Mississippi bubble, south sea bubble, and railroad
Thin information set idea extends beyond bubbles and it comes down to how much prior knowledge there is about a prior sector and whether a bubble seems to be appearing. This relates to new things like railroad tech or the multi-coloured tulips. There isn’t much known about them when they appear. Tulips were an import from sea and it was new and relatively short-lived and no one knew a lot about it. o If you think about the Mississippi company (MC) people did not know much about the MC – they just thought it was profitable o Working in the context of fig 2. Demand curve is more likely to be effected by peoples expectation and beliefs. What does new information do to D and the equilibrium price of what we are looking at. If you have a well-established industry, a new piece of information would add a relatively small amount to the total knowledge about that sector but if you look at a new sector, a new piece of information is likely to be proportionately a large addition to your total information stock New information gets factored into the demand curve and the equilibrium price. New info will not add a lot to information stock Shift D right if it is good info and left if it is bad info. o Positive – people will want to get in on it o Bad – people want to get out of it Big impact on the total amount you know about the sector if the information is thin which will shift the D curve to the right Shift causes the price to rise or fall and at the amount of the price change will be greater when the information set is thin whereas there will be a smaller change when the information set is thick. The size of the information does not matter; it is the size of the information relative to what is already available. Larger swings in asset prices in sectors where the information set that is out there is already thin. This notion passes across different types of bubbles; it amplifies the effect of the initial cause of the left or right shift that has already occurred. That is why you see bubbles occurring more frequently in new areas. 1709, Abraham Darby I. o 1300 BC, there was a transition from bronze to iron as there was a shortage of bronze which forced people to look for a substitute so people started to smelt iron, but it was a learning experience as the iron came out soft or hard frequently due to the carbon content. The transition was because the Cypriot metalsmiths found of how to smelt the iron using charcoal. They figured out how to do this so effectively so iron became useful and cheap because the technology spread fast. There was a lot of wood that they could use to produce charcoal which they could then use to produce iron. Bronze became expensive, iron became cheap. Cost of older technology went up and they found a replacement technology as they had the inputs, wood and iron. o By 1709, people were still smelting iron the exact same way – using charcoal. o In 1600, England was starting to run out of wood. In Roman times, England was very heavily forested. By the late 1500s, early 1600s wood was being used for a lot of things like houses which were built out of mud. Multistory houses are being built – you either had to build them with stone or wood. Most housing was built multistory, with wood. You can find illustrations of this in London. They became a shipping country in industry and in defence. You get the use of the British Navy that were used to defend the British coasts. You had more ship building for the navy as well as for commercial use like fishing. You have more housing, trade, ships. The demand for wood increases. Wood was also the main source of heat. To make iron, you still smelt it using charcoal so they were running low on supply as it was being used for everything England goes from being a heavily forested country to open land because it was being used faster than it could be replaced. Wood should be a renewable resource if you replace it at the same rate you are using it. England begins running out of wood so iron is getting expensive. You see the same story as you saw from the transition from bronze to iron due to a shortage. In both cases, you have to look for an alternative technology. o The shortage of wood was so severe that it looked that England was going to have to stop producing iron all together and start importing it from Sweden. Sweden were ahead of the British because tree plantation was popping up – they would have to settle importing the heavy iron in wooden ships which is going to make it fairly expensive. o Industrial revolution was based off of England having a lot of wood. o They had to find an alternative technology for smelting iron. England had a lot of coal so they started to think of it as an alternative to charcoal and wood. When they started using it, it turned England very nasty as when it touches something it turns it black. They used coal up until the 20th century. Created fogs that were unnatural like pea soup fogs. It remained a feature of London for a long time. o December of 1950, a large number of people died in London from coal pollution poisoning. o 1600’s it emerged as an alternative to wood for heating and industrial purposes. Before steam engines but for things like smelting iron. The technology that worked for charcoal did not work with coal as carbon contents did not remain the same between the two methods. You needed new technology that does not bugger up the carbon content of the coal which is where Abraham Darby I comes into play. o Darby was in the brass wear business. He already knew that you could use coal to make brass so people thought you could use coal to smelt iron but he was the first person to actually do it. There is debate about this. o He figured out how to do it in 1709 in Coalbrookedale. The Darby family kept the process secret for three generations. Another speculation is that the coal they were using was exactly right and if you were using the coal from anywhere else you had to modify it to get it to work the same. It took a while for the use of coal to smelt iron to become widespread. Darby’s made a lot of money until 1750 when the technology took off and it allowed for the industrial revolution. o China in 1000 AD figured out how to smelt iron using coal so 700 years before Darby, China was doing it. The figured out how to do it due to the same thing happening – they ran out of charcoal. o The industrial revolution happened in the 18th century in England Conditions for the industrial revolution were perfect. Why did it not happen in the Netherlands of China? There was a confluence of factors coming together at exactly the right time and place. There’s an argument that you need the technology and attitudes and the view that its okay for an individual to get rich for coming up with new technology – it is okay to be a productive entrepreneur. The big difference in England during this period was that people were not property of the state like in China 1000 years previously. Attitude in England said that you could get rich and the state could not confiscate it. You could engage in creative destruction. Revolution happened not just because of technology but because it allowed individuals to be a stand-alone entity, individual enterprises could be rewarded. o Attitude of individualism in the 1600’s which was not present in China