The Clever Bit and the Gold Rush
In my last post I lamented the fact that it sometimes seems that fewer tech companies have a clever bit and that it seems it is more and more just about applying some known tricks to existing industries while driving software’s mission to eat the world forward. And that maybe this is just the way things go, just like how you used to be able to build a steam engine to build a factory, but later you could just buy a steam engine, you don’t need to be really good at tech anymore to build a tech company. When all companies are tech, none of them are.
But I think there’s more to where we are in our economic development. It occurred to me that historically economic progress has been equal measures of clever bits and gold rushes. The archetypal gold rush is probably the California, well, eh, gold rush. Gold is discovered and it doesn’t matter who is more clever or better at gold panning, what matters is who gets there first and who gets to stake a claim first.
This is what happened during the railroad boom in the United States. Where before you needed the right engine and to be able to lay down sturdy track, now suddenly it was about who got to a town first. The profits from unlocking a new town, let alone going coast to coast for the first time were phenomenal and shoddy work could also be redone later.
In Great Britain a strange chartered company gold rush had been playing out ever since the East India Company was started in 1600. You find some new bit of the world to trade with, get the crown to give you a royal charter that grants you a monopoly and see the money roll in — partly because it was a good time for setting up new trade routes but mostly because the trading was often done on rather uneven terms.
More recently we saw something like this play out during the dot-com boom. The IPO of Netscape showed that the enthusiasm for this new thing called the Internet was enough to take companies public that were not profitable by a long way. Hoping to follow this example, new companies sprung up left and right fueled by carefree venture capital spending. And these new companies started trading on the Nasdaq in record time where retail investors jumped on the opportunity to ride the dot-com boom.
There are certain similarities between these three cases. Arguably they all start with an actual clever bit; cross continental railways were possible because of tremendous improvements in technology. For more than five thousand years riding a horse had been the fastest way for a human to move and during those five millennia speed had barely improved. Now you could do San Francisco to New York in under four days.
The chartered companies were not just monopolies. Nautical innovations made it possible and economically feasible to trade over long distances. And as much as it was hyped at the time, it turned out that the Internet was indeed the new new thing that would change everything. Netscape the company went out with a whimper, but Netscape the browser changed the world as we know it.
In all three cases the role of government is also interesting. The mad dash to build the first transcontinental railroads would not have taken off as it did without generous government subsidies in the form of loans and land grants (with some of this based on the amount of track laid down leading to interesting incentives).
The chartered companies were creations by the government; the crown grants you a monopoly to trade with some corner of the globe and off you go. It went even further though; entrepreneurs and speculators lobbied the British government such that in 1820 a law was passed that made it impossible to have a joint stock company without a royal charter.
The Internet of course started off as a government research project into building a network that would be able to withstand a nuclear attack by presumably the Soviets. Around the same time as the fall of the Soviet Union, the rules were relaxed and changed to allow for commercial use of this network of networks.
The final similarity is of course that all three gold rushes led to spectacular bubbles. The railroad booms and busts are legendary and include the first case of a short squeeze that makes the GameStop saga look tame. I don’t suppose the dot-com bubble needs much comment here. The aforementioned 1820 law is also known as the bubble act because it kicked off a bubble in chartered companies, especially the South Sea Company.
So a new thing happens. It starts with a new technology, the clever bit if you will. Sometimes a change in government regulation accelerates the process. The new thing starts to thrive. This in turn attracts investments and when it turns out that the new thing is generally applicable, a gold rush follows. In the gold rush phase investors don’t really understand what is new about the new thing, just that it is the new thing. This can easily lead to a bubble and when it pops the last investors are left holding the bag and many others will say, that new thing, I never thought it would amount to much.
So how do these historic scenarios compare to where we are today? Despite markets being rather frothy all over, you can only be sure something was a bubble after it bursts. We are in the middle of a massive transition from a service oriented economy organized according to management principles to a data oriented economy organized by way of software. That should create a bit of a gold rush!
Even the clever bits that turn into bubbles by way of gold rushes often end up contributing to the next new thing. The railroads did turn the US into the biggest economy ever. The South Sea bubble didn’t create much for future use, but the dot-com bubble for sure did. This is how progress works and progress is what we need. Just keep the balance between the clever bit and the gold rush.
