Article by John Blundell in The Scotsman
Robert Miller, a former colleague of mine at the Institute of Economic Affairs, has just published railway.com, a rewarding look at the remarkable parallels between the arrival of railways 150 years ago and the sudden emergence of the internet for us now. Both networks promised to enhance productivity stupendously; yet often the rewards did not go to the original investors.
It might seem a bit strained to compare Isambard Kingdom Brunel and his Great Western Railway with Bill Gates and Microsoft. Look closer and the homologies are arresting.
Remove the top hat, waistcoat and whiskers of Brunel and he is shown to be a man with near identical dilemmas to those of Gates.
The most aesthetically pleasing argument from railway.com is that those who make bad investments are a necessary and valuable part of the market process. When an entrepreneurâ€™s venture fails, he has added to the body of learning. If a scientist falsifies a theory, he is performing a role very much like a businessman.
This adds a certain stature rarely attributed to commerce. I like the idea that an honest effort that finds no customers is still helping the mysterious process we call the market.
Most of academic economics is polluted by the dangerous notion of â€˜perfect competitionâ€™. It is dangerous because it is so utterly unlike the real world. Capitalismâ€™s great duty is the taking of risks. Success is measured not so much by the virtues of the product but its place in a subtle flux of prices and alternatives. Perfect competition, with its associated poetry of â€˜equilibriumâ€™ is a romantic folly.
This study goes into the close detail of a new technology. How, for example, did Britain choose its railway gauge when the engineers believed a far wider one would work better? It became a matter of necessity for railway companies to carry through-traffic on each otherâ€™s tracks. They resolved it by agreeing standards.
We have just lived through the huge conceit of the internet bubble. It turns out to be all but identical to the railway bubble of the 1850s. Miller makes the telling claim that the evident “waste” of all that money poured into both speculative surges actually achieved its purpose: to lubricate and reward a new technique, the full nature of which experts could not guess.
It was perhaps the absence of rules or regulations impeding their way that allowed both to happen so quickly and transform everyoneâ€™s expectations.
Being first in a new field has some glamour. Your shares may spiral upwards, but you are exploring new territory and likely to make the mistakes from which only your rivals will profit. The spectacular over bidding for 3G mobile licences turns out not to be that different from the railway companies scrambling for new routes.
Edinburgh was the great prize as the steel tracks stretched northwards. GNER won. By any engineering measure, Brunelâ€™s Great Western Railway was a triumph. “Godâ€™s wonderful railway” was the salesmanâ€™s phrase. Yet GWR shares touched Â£220 at the height of the railway bubble to ruin many at Â£40 by 1867.
Some important conclusions emerge that we cannot find in the fictional horizons of the textbooks. The great co-ordinating mechanism is price, or more precisely relative prices.
It seems evident from this scholarly attempt to observe parallels with the past that the policy implications are entirely laissez-faire.
All attempts at favouritism or capture by the political classes only impede learning. Trying to rig market processes, even for the most benevolent intentions, can be damaging.
There is nothing as daft as misgivings about the future. The market is an infinitely subtle process but with a defining characteristic – that all bargain makers are voluntary in their actions.
Such insights perhaps have enhanced value in Scotland where the preponderant assumption seems to be that public bodies can best fashion our future. Civil servants, however alert, could never have given us the railway or internet revolutions.
“Irrational exuberance”, as market bubbles are described, are not evidence of foolishness but of the participants imagining opportunities and providing the funds to transform our opportunities. The main beneficiaries turn out not to be the capitalists but the rest of us.
railway.com by Robert CB Miller IEA, £12.50