Americans have become bubble-conscious and bubble-shy. A tech bubble in the nineties, a housing bubble in the aughts, and fear of a massive fiscal bubble soon to come have temporally darkened the horizons of the world’s most optimistic people.
Not that bubbles are anything new. Black Friday popped the stock market. Eighteenth century bubbles burst on the Mississippi and in the South Seas. Tulips even made one bloom in Holland. Whenever greed and mania combine, bubbles beckon.
Conventional bubble imagery captures the stance of an outsider who watches it swell, vent, and collapse. But to genuinely appreciate bubble dynamics the insider’s perspective is better. The bubble experience, from within, is more like that of being in a closed universe, wherein lines of sight curve back upon themselves, and recycled expectations reinforce one another until surrounding realities are eclipsed. Realties, of course, cannot forever be obscured, however hyped hopes or blinkered perspectives become. When their force proves irresistible, bubbles break, revealing the true dispensation, all the grimmer for its long denial.
Most bubbles occur within particular settings, however their consequences may ramify. Illusions vanish about stocks, real estate, the ability of governments to pay their debts, with concomitant spillovers as the soundness of related assets are called into question. An atmosphere of gloom then replaces euphoria, apprehension complacency, and the wheels of commerce timorously slow. But society’s mainsprings generally escape permanent damage. Its institutional infrastructure, its human resources, even much of its financial capital, survives intact. And as good feeling recuperates constructive activity assumes its normal pace.
But can a whole society bubble and burst, with the resulting fall more than just a ratchet or two, but into an entirely new and degraded state? Can runaway expectations fuel the blowout of an entire civilization? Could ours be at such a risk? There may be reason to think so.
Consider the inner logic of the bubble: skyrocketing expectations due to forgetfulness about life’s plainer facts. This usually starts in a process of habituation that spirals out of control — gradually at first and then with more and more rapidity. The price of a given commodity rises steadily, initially as the result of a well-founded belief in its growing value, then because its track record suggests a sensible investment, and finally in frenzied efforts to turn a quick, and seemingly inevitable, profit. As the process accelerates, behavior becomes more and more reckless, not only through a spontaneous upsurge of animal spirits, but because a multiplying number of intermediaries — brokers, merchandisers, politicians — come to profit off the profit-taking and pour further fuel on its psychological fires. At root the bubble phenomenon resides in a fantasy that becomes increasingly “real” to the fantasists as they share it ever more exuberantly with one another, and as it is stoked by those having a rational interest in sustaining the collective delusion.
No bubble can inflate without the help of anomaly. Typically, the anomaly is heightened economic value or opportunity. Technological breakthrough, the sudden availability of something otherwise precious, an unexpected upswing in demand, spike possibilities for gain, and produce spurts in investment, exploration, or acquisition. The dynamic growth of the Western world’s, and America’s, economy has produced many such anomalous episodes, each, potentially at least, the seed of a bubble. But all this has been encompassed in a far greater anomaly, which creates the possibility of a mega-bubble of colossal scale, one that might burst the entire modern world.
For about the last two hundred years (three in a few locales), the fundamental structure of Western civilization has been anomalous in a crucial way. The anomaly consists in this: whereas in the overwhelming majority of societies the dominant route to wealth and status has been through political control, essentially the use of force or threat of force to extract value from others, in the West it has generally been through exchanges in which the parties have choices, and in which value must be returned for value received if the transaction is to consummate. We’re so conditioned to this, to the fact that our great fortunes belong to entrepreneurs, inventors, magnates, entertainers, and athletes, people who make (or do) things that others want, rather than to royalty, nobility, high priests, mandarins, court favorites and military leaders, people who take in taxes and booty things that others would prefer to keep, that we — very much including historians, journalists, and social commentators of almost every stripe — give little or no thought to it, considering it pretty much the natural order of things. But our exchange-oriented social order does not represent the natural order of things, and what it anomalously results in is of enormous –though perhaps ultimately self-destructive — consequence.
