Technology bubble has many similarities with railways in the 19th century
Anyone who has ever traveled around Britain by train will have discovered two things. One, they are a relatively poor way of getting from place to place. And two, as if in compensation, they make a fine refresher course in industrial and economic history.
As you kill time between trains, look closely at the blackened stone and brick of the old Victorian stations: if those walls could speak they could tell you everything you need to know about how markets have a tendency to cyclical excess, and how technology bubbles can crash without necessarily destroying the technology that first breathed life into them.
This point is made brilliantly by Darren Williams and Richard Reid in an essay called Back to the Future, just put out by Schroder Salomon Smith Barney, a unit of Citigroup.
Plenty of other commentators have drawn attention to the similarities between the new economy bubble we have just lived through and the great railway investment bubble of the mid-nineteenth century. Both were about a revolutionary new technology that allowed lots of stuff to be sent from one place to another far more quickly and cheaply. Both involved huge and speculative capital investment and both were marked by a stock market bubble in which fortunes were made and lost in the blink of an eye.
Williams and Reid have looked beyond that to see what happened to the railways after the bubble burst. Their conclusion: that even after share prices have collapsed, the core technology can still have profound effects on the economy, promoting rising productivity and corporate restructuring for decades to come. At a time of deep new economy gloom, with each day bringing news of more businesses closing, that may well be a lesson worth re-learning.
The manic, chaotic over-investment of the railway boom is best illustrated on London's Euston Road, a dismal, traffic-clogged strip of land filled with train stations, office buildings and cheap hotels. All in a row you get King's Cross, St Pancras and Euston stations, three almost identical hubs sending trains to different bits of the north of England.
Why would anyone build three train stations right next to each other, each of them hugely expensive and one (St Pancras) among the greatest works of Gothic architecture in the world? It's like building three airports next to each other. Surely it would be cheaper and more convenient for passengers to have one larger station, with three different lines running into it?
No doubt it would, but in a boom things don't work out like that. Everything becomes unhinged. How many toy portals and mobile messaging services did we need? Not as many as we got, just as the Victorians didn't really need three stations on the Euston Road. But that was how it ended up.
In 1845, 620 railway schemes were put before the British Parliament, with a combined capitalization of £563m, equivalent to 100% of British GDP at that time. Needless to say, most of them collapsed. Britain is a smallish island and you can't really find 620 places worth running a railway to. At the end of 1845, share prices collapsed and even good companies such as Great Western Railways and London and North Western Railways saw their share prices more than halve, and remain depressed for a decade.
The point is what happened next. The railways did not disappear. They had a huge impact on the British economy. In the first half of the nineteenth century, UK growth averaged 1.5% a year; in the second half of the century, it averaged 2.5%. Not all of that was due to railways but some estimates put a quarter of that growth down to the new transport system.
That was combined with three decades of permanently declining prices which, in both the UK and the US, actually fell by 20% between 1870 and 1900. At the same time, productivity, after initially falling as companies grappled with the new technology, started to rise sharply. In the end, the winners from the railway boom became the giants of the first industrial era ' when the Dow Jones index was launched in 1884, nine of the original 11 stocks were rail companies.
Does that sound familiar? Strong growth, low inflation, a productivity revolution and a new industrial elite; precisely the bill of fare promised by advocates of the new economy.
'The fact that new technology get-rich-quick schemes often end in tears does not mean the technology itself will fail to deliver significant long-term benefits,' note Williams and Reid.
Marcus Brookes appointed CIO
In association with Professional Adviser
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