in about 1000 AD. Historically it is an unusual way to think about people. o David Hispocksy’s idea of individualism. Shakespeare was buying things cheap at harvest time which he was able to do because he had a large storage area. He stored stuff until winter and then sold it at a higher price. Had he not done that, what would you have eaten? By selling it at a higher price he was able to cover the cost of the storage building. What you get out of the transition is the ability to produce iron relatively cheaply. When iron was smelted with charcoal you were not going to get economies of scale but when you used coal and a furnace you could do it on a large scale and have economies of scale. The quality increased as there isn’t a lot of suppliers, the suppliers are more condensed. o Prior to the revolution there was Smithian growth. Using your resources to o Ricardian. Using your existing technology to shift PPF out. o Industrial revolution rested on having uniform, good quality iron. Without Darby, you could not of had reliable engineering because the quality of iron would not have been consistent so you could not have the stream engine. James Watt: did not invent the steam engine. He was a civil engineer and got a job as a machine maker, mechanic, tool maker at Glasgow university where his job was to repair the devices to teach the students. One of the tools he was asked to mend was a desktop model of the steam engine. o Herom of Alexandria thought about steam power in about 100 BC o Thomas Savery is said to have thought about the steam engine. He had a patent for some kind of a steam engine. To get a patent, he had to have an act of parliament to grant him the patent. It was a long time before patenting became the process it is now. Savery never built a steam engine as far as anyone can tell. o Thomas Newcommen built the first working, low pressure steam engine. He had to go into a business arrangement/partnership with Savery because Savery had a patent. So on every engine he built, Savery got a royalty. His engines were inefficient. They had to burn a lot of coal to produce a little power. They were limited in their abilities – they mainly pumped water. You had to use a lot of coal to produce enough steam to pump water out. They were mainly used in mines like Cornwall. You were burning coal to pump coal out of coal mines and get more coal. No point in Britain is more than 80 miles from the sea. The coal there was sometimes found under the water. If you were going straight down and you were near the coast, water often seeped into the mines. Mines did not have to go far down before it would flood. Newcommen comes along and he has a gadget that allows them to pump water out of the mine so they can keep mining rather than closing the mine and move on. If you use the Newcommen device, are you burning more coal than you are getting out of the mine? o If you took the amount of coal you were able to get with the amount of coal you had to burn, the net effect was not favourable. o Newcommen’s engine was valuable but not efficient James Watt: he was asked to repair a table top sized model of the Newcommen steam engine that was being used to train students. He fixes it. While he was fixing it, he realized it was inefficient and came up with a way of making it more efficient by developing an external condenser which makes the engine more efficient. The condenser was not part of Newcommen’s patent so it did not violate it. He did not have to pay royalties because of this. o This is the thing about patents. Patents must be original and there mustn’t be that much prior knowledge out there. If there is already an existing thing out there that does the same thing, your product must be sufficiently different. This whole business of sufficiently different is argued a lot in pharmaceuticals as they are often aiming at the same disease target. You end up with a mess of companies recognizing that there is a particular unserved area out there. There is a market and the first company to come up with a treatment is going to make a shit tonne of money but the failure of not finding a cure causes many to drop out of research. “Me too drugs”. You cannot copy a drug that’s under patent but you can come up with a drug that has a different mechanism of action that treats the same disease. Hep C. Giliad produced a drug (Sivaldi) that cured hep C and was priced at $1000. Within five years, there were five years on the market but none of them violated Sivaldi’s patent. It takes a long time to develop a drug, followed by your clinical trials which could last ten years. A lot of drugs can kill the bugs/viruses but may not work in humans or kill the humans. Lab work often does not carry over from animals to humans. There’s a lot of cancers that you can kill in rats that you cannot kill in humans. You have an aging population which means that there is going to be a growing market for treatments that are associated with aging. Patenting in the pharmaceutical sector is extremely important because if you don’t have a patent anyone can copy your drug which is where generics come into play. Generics are drugs produced after the patent on a drug has run out. They patent very early in the research stage as someone may beat you to the cure. Watt was able to get a patent in 1769. He patented this thing and made desktop size models so he can prove his technology is different but he has not produced a real size engine which is far different. Models in engineering do not just scale up. Going from the small to large is a special engineering feat in itself. He needs finance to build this real industrial size engine. He did not have enough money to fund it himself. His funds come from John Roebuck who was an industrialist. The power in factories was not produced by steam engines but rather water wheels – they could do things other than grind corn. The wheels would turn shafts which would convert energy so you were starting to get industry based on power. The factories would have to be located next to fast running rivers. o He was in the iron business o He initially financed Watt’s research but it took a long time to figure out how to go from a model to the real thing. o Roebuck goes bust because his bank goes bust (the Ayr Bank). The Ayr Bank went down because it was dealing with a bank in London (Neale Fordyce James Bank). One of the people running the bank was Alexander Fordyce who took his clients’ money and forced raids on the East India Company. He was shorting the EIC relying on their share price to drop. However, the price of the shares did not drop when he staged the short on EIC. He then raided the accounts to return the money to his broker, leaving the bank broke and it goes bust. The Ayr Bank is one of the clients so it goes bust. When Ayr goes bust, Roebuck goes bust. o Roebuck has to raise cash. Roebuck owned 2/3 of Watt’s patent – one his few assets left. He sells his share of the patent to Matthew Bolton who had been interested in buying into the business before. He was an industrialist who wanted to use it in his factories. Bolton then started financing Watt’s research. Bolton only agreed to the deal if Watt could get the patent extended as there were only about six years left on it and the engine was nowhere near ready – this was the only way he would buy Roebuck’s share of the patent.