Artificial Intelligence and the History of Bubbles
From Railways to the Internet to AI: The Anatomy of Investment Manias
Few forces have shaped financial history as diametrically as technological innovation. From the steam engine to electricity, from railroads to the internet, transformative technologies have repeatedly altered the structure of economies, the organisation of industries, and the trajectory of human progress. Yet these periods of genuine innovation have also been accompanied by some of history's most spectacular financial bubbles.
This apparent contradiction has long puzzled investors. How can markets simultaneously overestimate the short-term impact of a technology while underestimating its long-term significance? Why do revolutionary innovations so often become associated with speculative excess? And what can the history of previous technological manias tell us about the ongoing development of artificial intelligence?
Artificial intelligence represents one of the most significant technological developments of the modern era. Its potential applications span nearly every sector of the economy, from healthcare and manufacturing to finance, logistics, research, and education. The economic implications may ultimately prove comparable to those of electrification, computing, or the industrial revolution itself. At the same time, capital markets have already begun to display characteristics familiar to students of financial history. Valuations have expanded rapidly, capital has flowed aggressively into AI-related ventures, and expectations have become increasingly ambitious. Investors, corporations, governments, and media organisations have all begun competing to position themselves within the emerging AI ecosystem.
Whether artificial intelligence ultimately becomes a bubble, avoids one entirely, or follows a more complex path remains uncertain. However, the historical relationship between transformative technologies and speculative enthusiasm offers valuable insights into how investors should think about the opportunities and risks that accompany periods of technological change.
Understanding Financial Bubbles
A financial bubble occurs when asset prices become increasingly disconnected from underlying fundamentals due to self-reinforcing expectations of future price appreciation.
Importantly, bubbles are not merely periods of high valuation; assets can become expensive while remaining fundamentally justified by future cash flows. A bubble emerges when expectations themselves become the primary driver of valuation, creating feedback loops in which rising prices attract additional buyers, further increasing prices and reinforcing optimistic narratives. The history of bubbles demonstrates that they are fundamentally social and psychological phenomena. Investors do not simply analyse future cash flows. They observe the behaviour of other investors, interpret prevailing narratives, and update their beliefs in response to collective market sentiment.
As economist Hyman Minsky argued, stability itself can generate instability. Extended periods of success encourage greater risk-taking, greater leverage, and greater confidence in optimistic assumptions; eventually the financial system becomes increasingly vulnerable to disappointment. Technological innovation often provides the ideal foundation for these dynamics because genuinely transformative technologies create enormous uncertainty. When the future is difficult to estimate, narratives become particularly influential, and optimism can expand far more rapidly than objective evidence.
The challenge for investors is that bubbles frequently form around ideas that are fundamentally correct.
The Railway Mania
One of the earliest examples of a technology-driven bubble occurred during Britain's Railway Mania of the 1840s.
Railways represented a revolutionary breakthrough in transportation. They dramatically reduced travel times, expanded economic integration, lowered transportation costs, and transformed patterns of commerce. Investors recognised that railways would reshape society and they were correct.
However, recognition of a genuine technological revolution did not prevent speculative excess. Railway companies proliferated rapidly; capital flowed into projects with questionable economics; investors competed to gain exposure to what appeared to be the defining technology of the era. By the mid-1840s, railway securities reached extraordinary valuations. Many projects were financed based on unrealistic assumptions regarding future demand and profitability; and inevitably, when expectations eventually collided with economic reality, railway shares collapsed. Yet the collapse of the bubble did not invalidate the underlying technology. Railways continued expanding across Britain and the world, with them becoming one of the foundational infrastructures of modern industrial society. The investors who purchased railway assets at the peak often suffered substantial losses; society, however, benefited enormously.
This distinction between technological success and investment success remains one of the most important lessons in financial history.
Electricity and the Second Industrial Revolution
The development of electrical infrastructure during the late nineteenth and early twentieth centuries presents a similar pattern.
