Adam Smith Institute

An excellent article in Business Week explains why bubble markets aren’t all bad.

"The stuff built during infrastructure bubbles—housing and telegraph wires, fiber-optic cable and railroads—doesn't get plowed under when its owners go bankrupt," writes Daniel Gross in Pop! Why Bubbles Are Great for the Economy. "It gets reused—and quickly—by entrepreneurs with new business plans, lower cost bases, and better capital structures. And when new services and businesses are rolled out over the new infrastructure, entrepreneurs can tap into the legions of users who were coaxed into the market during the bubble."

For example, this happened during the late 1990s. Speculators predicted that the growth of the Internet would necessitate huge increases in fibre-optic cable. The predictions were incorrect and much more cable was laid than necessary for the intended purposes, but after, business used the cable in an even more beneficial way (see The World is Flat, the steroids part of the ten flatteners section for more on that). The high oil prices hit us where it hurts the most—our wallets. But this too shall pass, and when it does, we will all be better off because of it:

As the "hot money" is flowing in, the investment is building ever tighter and stronger economic ties between the developed and developing economies, creating wealth at an unprecedented rate, building bridges that will strengthen in coming decades. And it's the growing economic vigor of a vastly healthier global economy that is pushing up the price of commodities. These higher prices are encouraging enormous increases in investment in alternative energy and increased agricultural production.

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