The Wall Street Journal’s David Wessel interviews Nobel laureate Professor Robert Shiller about investing and bubbles this week. I particularly liked this bit, on why bubbles aren’t necessarily “bad” or “good”, but perhaps necessary for capitalism:
Q: Are bubbles always a bad thing, or do they have some good effects?
A: First of all, it’s a free world and people can do what they want. I’m not proposing we put the straightjacket on these things. The other thing is that human nature needs stimulation and people have to have some sense of opportunity and excitement. I think profits are an important motivator. In the long run, it’s hard to say that bubbles are really bad.
Take the Internet bubble in the 1990s. What that did was generate a lot of start-ups, some of them foolish, some of them failed, but others survived, so is it a bad thing? I find it hard to think what the alternative would be. We could have had a Federal Reserve that tried to lean against that. Ultimately, our policies in economics are somewhat intuitive and our models are not accurate enough to tell us what the right policy is, so I’m thinking we might have been better off if we tamed these bubbles, but there is no way to be sure.
I’ve been talking a lot about the biotech bubble this week. I actually think there are some real benefits to it continuing – with all of the money raised by the sector, a ton of research and clinical trials will be funded that might not otherwise have had the chance. Who knows what might come out of that, even if a lot of this capital sloshing around will ultimately be wiped out. As I’ve said, better to have a medical research bubble that leave behind possibly world-changing life sciences progress than a stupid social media bubble or another credit bubble that leave behind only debt and nothing of substance.
Don’t miss the rest of the Shiller interview, link below…