Electricity represented a transformative general-purpose technology. Factories, transportation systems, communications networks, and households all stood to benefit from widespread electrification. Investors once again, recognised the opportunity and aggressively financed electrical companies; new ventures emerged rapidly; capital markets enthusiastically funded infrastructure expansion. Many businesses ultimately failed. Numerous early electrical firms disappeared through competition, consolidation, or bankruptcy. Yet the technology itself fundamentally transformed economic productivity.
Historian Paul David famously observed that the productivity gains associated with electrification took decades to fully materialise. Factories initially attempted to integrate electricity into existing production structures rather than redesigning workflows around its unique capabilities. Only after organisations adapted their processes did the full economic benefits emerge.
This historical pattern is particularly relevant for artificial intelligence, as technological capability alone does not guarantee immediate productivity gains. With organisational adaptation often determining whether innovation translates into economic value.
The Roaring Twenties and Radio
The emergence of radio technology during the 1920s generated another wave of speculative enthusiasm.
Radio represented a remarkable breakthrough in communication. For the first time, information and entertainment could be transmitted instantaneously across vast distances to mass audiences. Once again, investors rushed into radio-related companies, and share prices surged as markets attempted to estimate the economic potential of an entirely new communications medium.
The most famous example was the Radio Corporation of America (RCA). Its valuation expanded dramatically despite limited current profitability, as investors focused not on existing earnings but on anticipated future dominance. Radio ultimately transformed media and communications. Yet many investors paid prices that embedded unrealistic assumptions regarding future growth and profitability. Again, technological success and investment returns diverged.
The Dot-Com Bubble
No historical comparison is more frequently invoked in discussions of artificial intelligence than the dot-com bubble.
During the late 1990s, investors recognised the transformative potential of the internet; the underlying insight was correct; the internet fundamentally changed commerce, communication, media, information distribution, and business operations. What investors struggled to estimate was timing, adoption, competition, and valuation. The result was a speculative boom characterised by extraordinary capital inflows, aggressive valuation multiples, and widespread enthusiasm for internet-related businesses; companies often achieved billion-dollar valuations despite generating minimal revenue and no profits. When expectations eventually exceeded reality, the bubble collapsed; however, the bursting of the dot-com bubble did not invalidate the internet.
In retrospect, many forecasts regarding the internet's long-term importance proved too conservative rather than too optimistic. Online commerce, cloud computing, social media, digital advertising, streaming services, and mobile applications ultimately surpassed many expectations. The problem was not that investors overestimated the technology. Rather, they overestimated the pace at which value would be created and underestimated the competitive dynamics that would determine who captured that value.
A small number of firms eventually generated extraordinary wealth, whilst many others disappeared entirely.
Artificial Intelligence as a General-Purpose Technology
Artificial intelligence shares several characteristics with previous transformative technologies.
First, it appears to function as a general-purpose technology; general-purpose technologies affect numerous sectors simultaneously rather than addressing a single narrow application. Examples include steam power, electricity, computers, and the internet. Second, artificial intelligence exhibits strong network effects and economies of scale. Access to computing infrastructure, data, talent, and capital may reinforce competitive advantages among leading firms. Third, artificial intelligence has the potential to alter production processes rather than merely improve existing products; such technologies often create second-order and third-order effects that are difficult to anticipate. Finally, artificial intelligence generates substantial uncertainty regarding future market structure; investors know that the technology is important; what remains unclear however, is how economic value will ultimately be distributed.
As history suggests, this uncertainty creates fertile conditions for speculative narratives and the formation of a bubble.
Why AI Could Generate a Bubble
Several mechanisms could contribute to bubble-like dynamics within artificial intelligence markets.
Narrative dominance represents one possibility. When investors become convinced that a technology will reshape the future, conventional valuation frameworks may lose influence, ultimately, expectations become anchored not to current cash flows but to hypothetical future outcomes. Capital abundance represents another factor, technological revolutions often attract extraordinary funding, and large capital inflows can temporarily sustain business models that might otherwise fail under normal market conditions.
