Between 1600 and 1795, the Netherlands did most things right to industrialize, yet the country’s industrialization occurred only after 1850. In the 17th century, the Netherlands made a massive investment in windmills, a technology clearly superior to water and animal power, but not readily adaptable for railroads or most industrial purposes. Then later, with industrial windmills predominant, the early steam engines were not sufficiently cost-effective to be worth adopting. This syndrome, of an existing technology becoming locked in and preventing further progress, has occurred elsewhere, and may be hampering us today.

The Netherlands had used windmills since early mediaeval times, but the first real breakthrough in their industrial use was the invention of the windmill-powered sawmill in 1598. The advantages were huge of windmill-powered technology for powering sawmills, avoiding back-breaking manual labor for an application that could generally be held over for suitably windy days. Further technological advances included the Archimedes screw for water pumping, patented in 1654 and the “Hollander” paper-making windmill in 1674. Industrial windmills were concentrated in the Zaan region (north of Amsterdam), and were used for sawing, oilseed pressing, papermaking, cutting tobacco, paint preparation and hemp processing. The number of Zaan region windmills rose from 128 in 1630 to 584 in 1731, with over 900 industrial windmills in operation around the country by 1700.

The industrial windmill had three major disadvantages as the centrepiece of an Industrial Revolution. First, its maintenance costs were very high, so even before full industrialization, the profitability of windmill-powered operations was declining as competitors became more capable – the windmill count in Zaan decreased to 482 by the time of the French invasion of the Netherlands in 1795. Second, windmills worked best for discrete processes; you could not run a wind-powered textile mill because variable speeds and pauses for calm days were impossible to accommodate. Third, their power was limited; there was no way to make a windmill-powered railway (the Netherlands had developed an excellent canal network, which also delayed the advent of railways.)

The Netherlands’ windmill infrastructure thus drove away industries such as textiles for which wind power was unsuitable, and delayed the advent of steam power, whose early iterations were uncompetitive to the windmill network. Dutch industrialization thus did not occur before 1795, which in practice, given the country’s occupation, war and impoverishment, delayed most of it until after 1850.

There was an equally clear historical example of the Windmill Effect in the British railway network. Britain developed a dense rail network early, entirely powered by steam. When more efficient diesel engines arrived in the 1930s, the British companies did not adopt them, while U.S. and German railways did – the “Superchief” dates from this period, for example. Instead, the great British engine designer Sir Nigel Gresley (1876-1941) produced beautiful but fragile masterpieces like the 1937 Coronation Scot (an engine of this A4 Mallard class still holds the world speed record for steam locomotives). Only in 1957 did the now nationalized British Rail admit the inevitable and begin the switch to diesel – 20 years after other countries.

Another example of this effect came in cable television. In Britain, the country’s heavy regulation and very limited range of TV stations meant that cable was not attractive in the 1960s and 1970s. In the United States, on the other hand, there were far more TV stations, including all kinds of local stations, and vast areas where over-the-air broadcast signals reached only fitfully. Consequently, cable TV became common in the 1960s and 1970s, and almost ubiquitous by the 1980s as a plethora of new channels developed to use the cable TV systems.

When satellite television became feasible, after about 1985, the position was reversed. In Britain, there was massive demand for programming beyond the terrestrial channels; for example, blue-collar followers of the major soccer clubs wanted to see their games (and had no interest in the innovative social-realist dramas that were a staple of the existing TV channels). Consequently, satellite dishes, marketed by the Murdoch Group’s Sky TV, sold very well in Britain around 1990. In the United States, on the other hand, the huge existing cable network meant that satellite TV never really took off.

There is almost certainly a Windmill Effect in the automobile industry. The entire world is very heavily invested in internal combustion engine automobiles, with vast additional investments attached such as chains of auto dealerships and gas stations, and major corporations devoted to auto parts. It would thus in ordinary circumstances be very difficult to imagine how that investment could be supplanted by a different technology unless the new technology was hugely superior. Now governments have given huge subsidies to electric automobiles, and the world’s markets, primed by absurd amounts of funny money, have magicked into existence a major new participant, the battery-powered automobile, whose leading competitor, Tesla (Nasdaq:TSLA) has double the market capitalization of the entire U.S. automobile industry. At first sight, therefore, it appears that government subsidies and a funny-money market have created a mechanism whereby the Windmill Effect in the automobile industry has been overcome.

A nagging doubt should however remain with you on this question. Are we sure that battery-powered automobiles such as Tesla makes are the optimal replacement for the gasoline-powered automobile? Their recharging problems are severe, and the batteries use large amounts of scarce and toxic metals, which might well become unobtainable if the entire world’s automobile fleet were dependent on them.

The process by which Tesla has emerged bears very little resemblance to a true market evolution. Its initial sales and creation were entirely dependent on subsidies, and its hyperbolic growth has been entirely driven by a crazy stock market. There was no market impulse in its creation, and there has been no market control over its expansion – it has never had to justify its investment by free-market profitability. It may well be that hydrogen-powered automobiles, for example, are the truly optimal replacement for the internal combustion engine, and that Tesla’s stellar ascent has merely resulted in a massively economically costly dead-end, with huge destruction of value, before those hydrogen-powered automobiles finally emerge against heavily subsidized competition. In a decade or two, we shall know the truth, but it is certainly too early to proclaim Tesla’s emergence as a triumph of thoughtful government planning over the ignorant, primitive free market.

In general, it is almost certain that in a decade we shall see that the funny money period of the last two decades has been a massive generator of Windmill Effects. The ability of tech companies to remain private for decades, losing money all the while and funded by ever larger inputs of private equity capital, is economically very dangerous indeed. A company whose “new” technology does not truly catch on can absorb thousands of the very best engineers, for a large part of their careers in an enterprise that never makes a profit, absorbs huge resources and eventually has to be wound up. Engineers who are well paid at say Google, perhaps working in one of the multiple Google venture capital arms, are not going to start their own business – life is too well-paid and comfortable. More important, engineers who are employed for a decade in a private equity-funded start-up that offers them the ever-receding goal of an eventual IPO are not employed in other potentially more profitable and valuable companies not backed by private equity.

Make no mistake about it, the ubiquitous over-availability of private equity funding is killing more genuine start-ups than it creates, as evidenced by the sorry level of business creation in the U.S. economy compared with that of the 1970s, before private equity existed. Most private equity titans are finance types, and they tend to operate in a thundering herd, as though still working for Merrill Lynch. Good ideas are attractive to them if they are very similar to another good idea that has been widely talked of as a huge success; they must also be “scalable” to around the billion dollar mark, to give the private equity investor the thrill of participating in a “unicorn.” Hundreds, thousands, of small companies that would be perfectly successful at the $20-50 million level – and profitable, too — fail to attract private equity funding (or, if they do get funding, are then so loaded with unnecessary overhead that the modest idea’s profitability disappears, and they become a perpetually loss-making pass-the-parcel game between successive rounds of funding.)

The entire private equity industry, now that it has grown so oversized, and with too much money, has become a machine for creating Windmill Effects. The U.S. and world economies will be very much better off when the bubble bursts, malinvestment implodes, and reality once again intrudes itself.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)