Reed’s view
Comparisons between the AI boom and dot-com bubble (remember Pets.com?) abound. But there’s an important distinction to keep in mind: The financial speculation in the latest tech explosion is unrelated to the potential economic benefits.
After the dot-com crash in 2000, the stock market tanked and venture capital funding plummeted. People had trouble separating the bubble from the level of innovation.
The Wall Street Journal noted in 1996 that internet companies were propping up the stock market. Economists worried that the technology didn’t do enough to improve productivity to justify the hype.
Some investors ran away from the internet after the bubble burst, but by one measure, the crash never even happened. Annual research and development spending by US companies, which hit $202 billion in 2000, only dipped slightly the following year and never again fell below $200 billion. In 2023, it was at $735 billion.
Not all of that was Silicon Valley companies, but a significant portion of it was. Companies like Google and Amazon kept on building and never missed a beat. The internet turned out to be the most important economic driver in the decades that followed, and the infrastructure built to support it turned out to be necessary. Even venture capital spending, when viewed from 1995 to 2022, wasn’t knocked off its steady growth trajectory.
It’s often difficult to predict how people will make use of new technology. It helps to think of AI more as a continuation of human innovation. Throughout history, people have found ways to automate tasks or make them easier.
There may be a bubble and a crash, but this new and powerful advance in automation will continue to be big business and lead to long term economic growth.
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Room for Disagreement
In Jesse Damiani’s Substack Reality Studies, the writer and podcaster argues if the AI bubble pops — by investments not producing expected returns, or any other number of causes — “a broader economic downturn” could follow. He adds: “What we need is a prudent ramp down in speed, to build a more sensible foundation upon which to develop the technology using the infrastructure (of various kinds) that has already been built.”
Notable
- The AI boom doesn’t entirely deserve comparisons to the early days of the internet, which was backed by debt and speculative capital, Semafor’s Liz Hoffman argues.
- “While you can quibble with this or that estimate or figure, the order of magnitudes make it pretty clear that AI itself is not enough to buoy the economy, sales, or earnings ahead,” Bob Elliott, co-founder and CEO of Unlimited Funds, wrote on Substack.