Tech chiefs overbuild because rivals are building
Former regulator Gary Gensler says fear of missing out and defense of current profits push companies to spend, with investors backing them.
Freakonomics Radio Network · 684. He Helped Clean Up the Last Crash. Does He See Another One Coming? | Freakonomics RadioGary Gensler, who spent 18 years at Goldman Sachs and later chaired two federal market regulators and now teaches financial booms and busts at MIT, was explaining why big new technologies never arrive in balance. A new technology always needs a lot of startup investment, he said, and the late 1990s companies that laid internet cables showed the same imbalance now visible around artificial intelligence.
Then he put himself inside the mind of a chief executive in one of those eras. "Oh my god, they're building a canal. I got to build a canal," Gensler said. He added the railroad version of the same thought, "They're building a railroad. I got to build a railroad," and suggested Mark Zuckerberg shows the modern version, asking, "Mark Zuckerberg can't help himself, right?"
What Gensler meant, he argued, is that the spending comes from two pressures at once. One is the fear of missing out, and the other is defensiveness. A chief executive wants to protect the high profit margins he has currently, Gensler said.
His example was Zuckerberg, who spent more than 80 billion dollars on the metaverse and its goggles. His other example was Google, which Gensler said rightly worries that if it does not make this spending, it could lose its advertising revenues to OpenAI.
Gensler argued that "the capital markets support it over and over again." "Decade after decade we support these booms," he said. The result, he said, is "an overinvestment that comes from the actual incentive systems right in the moment," from financial incentives and fear-of-missing-out incentives and enthusiasm, until spending finally plateaus.
Questions people ask
If companies overbuild, does that mean the technology itself will fail?
No, not necessarily. A technology can become essential while its early builders and investors lose money. Railroads, electricity, and the internet all ended up widely used after periods when too much was built too fast.
Is this kind of defensive spending ever sensible?
It can look sensible inside the company. In Gensler's example, Google spends because it fears losing the advertising revenues it already has if it does not make this spending.
Why do capital markets keep funding booms if overbuilding happens every time?
Generally speaking, investors keep funding expansion because they do not want to miss the possible winner and because early growth looks exciting. That general pattern is separate from Gensler's point about chief executives defending their current profits.