Are we in an AI bubble? It’s complicated.

The better question: Will it be productive?

Next:Economy Newsletter Image generated using Microsoft Image Creator and Adobe Photoshop   Is growth like this sustainable? The constant drumbeat of new AI tools along with NVIDIA's sky-high valuation are causing a bit of consternation of late. So, are we in an AI bubble? Yes? No? It's complicated? In a recent column, Bloomberg's John Authers asks "whether what we're seeing at present is a stock market bubble, a focused bubble in artificial intelligence beneficiaries (led by Nvidia Corp.), or a still-healthy bull market ," drawing connections between our current moment and both the 2008 financial crisis and the dot-com crash—with a particular focus on the similarities between NVIDIA and Cisco. From the data Authers scrutinizes, NVIDIA sure looks a lot like Cisco back in 2000, before the bottom dropped out and Cisco's profits fell back to earth. "To be clear," Authers notes, "Nvidia is doing something special, and selling real products to people who want to buy them. . . .But it's hard to see how growth like this can be sustained." And as he explains, the same might be true of the wider tech industry—a bubble with a much longer time span: If we dig further, there's evidence for the notion that earnings themselves are in the unsustainable bubble. Technology takes roughly the same share of global and US market cap as in 2000, and hasn't exceeded it. With tech businesses much more mature now, that is defensible. But if we look at tech's share of earnings, it's far higher than 24 years ago. . . . . . .And that is the crucial question we should be asking: Can earnings that have grown so fast possibly be sustained? + In Stratechery, Ben Thompson unpacks NVIDIA's "AI Woodstock" event and the company's hardware strategy for the future.   On productive bubbles But maybe the more important question is, What happens when blistering growth stops? In his book Doing Capitalism in the Innovation Economy, economist and venture capitalist Bill Janeway argues that speculation is central to what he calls the "Innovation Economy"—both its driving force and the "culmination" of its efforts. But Janeway suggests that it's important to distinguish between a purely speculative bubble, like the 17th-century Dutch tulip mania, and what he calls a " productive bubble." Janeway contends that while many bubbles simply burst (sometimes with dire consequences), a truly transformative innovation "creates a 'new economy' from the wreckage of the financial bubble that attended its birth." And in an interview with Project Syndicate last year, he nods to just how this transformation might happen, using green technology as an example: One key insight is not to place "greentech bubble" in opposition to "greentech revolution." In fact, the former may well be a stepping stone to the latter. Like state procurement, speculative investment is decoupled from concern for visible economic value and therefore can finance the trial-and-error experimentation necessary for frontier innovation. + You can read the introduction to Doing Capitalism in the Innovation Economy here. + And here's an interview Janeway did with Jennifer Pahlka when his book was first published in 2012. + Back in December, the Guardian's John Naughton used Janeway's work as a lens through which to examine AI.   Is AI a technological revolution or just a revolutionary technology? In her masterful Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages , economist Carlota Perez calls transformative moments of innovation "opportunity explosions." Like Janeway, Perez finds that new technology very often initially engenders a speculative bubble—the railroad bubble and the dot-com bubble, for instance. But once the bubble pops, there's a longer process by which the technology becomes integrated into society (something like the stepping stone from bubble to revolution Janeway refers to above). And this moment opens the door to improving society as a whole. As Perez notes in an interview with Jonathan Rutherford, "After the bubble collapses, conditions are ripe for political forces to regulate the financial markets, redistribute wealth, and create institutions of social cohesion"—an era she designates a "golden age." Which leads us back to AI. In an article published last week, Perez considers "AI's place in history" and whether it "represent[s] a new technological revolution." It doesn't, she asserts, even though AI might turn out to be a "revolutionary technology." Instead, AI "belongs to a much larger technological revolution that is still in the middle of its diffusion process." And creating a golden age will require us to take advantage of the disruptive opportunity the technological revolution offers. Perez clarifies: AI. . .will indeed play a major role in shaping the future. But if AI's development unfolds in a system where financial markets remain unregulated and decoupled from the real economy, it is unlikely to move us in a more environmentally, socially, or politically sustainable direction. Changing this broader political-economy context has become the most urgent task of our time. + I include a brief overview of Perez's arguments in "Why It's Too Early to Get Excited About Web3." Ben Thompson also shared a detailed review of Technological Revolutions and Financial Capital in Stratechery. + Perez expands on these themes in her talk at USI 2022, "Could There Be a Golden Age Ahead?"   Greater opportunities remain In an interview we shared in Next Economy a few weeks ago, I explained that "the whole point of a bubble is that it's a wild exploration of new possibilities." Some bubbles collapse leaving nothing behind. But for others, "when the bubble ends, greater opportunities will remain." The trick is to figure out which kind of bubble you're in. In an interview with Project Syndicate a year ago, I outlined the five signs I look for to determine " whether speculative activity is productive or unhinged from reality": First, is usage large and growing rapidly? Second, are innovators applying the technology to the operating economy, even though it isn't yet clear how the technology will be monetized? Third, are any of the relevant companies profitable, even if they are reinvesting those profits in growth? Fourth, is capital being used to create infrastructure and capabilities that will survive even if the companies receiving it are wildly overvalued? And fifth, is the technology aligned with long-term innovation trends and market needs? In other words, we need to think hard about the value being created by new technologies—and the higher values those technologies reflect. At the time, I placed AI firmly on the side of the operating economy, and that's still true. But like Perez, I believe that getting to the golden age she predicts will require us "to interrogate our values and to remake our society in line with the values we choose."   —Tim O’Reilly and Peyton Joyce This message was sent to alexvarboffin.abbb@blogger.com. You are receiving this because you've signed up to receive email from us. Privacy Policy | Unsubscribe From All | Unsubscribe From Next:Economy O'Reilly Media, Inc., 1005 Gravenstein Highway North, Sebastopol, CA, 95472 (707) 827-7000