Now at the same time that this wave was building something else was going on, something rather strange. We have gone through two economic bubbles in a very short period of time. Economic bubbles generally occur for two reasons. The first and the one that most people focus on is that businesses are generally flush with cash, have money to burn. They are looking for something new to invest in, some novel source of super capital. It is a feeling in the air–vast amounts of money can be made in some new way.
The competition heats up. Someone hits upon something that promises fast money and in fact yields a substantial return; it gains momentum. The profit that is produced has little to do with real economic forces, but rather with human psychology–greed, the contagion of emotions, exuberance that comes from something fast and easy. Money is poured into things that have no real value apart from what people imagine is there and once real economic forces come into play, the bubble is burst and it all collapses.
Another aspect of bubbles, one that is generally less discussed, is that they tend to prefigure or occur in periods of transition. People sense that something is going on; a significant shift is occurring in how business is done. They are more likely to believe that all of the old rules of investing and building value are a thing of the past and that anything goes. And so in such transitional periods people are much more susceptible to the psychology of a bubble and the exuberance it breeds.
The fact that we went through two bubbles, one succeeding the other in a matter of a few short years is an undeniable sign of something stirring from below–a sign of change and systemic instability. The first bubble was in tech stocks and its affect was relatively mild. But the second bubble (in finance and housing) burst at a moment when the wave that had been building since the 90s had finally gained sufficient momentum. These two forces–deep social changes and the economic bubble–converged at a moment in time to create a kind of tsunami. The old order that had been clinging to power and resisting what had been stirring from below was finally swept away in a cycle in capitalism known as Creative Destruction.
As this tsunami is just now beginning to recede, what we see in its wake is an altered landscape that at first glance seems like devastation. Businesses that had been dependent on times of prosperity, that created products that had no deep connection to consumers and needed a lot of marketing to be sold, these are wiped out by the tsunami, never to return. Large companies that had used their size as tremendous leverage in the marketplace find that it is difficult to adapt; they are dependent on their scale of mass. They are like dinosaurs–big and lumbering, they will continue to make noise but they are doomed to disappear within a decade or two.
Other companies, however, which had foreseen the tremendous shift going on and had structured their business accordingly, they are poised to not only survive the tsunami, but to thrive. I am referring to a company like Google, which I will talk about later on, but there other examples as well. Last and most important, with all the destruction that is going on, there is finally space for new businesses to spring up, based on a model that fits the times. A thousand flowers can now bloom.
Stay tuned for the next installment, or read The Descent of Power as an ebook.