Where the route to wealth is via exchange, members of society, especially the most talented and energetic, are motivated to produce more wealth in order to trade it for the wealth produced by others. Relationships tend to become mutually beneficial, overall wealth increases, and inventive ways are found to produce ever more of it. On the other hand, where the preferred route to wealth is command, outcomes are quite different, exchanges being less wealth for wealth than wealth for (as some waggish economists have put it) “illth” — or at least potential illth in the form of “offers that can’t be refused.” Wealth, if it grows at all, grows slowly, with innovation becoming more concentrated on how to extract and how to evade, than on how to produce. Society takes on a hierarchical and less mobile cast; more centered on birth and alliances among elites, less on creative ability; more status consciousness and less socially egalitarian.
This last circumstance is particularly worth stressing because of the social atmosphere it fosters. While power is always distributed unequally, the average individual has much more clout in exchange-centered (let us simply say “free”) than in extraction-centered (“unfree”) societies. Extraction is based on narrowly distributed skill sets, those of the warrior, courtier, and bureaucrat, who generally seek to, and usually succeed in, monopolizing their functions. Productivity, by contrast, may assume many forms, and individuals — both as producers and consumers — typically deal with vastly larger numbers of transactional partners through the marketplace than in the polity. Even compared to representative government, with regular, competitive balloting, the marketplace offers the average person far more choice, not just among a few promise-making candidates at widely spaced electoral intervals, but among numerous products and providers on a daily basis. The upshot is that in free societies the typical individual has more leverage and can demand more consideration than in those organized around command. Competition in productivity — however sharp its elbows may sometimes feel — tends to elevate the standing and dignity of the ordinary man and woman, enriching them as much in psychological as in material possession. In highly developed exchange societies the demos — consumerdom — may not be royalty, but it is catered to with deference by those eager for its custom (and votes). Customers may not be always right, but they’re nearly always flattered.
So, by what means might this special set of circumstances, those of our free civilization taken as a whole, provoke a bubble?
First, by encouraging those habituated to it thoughtlessly to universalize the peculiar aspects of their condition, imagining that they exist as humanity-wide constants rather than as socially exceptional contingencies — a natural tendency for those encased within a closed perceptual sphere. Specifically, it has the potential of leading to fundamental misapprehensions, an innocence one might say, about human nature and human action, dangerously overestimating their benignity and leading to excessive or misplaced trust. To translate this into bubble-talk: the difference between the “social pressure” inside and outside the bubble becomes too great.
Second, as with anything of long-standing, it can produce forgetfulness about the struggles that first called it into being, about the perils that attended its birth, and about the lessons these should leave. As with the preservation of all things hard-won vigilance is necessary. But with extended enjoyment an easy smugness may instead take hold, fostering frivolousness about what should be held dear and veiling threats toward which less favored ancestors would have been continually alert. To translate this into bubble-talk: the distance between the bubble’s point of origin and its circumference becomes too great.
Third, it spoils. Desires too regularly satisfied are desires likely to grow, a process that may carry them beyond what even the most cosseted optimism ought to think possible. Politicians with short time horizons and the ability to pass along, and thus hide, costs, are tempted to play upon such false hopes, bidding them ever upward. To translate into bubble-talk: the bubble’s surface becomes too insubstantial.
In each of these three cases, that which starts as solid fabric — real cultural and economic achievement — becomes progressively stretched and progressively frayed until its tensile strength is exceeded.
Now recall the circumstance of anomaly. The bigger the anomaly, the bigger an ensuing bubble is likely to be. The anomaly constituted by modern civilization is truly enormous. If modern civilization turns out to be a bubble the distance from its surface to its point of origin, that is to say the distance of its collapse, will be enormous as well. Once support is removed it’s going to be a long, long way down. Stock market and real estate bubbles are survivable because the collapses generally erase only a few years of accumulated value. Not so a plunge from where we now stand to the normal human condition. As with an airline cashing in mid-flight, not much may be left afterward.