Maybe your Uncle Julius has told stories about how he could have bought half of Nevada for US$1.50 way back when. It was all just worthless desert in those days, but now it is called Las Vegas.
Your uncle's tales may be worth recalling, now that we are faced with a glut of long-haul fiber optic lines installed by companies eager to cash in on the Internet boom. Something like 100 million miles of these lines have been laid in the last two years, and the great bulk of this capacity is unused.
For investors who put up the estimated US$35 billion to pay for all this, it has been a disaster. Many companies involved are awash in red ink, and bandwidth brokers report plummeting prices for long-distance telecommunications capacity. Even worse, such a presumably gross misallocation of capital is bad for the entire economy: Had the money been directed more profitably, output and employment would be higher and everyone would be better off. Now that the economy is weakening, the US is starting to look like a high-technology Gulliver, tied down by costly Lilliputian threads of glass.
But was this really such a wholesale misallocation? Will society really suffer for the misguided enthusiasm of fiber optic investors and entrepreneurs? History suggests not. Again and again, investors have gone hog wild over new networking technologies, spent a fortune to install them, and found themselves with vast overcapacity and ruinous competition. Yet eventually the capacity was always used, often for purposes never foreseen when it was installed. And in the long run, the economy was the better for it.
"The turbulence in this market is entirely predictable," said Richard John, a communications historian at the University of Illinois at Chicago. He noted that the US' telegraph system was unprofitable for its first 15 years, and that in the early 20th century many felt that it had too much capacity, partly because it was built to accommodate huge peak loads during business hours. At first, the telegraph network was not used for what would become a main function: managing the railroad system.
"Almost all of the big-mileage railroads, once you get west of the Missouri, were built in advance of demand," said Maury Klein, a University of Rhode Island historian. Despite serious investor losses, a staggering increase in national wealth would result. "The rail network completely transformed the West," Klein noted. "It created cities where none existed, and businesses where none existed."
Long ago, the railroad historian Julius Grodinsky summed up the process in words that would apply just as well to fiber optic networks today: "The story is typical of a growing industry in its pioneering stage. Competition then and now works itself out in a similar fashion. Some businessmen gain, some lose -- but the public benefits."
In another example, the parkways of the New York area were built to give city residents a way to reach outlying beaches and state parks. But these roads also abetted suburban development and soon were filled to capacity with commuters.
There are many reasons to believe that the vast new fiber optic network will similarly call forth unforeseen new applications. Adventis, an information industry consulting firm in Boston,predicts an "inferno" of bit-burning applications once high-capacity networks overcome the last-mile bottleneck -- the delay in hooking up a high-speed Internet network to homes or businesses. If that happens, it will not be the first time that communications overcapacity turned into a shortage. When telephone numbers were first allocated, who imagined that we would ever run out? And once upon a time, a million shares was considered enormous volume on the New York Stock Exchange.
And that misallocation of capital? True, the money could do something else as we wait for all that bit-burning. But history shows that this is the US way. Many European postal systems, telegraph lines and railroads were built with government money, and sometimes with insufficient capacity. But in the US, instead of burdening taxpayers, we sell investors the equivalent of high-priced lottery tickets each time one of these technologies arrives.
The proceeds from these speculations -- the capital paid for stocks and bonds -- may seem misspent. In the long run, the results are called infrastructure, and they are what economies are built on.
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