It was a time of enormous optimism, based mainly on one specific technology that promised to have transformative effects on the economy. Businesses developing and implementing the new technology spent huge sums on construction and equipment. Individual investors piled into these businesses’ stocks, sending their prices soaring.
And enthusiasts were right about the technology’s potential. It would eventually transform the economy, indeed society as a whole. But long-term transformation doesn’t necessarily translate into profits for businesses at the cutting edge. As it became clear that the financial returns wouldn’t live up to the hype, some companies went bust, while stocks tied to the technology lost most of their value. And plunging capital spending pushed the economy into a nasty recession.
Yes, Britain’s Railway Mania of the 1840s was quite a story.
Over the past couple of months there has been a palpable change in the way people talk about the technology everyone calls AI. However, it isn’t really artificial intelligence as people usually understand it. Some commentators are careful to say “generative AI,” where in practice the extra word serves the same purpose as calling some supermarket items “cheese food” or “juice beverage,” indicating that they aren’t quite what they look like.
Whatever it is, few are denying that the technology is impressive. But warnings that there may be a huge AI bubble are getting louder. Worries about the financial underpinnings of all that capital spending are growing. And many people have noted that the AI boom is driving most, possibly all, of the economy’s recent growth. So what will happen if the boom goes bust?
By the way, some early subscribers to this newsletter may remember that I interviewed Jim Chanos, the famous short-seller, back in February, and he made the case then for an AI bubble. But people weren’t yet ready to hear it.
Today’s primer will not be about the long run economic and social implications of AI, which is an entirely different subject. I will write in a future primer about technology, growth and jobs in general, with some speculations about AI. For today, however, I’m going to focus on what history — especially, but not only, the telecommunications boom of the 1990s — can tell us about the AI boom and its consequences.
Beyond the paywall I will address the following:
1. The AI boom in historical perspective
2. The logic of technology manias and bubbless
3. The “Winner Take All” nature of technology bubbles
4. What will happen if the AI boom goes bust?