Saturday 23 February 2013

What Caused the Dot Com Bubble: 1: Money and Economy - Enlightenment From Mississippi Bubble


John Law is “the pleasant character mixture of swindler and prophet.”

------------------Karl Marx

 


 

Yet his swindle has some similarities with contemporary monetary theory?

 

There is much more to talk about the Mississippi Bubble than I have space to explain here. But basically, Law’s idea is that

1: get the right to issue the bank note.

2: Issue the share of his company with the government debt as collateral.

3: The government use the bank note to pay back to the public.

4: The public use the bank note to pay for the share of Law’s company.

 

From the prospective of history, Law is a pioneer. From the strategy above, we can see something similar with the theory of Keynes and Schumpeter. It also reminds me of Krugman’s advice for Japan of 90th last century which was mainly to say that just print money to pump the economy. The causes of the burst of bubble had been concluded by many researchers. But it is a problem that whether to ask why the bubble burst or to ask why Law’s theory didn’t sustain.

 


Law values paper money. Law’s theory is that in order to make the country rich, money should be utilized. As long as the monetary policy can be flexibility used, prosperity can be achieved. As long as credit can be appropriately adjusted, the economy can be more efficient. Put aside the Mississippi bubble, Law’s theory can win a place in the history of monetary theory. Schumpeter ever praised him as one of the most important monetary theorists. Advanced theory is like the rabbit tied to the tree, run a circle and back to the origin.

 

Law ever controlled all of the financial market, tax and trade of France. Few economists can be as lucky as him in that he can apply his own theory into practice in such large-scale. Although the Mississippi Bubble seems simple and crude in today’s view, but is reveals the essence of bubble: under the stimulation of optimistic expectation, the excessive expansion of credit is likely to stimulate the price of the stock to offset its fundamental. The essential relationship is concealed in modern economy by all kinds of complicated tools and the system itself. But it hasn’t changed too much.

 

What if Law’s theory had been carried out in a more conservative way? What if the state apparatus is more powerful at that time in France? What if Law succeeded in transforming the bubble into a new bubble? What if the incidental incentives that leads to the burst of Mississippi bubble at that time had been put off?

 

All of these give us a new angle in prospecting the dot com bubble (And the financial crisis?).

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