Many believe we are on the brink of a new industrial revolution, in which robots and artificial intelligence will transform the economy. Let's leave aside the fact that the evidence for this is absent from the data on capital spending and productivity and ask: if such talk is true, what would it mean for equities?
We don't need a crystal ball here. We have history. This tells us that industrial revolutions aren't necessarily good for shares.
The first industrial revolution is generally considered to have occurred between around 1760 and around 1840. Bank of England data show that for much of this time, shares actually fell. Adjusting for inflation, prices were lower in the 1830s than they were in the 1750s.
This should remind us that capitalism is, as Joseph Schumpeter said, a process of creative destruction. It devalues existing companies as well as creating new ones: just think how the digital revolution destroyed Kodak, Polaroid and fax machine manufacturers and is undermining media companies.
A similar thing happened in the 1770s. One reason why shareholders lost money then was that the East India Company (pictured above) struggled. Granted, this wasn't so much the direct result of the industrial revolution so much as bad management: when Adam Smith wrote that "negligence and profusion" always prevails in joint stock companies he had the EIC in mind. But even so, there's a lesson here for us today: huge companies can become unmanageable.
Nor does the creative element of creative destruction always benefit shareholders. In the 1840s, investors correctly foresaw the rise of railways just as they rightly saw the potential of the internet in the 1990s. But many lost fortunes by buying shares that subsequently collapsed. There's a massive gap between a good idea and a good company, a fact that is always forgotten during bubbles and relearnt during crashes.
Not that good companies are always useful for equity investors. Boulton and Watt, perhaps the iconic firm of the first industrial revolution, was a partnership rather than a listed company. This tells us that growth can come from outside stock market quoted companies. It might be that private equity, rather than listed stocks, are a better play upon future growth.
This isn't to say that industrial revolutions are always bad for shares: the market did well during the second such revolution, from 1870 to 1914.
This should remind us that institutions matter. Not only is there the question of whether growth is captured by listed companies, there are two other differences between the first and second industrial revolutions.
The second was a time of peace and social stability, whereas much of the first saw the Napoleonic wars and the fear that the English would follow the French into violent revolution.
And, as Durham University's Ranald Michie has documented, the first industrial revolution saw more and bigger financial crises than the second: in the latter, the financial system was more a source of expansion than instability than it was in the first industrial revolution.
We cannot be confident that the next industrial revolution will be more like the second than the first in these respects.