Don't Fear the Bubble

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Let's go back to the dot-com example. What's remarkable is just how quickly the Internet economy was established during that so-called era of fictitious value. "The conventional wisdom is that the period of exuberance during the boom period—especially 1999 and 2000—was a bubble," writes BusinessWeek Chief Economist Michael Mandel in his book Rational Exuberance. "It carries connotations of something fragile, which was never quite real in the first place."

But rather than a bubble, argues Mandel, the second half of the 1990s could just as easily be called an "age of exploration." "The low cost of capital enabled risk-taking people and companies to try out lots of new ideas simultaneously, and on a large enough scale that they got a fair test," he writes.

And some bubble beneficiaries ultimately stand the test of time. During the dot-com boom/crash, the online grocer Webvan went out of business but bookseller Amazon (AMZN) survived, and eventually found its way to solid profitability. Web browser pioneer Netscape essentially disappeared, but Google (GOOG) triumphed.

Putting Resources Where They'll Pay

Put it this way: Bubble moralizers greatly underestimate the vital role of speculators and speculative markets in allocating resources toward an economy's fast-growing sectors and away from stagnant industries. "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."

Now, let's fast-forward to today. Much of the rise in prices for oil (and food for that matter) reflects the growth of India and China. But remember all the warnings about the developed world's eagerness to invest in China, India, Vietnam, and other emerging frontiers of global capitalism, how it had all the earmarks of a bubble. The bubble worriers will eventually be proved right. Too much money is flowing into emerging markets.

But take a step back. While 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.

Meanwhile, the Fed (as well as other central banks) should continue to develop the expertise and authority to limit the downside damage to the financial system and the real economy when prices abruptly tumble. Ben Bernanke is leading the way.

Will the boom go bust? Of course it will. Fortunes will be made and lost. Investments will coin money or vanish. But much of what will remain will be real, and of lasting value. Thank you, speculators.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.