Fear of missing out can further amplify speculative behaviour; investors may purchase assets not because valuations appear attractive but because they fear exclusion from a potentially transformative trend. Corporate incentives can also reinforce enthusiasm, as management teams benefit from associating themselves with dominant technological narratives. Firms may emphasise AI strategies to attract investor attention, regardless of whether such strategies create genuine competitive advantages.
These dynamics do not require irrationality; as rational investors operating under uncertainty can collectively generate outcomes that resemble speculative bubbles.
Why AI May Be Different
Historical parallels are useful, but every technological revolution possesses unique characteristics.
Artificial intelligence is developing within an economy already structured around digital infrastructure; unlike railroads or electrification, many of the foundational components required for adoption already exist. The pace of information diffusion is also unprecedented; advances, breakthroughs, and applications spread globally within hours rather than years.
Furthermore, artificial intelligence is increasingly integrated into existing business processes rather than requiring entirely new physical infrastructure. This may accelerate adoption relative to previous technological revolutions. Another distinction involves the concentration of resources among leading firms. As unlike some historical bubbles characterised by thousands of speculative entrants, much of the AI ecosystem currently revolves around a relatively small number of well-capitalised companies with significant technical expertise.
Whether these differences reduce or amplify bubble risk remains unclear and uncertain.
The Economics of Expectations
Perhaps the most important lesson from the history of technological bubbles is that expectations matter as much as technology itself. Asset prices reflect future possibilities rather than present realities, and investors attempt to discount decades of uncertain outcomes into current valuations.
This creates a paradox.
When a technology is obviously important, markets often recognise its significance early; the challenge then becomes determining whether future success is already reflected in current prices. A company can execute successfully while generating disappointing returns if expectations were excessively optimistic at the time of investment. Conversely, a company can exceed expectations despite operating within a difficult industry if market assumptions were sufficiently pessimistic.
The central investment question is therefore not whether artificial intelligence will transform the economy. The more pertinent question is how much of that transformation has already been incorporated into asset prices.
The MorMag Perspective
The history of technological bubbles suggests that investors should distinguish carefully between technological progress and investment opportunity.
Artificial intelligence appears likely to become one of the defining technologies of the twenty-first century. Its potential applications span a remarkable range of economic activities, and the long-term productivity implications may prove substantial. Dismissing its importance would ignore powerful historical evidence regarding the transformative effects of general-purpose technologies. However, history also demonstrates that revolutionary technologies frequently coexist with speculative excess. Railways transformed transportation despite the Railway Mania. The internet transformed society despite the dot-com collapse. Electricity reshaped industrial production despite widespread corporate failures among early adopters.
For investors, the primary challenge is not identifying whether artificial intelligence matters. It almost certainly does. The challenge instead is understanding valuation, competitive dynamics, capital allocation, market structure, and the distribution of economic rents. Technological revolutions create enormous value, but they do not distribute that value evenly among firms, investors, or industries. A disciplined approach therefore requires separating narrative from economics. Namely, excitement should not substitute for analysis; long-term potential should not eliminate scrutiny of valuation; technological optimism should not replace probabilistic thinking. The most successful investors during periods of technological change are often those who remain intellectually open to transformative possibilities while maintaining rigorous standards regarding evidence, incentives, and price.
Artificial intelligence may ultimately reshape the global economy. Whether current market participants capture the resulting value remains a separate question.
Conclusion
The relationship between technological innovation and financial bubbles is one of the enduring patterns of economic history.
Again and again, transformative technologies have generated both extraordinary progress and speculative excess. Investors have repeatedly recognised important innovations while simultaneously misjudging timing, valuation, and competitive outcomes. Artificial intelligence now occupies a similar position within the global economy; it represents a genuine technological breakthrough with potentially profound implications for productivity, decision-making, and economic organisation. At the same time, it has become the centre of powerful narratives, ambitious expectations, and significant capital flows.
History offers neither reassurance nor warning in isolation. Instead, it provides perspective, technological revolutions often change the world; yet, financial markets often struggle to price them correctly. Understanding both realities simultaneously may be one of the most valuable advantages an investor can possess.
