix”.
Investors in technology companies will begin to worry about “when did we stop trying to change the world and instead just make indulgence products for rich 30-year-old singles?”.
“As often happens in markets, it could be an exogenous shock that turns these rumblings into a crisis,” they said. A black swan event or some seemingly unrelated concatenation of events.
“Within a short period, the market capitalisation of big and small technology companies alike could collapse — declines in the order of 50 or 75 per cent would not be out of the question.
We are heading for another crisis. And this time we could fall very deeply into recession worldwide
“When ‘castle in the air’ narratives lose their lustre, the carnage is frequently swift and ruthless — and this time would be no exception.”
A financial panic would spread.
As a team of academics studying cybersecurity, they were particularly interested in what would happen to the incalculable volumes of data – Big Data, that is – these bankrupting companies are currently sitting on.
Like any company being liquidated, the data would be sold – your personal data, your family’s, your government’s; a fire sale of people’s private data, gathered through an effectively unregulated time by unsustainable companies, sold to the highest bidder whether that’s governments or private investors, in legal and illicit sales.
All it would need is a spark to light the tinder.
A ratchet-up of violence in the Middle East, maybe.
A dramatic rise in oil prices that could result in a sharp fall in confidence.
Maybe the underperformance or even failure of a single iconic firm, or an underwhelming IPO. Or, maybe, a contested presidential election in the United States.
Carlota Pérez doesn’t like what she sees.
“The financial world has abandoned the real economy since the 2008 crash. It is trapped in a casino betting on currencies, bonds, securitised debt, derivatives and whatever else comes along,” she said in an email to the Magazine.
The combination of quantitative easing, artificially low bond yields, and massive economic inequality has produced the perfect storm for investment in hyped-up technology companies.
“We are heading for another crisis,” she told this newspaper.
“And this time we could fall very deeply into recession worldwide. If governments don’t understand the risk . . . then business should!”
Tom Boellstorff believes that from here, the outcome is unpredictable.
“The thing for me as a social scientist is that anyone who can tell you what is going to happen in the future is trying to sell you something.
“Social and technological [trends] are not like the laws of gravity, where you drop a rock off the top of a building and I can predict where it’s going to be five seconds from now – that’s predicting the future.
“But things with human cultures and especially where technologies are involved have such unexpected outcomes and are so complex that they just can’t be predicted.”
It may be unpredictable. But it won’t be unexpected. ■