When interest rates are low and capital easy to come by, the valuation of assets can be out of kilter. Take Airbnb. Last week it was floated on the US stock market. The company was hoping that the shares might trade at about $60 (€49) a share. This week it was traded at just shy of $140 a share. Twice what the company valued itself at.
Earlier this year, as travel stopped, people in the know suggested that the company should trade below $30 a share. Today this company, which has yet to make a profit, is valued at $85 billion. Remember that behind all the hype, Airbnb can’t make a profit, so how can it have such a huge valuation?
It's not just Airbnb. Consider Tesla. This company is now valued at $600 billion. This means that Tesla, a battery company with a car chassis dropped on top of it, is now worth six times more that General Motors and Ford combined.
Maybe Tesla will hoover up the electric car market in the future but it’s more likely that these valuations are more a reflection of stock market frenzy, where companies that can’t make money are benefiting from “hope” value rather than real value. It may be the case that Airbnb will continue to expand its revenues by 30 per cent a year (as it was doing pre-Covid-19) and eventually make the sort of profits that $140 a share require, but it’s still a punt, not an investment.
However, as the great economist Joseph Schumpeter noted “innovation is the outstanding fact in the economic history of the capitalist society”. And Airbnb is an innovator.
Its innovation is not some wonderful piece of technology, like Tesla’s batteries, but the understanding that property is expensive and underused, so people will rent out their places to those who fancy a cheaper option than a hotel. Hardly rocket science, but innovation is not about invention; it is about joining existing things that people never put together before. Critically, it is also about making these new products commercially viable.
Innovations have always excited speculators as distinct from investors. Speculators are always first. They are the pioneers of capitalism; investors are the settlers. Speculators want to capture the gains that derive from disruption. They are interested in the spectacular.
The investor, on the other hand, is concerned with the return on capital and a steady income stream thereafter. The investor doesn’t like the disruptive moment, preferring the state of the world as it returns to normality or equilibrium, allowing stable returns to accrue. The speculator is interested in the change itself, while the investor is interested in the world after the change. This is why the speculator loves what’s new, exciting, innovative.
Canal mania
Down the ages, the speculator has loved technology. In the Ireland of the 18th century, Dublin’s coffee houses became hotbeds for “canal mania” – one of my favourite economic parables, which Airbnb’s flotation makes relevant once again. Most of those who put money into canals lost their shirts, particularly on the Royal Canal, which ran over budget and took far too long to build.
Canal mania gripped England from 1767, when the Bridgewater Canal was completed around Manchester. Over the next 20 years, more than 1,000 miles of canals were dug in England.
(The term “Irish navvies” comes from this building boom. Because the men were digging canals, sluices and watery locks, they were constantly in water and became known as navigators rather than labourers.)
In the beginning the canals yielded huge profits, attracting the speculators. The canals promised to open up the country, massively reducing the cost of transporting goods and the time it took to get goods from one city and town to another. Shares in canal companies soared ever-skywards.
In 1790, at the height of this mania, work was begun on the Royal Canal, funded by Ireland’s landed gentry. Ahead of the Act of Union, Dublin was a cosmopolitan port city, and if the produce of the country – its agriculture – could get from inland to the coast more quickly and more cheaply, it would be a licence to print money.
The speculators piled in, excited by the prospects of a quick shilling. But like all manias, this one peaked, and, in 1791-1792, the shares crashed back to earth. The trigger for this was the beginning of the revolutionary war in France. The French revolution, with its message of democracy, equality and liberty, terrified the aristocracy, burst their bubble and caused them to reassess the future.
By 1794 the Royal Canal Company was bankrupt, digging had stopped, and the canal was not finished until 1817, leaving investors – who, unlike the speculators, didn’t trade the market – nursing huge losses.
By 1825 only one in five canals throughout Ireland and Britain was paying investors a dividend, and even that dividend was lower than the rate of interest of UK government bonds.
Railway mania
Less than ten years later, technology rendered the canals obsolete commercially, when construction of the Dublin to Kingstown (Dún Laoghaire) railway started in 1833.
Canal mania was replaced by railway mania, and the speculators were in again. The railway promised the same as the canals: cheap transport, speed and a miraculous new mode of linking cities. Yet again, the link between new technology and the heady speculator drove share prices way above anything other than “hope” value.
Railway terminology even seeped into our language, with people “getting up a head of steam”, and railway time completely altered our sense of distance. Real manias tend to be cultural rather than merely financial.
Over the next two decades, fortunes were made and lost on railway speculation and investing and, following one of the biggest financial scandals in Irish history, culminated with the suicide of John Sadleir, an Irish Parliamentary Party member and ally of Charles Stewart Parnell.
Scandals constantly follow booms and manias. There is always someone, somewhere operating a scam, inveigling money from excited punters, giddy on the promises of wild returns and lavish profits. We saw it here in the housing boom. We see it everywhere, from bank manias to housing bubbles, from tulip frenzies to stock crashes. This doesn’t mean that technology doesn’t change the world, it just means that betting on it is tricky.
A journey on the Dart – on the lines first laid in 1833 – often reminds me of the canal and railway manias of centuries past. I travelled that line again this week, and as I scrolled through the news of the Airbnb tech mania gripping Silicon Valley and Wall Street, I couldn’t help wondering how it would all end.