{"text":[[{"start":5.28,"text":"Swiss psychiatrist Elisabeth Kübler-Ross suggested that there are five stages of grief, but nobody has the attention span for that any more. We have leapt instead from stage one, denial — “there is no AI bubble”, to stage five, acceptance — “AI is a bubble and bubbles are great”."}],[{"start":26.36,"text":"The “bubbles are great” hypothesis has been advanced both in popular and scholarly books, but it was hard to ignore when Jeff Bezos, one of the world’s richest men, sought to draw a distinction between financial bubbles (bad) and industrial bubbles (less bad, maybe good). Bezos, after all, built one of the 21st century’s great businesses, Amazon, in the middle of a bubble that turned contemporaries such as Webvan and Pets.com into a punchline."}],[{"start":60.45,"text":"There is a solid theory behind the idea that investment manias are good for society as a whole: it is that without a mania, nothing gets done for fear that the best ideas will be copied."}],[{"start":75.5,"text":"Entrepreneurs and inventors who do take a risk will soon find other entrepreneurs and inventors competing with them, and most of the benefits will go not to any of these entrepreneurs, but to their customers."}],[{"start":89.45,"text":"(The dynamic has the delightful name of the “alchemist’s fallacy”. If someone figures out how to turn lead into gold, pretty soon everyone will know how to turn lead into gold, and how much will gold be worth then?)"}],[{"start":105.10000000000001,"text":"The economist and Nobel laureate William Nordhaus once tried to estimate what slice of the value of new ideas went to the corporations who owned them, and how much went to everyone else (mostly consumers). He concluded that the answer — in the US, between 1948 and 2001 — was 3.7 per cent to the innovating companies, and 96.3 per cent to everyone else. Put another way, the spillover benefits were 26 times larger than the private profits."}],[{"start":139.63,"text":"If the benefits of AI are similarly distributed, there is plenty of scope for AI investments to be socially beneficial while being catastrophic bets for investors."}],[{"start":151.57,"text":"The historical parallel that is mentioned over and over again is the railway bubble. The bluffer’s guide to the railway bubble is as follows: British investors got very excited about railways in the 1840s, share prices went to silly levels, some investors lost their shirts, but in the end, guess what? We had railways! Or as the Victorian historian John Francis wrote, “It is not the promoters, but the opponents of railways, who are the madmen.”"}],[{"start":183.81,"text":"Put like that, it doesn’t sound so bad. But should we put it like that? I got in touch with some bubble historians: William Quinn and John D Turner, who wrote Boom and Bust: A Global History of Financial Bubbles, and Andrew Odlyzko, a mathematician who has also deeply researched the railway mania. They were less sanguine."}],[{"start":206.51,"text":"“Funding the railways through a bubble, rather than through central planning (as was the case in much of Europe), left Britain with a very inefficiently designed rail network,” says Quinn. “That’s caused problems right up to the present day.”"}],[{"start":222.20999999999998,"text":"That makes sense. There are several possible definitions of a bubble, but the two most straightforward ones are either that the price of financial assets becomes disconnected from fundamental values, or that investments are made on the basis of crowd psychology — by people afraid of missing out, or hoping to offload their bets on to a greater fool. Either way, why would anyone expect the investments made in such a context to be anything close to socially desirable?"}],[{"start":252.84999999999997,"text":"Or as the Edinburgh Review put it, “There is scarcely, in fact, a practicable line between two considerable places, however remote, that has not been occupied by a company. Frequently two, three or four rival lines have started simultaneously.”"}],[{"start":270.42999999999995,"text":"Nor was the Edinburgh Review writing in the 1840s — it was describing the railway bubble of the 1830s, whose glory days saw promoters pushing for sail-powered trains and even rocket-powered locomotives that would travel at several hundred miles an hour."}],[{"start":287.3299999999999,"text":"The bigger, more notorious bubble of the 1840s was still to come — as was the 1860s bubble (“a disaster for investors”, says Odlyzko, adding that it is debatable whether the social gains outweighed the private losses in the 1860s). The most obvious lesson of the railway manias is not that bubbles are good, but that hope springs eternal and greedy investors never learn."}],[{"start":315.7299999999999,"text":"Another lesson of the railway mania is that when large sums of money are on the line, the line between commerce and politics soon blurs, as does the line between hype and outright fraud."}],[{"start":329.2599999999999,"text":"The “railway king” George Hudson is a salutary example. Born into a modest Yorkshire farming family in 1800, he inherited a fortune from a great uncle in suspicious circumstances, then built an empire of railway holding companies, including four of the largest in Britain. He was mayor of York for many years, as well as an MP in Westminster. Business and politics inextricably intertwined? Inconceivable!"}],[{"start":359.34999999999985,"text":"Another bubble historian, William J Bernstein, comments on Hudson that “the closest modern equivalent would be the chairman of Goldman Sachs simultaneously serving in the US Senate.” That’s a nice hypothetical analogy. You may be able to think of less hypothetical ones."}],[{"start":378.4499999999999,"text":"Hudson, alas, is not a man to emulate. He kept his finances looking respectable by making distinctly Ponzi-like payments, funding dividends for existing shareholders out of freshly raised capital, and he defrauded his fellow shareholders by getting companies he controlled to buy up his personal shares at above-market prices. In the end, he was protected from ruin only by the rule that serving parliamentarians could not be arrested for unpaid debts while the House of Commons was in session. He eventually fled to exile in France."}],[{"start":416.4799999999999,"text":"The railway manias are not wholly discouraging. William Quinn is comforted by the observation that when banks stay away from the bubble, its bursting has limited effects. That was true in the 1840s and perhaps it will be true today."}],[{"start":432.3599999999999,"text":"And Odlyzko reassures me that the mania of the 1830s “was a success, in the end, for those investors who persevered”, even if one cannot say the same for the 1840s and the 1860s. But Odlyzko is not impressed by analogies between the railways and AI. People at least understood how railways worked, he says, and what they were supposed to do. But generative AI? “We are losing contact with reality,” he opines."}],[{"start":463.2399999999999,"text":"Find out about our latest stories first — follow FT Weekend Magazine on X and FT Weekend on Instagram"}],[{"start":478.7599999999999,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1762848412_2520.mp3"}