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Cultural Consequences of the Dot-Com Crash By: Robert Locke
FrontPageMagazine.com | Tuesday, April 24, 2001

DESPITE ANY REMAINING SPASMS of political manipulation of the stock market by the Federal Reserve Bank, which ought to at least give pause to people who still want to believe we live in a "free" market, most people now realize that the new economy fantasy is over. They also probably realize that there was a lot of very dumb thinking going on while the boom was still alive. What they probably don't realize is just how deep the intellectual rot went. I was involved in the computer business during the boom, so I had a ringside seat to a lot of the nonsense that went on. Fortunately, a lot of it will now go away.

The key to the new economy fantasy was the mutual reinforcement of stupid ideas by stupid money. Stupid money is money that gets made without hard work. No-one but a red has a problem with stock-market speculation as such, but when people make money investing in peanutbuttersandwiches.com despite the fact that the company is going broke, it does have the unfortunate consequence of validating whatever dumb logic led them to the investment. At the height of the boom, anyone who questioned the proposition that we were witnessing the emergence of something fundamental enough to be called a whole new economy was derided with the taunt, "you be right, and I'll be rich." This was quite stinging in a world where the fundamental profitability of many dot-companies was totally irrelevant to whether they made money for their investors. The creepy thing, of course, is that this argument concedes that the fundamental economic logic is against it. It just doesn't care, and the scary thing is that it doesn't have to. But fundamentals are, of course, never irrelevant, and having a stock market that makes people think they are, is a recipe for disaster in the long run.

The most dangerous words in the English language are "it's different this time." A speculative boom in the stock market can't change the basic laws of business, like the idea that companies have to make a profit, but it can, dangerously, make people believe that they have changed. We have had speculative booms before, most famously in the 1920s, and they, too, had their rationalizations about how technology had changed everything. In the ‘20s, the hot technologies were radio, automobiles, and aviation. They still crashed.

Which brings us to an interesting issue: the self-corruption of capitalism. People don't like to talk about this because of their simplistic worship of the proposition that "the market is always right." But how can the market always be right if it prices Cisco.com as worth more than the entire US oil and gas industry, which it did at one point during the boom? Free-market ideologues hate to face the implications of facts like this, but they need to have their faces ruthlessly rubbed in them. Nobody (and certainly not me, before anyone starts crying "socialist!") is saying the government could have done a better job, but it is time to face up to the fact that the free market can make mistakes and is sometimes driven more by crowd psychology than economic logic. This is hardly a new insight; the sad thing is that we forgot it and had to learn all over again. It may be my imagination, but it seems that the decline of historical education in this country has led to a declining ability on our part to retain the lessons of our past. Of course, as long as people are making money, they don't care, so the end of the boom may be just the bucket of cold water in the face we need as a culture.

As someone who studied economics at the famed University of Chicago, let me assure the reader that serious free-market economists are perfectly well aware of these problems. The problem is that their ideas are not what reaches the public, which gets fed instead a vulgarized and simplified version in intellectually pretentious but analytically shallow magazines like Wired and The Industry Standard. This is becoming a serious problem in our intellectual culture. The truly frightening thing is that Wall Street analysts, who know the difference perfectly well, chose to use the latter version when it suited their aim of talking up stock prices. For example, there is an idea called Efficient Markets Theory which, in its twisted form, can be used to prove that one financial measure of a company's performance is as good as another, because all these things equilibrate and will "come out in the wash." That is to say, a company that makes money for its investors by paying dividends from profits is no different from one that does so by having an endlessly rising stock price. The problem, however, as we have just learned, is that there is a difference between the two: a company can't fake dividends but it can fake a rising stock price on the strength of a good PR department. What this suggests is that the old 1950's stick-in-the-mud philosophy of investing may not have been so dumb after all: no one measure of corporate performance is enough on its own.

The other problem that surfaced in the recent boom is the ability of capitalism to bribe itself. In ideal capitalism, corporations respond to economic signals contained in prices as rational economic actors. Their Achilles heel is that they aren't really economic actors in their own right, but giant social machines piloted by fallible human beings. So what if the interests of management were not the same as that of the companies they run? Well, giving stock options to management can bring this about, because it means that generating a run-up in the stock price becomes the highest goal of management, a goal that can be more easily served by verbally positioning the company as a "new economy stock" than by actually making profits. And in a generalized stock-market boom, any fool running a company looks like a hero.

Because the market boom was artificially pumped up on steroids by Alan Greenspan, the Federal Reserve has thus helped to undermine the wise management of business in America.  This is a shameful act that casts fundamental doubt on the legitimacy of a reserve system based on politicized fiat money. The Fed pumped liquidity into the markets three times: at the time of the Mexican bailout, at the time of the Asian crisis, and in anticipation of  Y2K-related run on the banks.  Panic over Y2K, which turned out to be a gigantic nada, was inexcusable.  The two bailouts were fundamentally bailouts of globalism: Mexico was an attempt to save a hostile (but profitable) foreign government from the consequences of its own lies; Asia was an attempt to disguise from the American public the consequences of tying our economic destiny to that of the corrupt and backward crony-capitalist economies of Asia.  Both these breakdowns were trying to tell us something; the Fed deliberately plugged our ears with cheap credit that flowed straight to the NASDAQ.

Let no one misunderstand: there is nothing fundamentally wrong with the Internet and associated technologies as tools for doing business. They are very useful for a lot of things. They do a lot of things better than the old ways, and a lot of people are obviously going to make a lot of money doing this. But somehow this got inflated into the idea that "the Net changes everything." Basically people believed this not because they misinterpreted any specific facts, but because they emotionally wanted to. There were three reasons for this:

1. When people see other people getting rich, and get told that they can get rich too if they will only believe the same things as those who got there first, guess what they'll do?

2. The counter-culture invaded Silicon Valley. Baby-boomers have a huge unfulfilled longing from their formative years for revolution. They have also learned the pleasures of wealth since then. The idea that the Internet constituted a revolution gave them both at once. (This is related to the bobo phenomenon I wrote about in another piece.) The other thing the counter-culture did was it made technology hip. Think back to the last technology boom, in the 80's. Technology was popular, but it was never culturally hip. This time it was, which was lots of fun for the nerds who never dreamed they would be considered hip, but had the disastrous effect of making people totally incapable of being objective about technology.

3. Globalists tried to use the Internet as an intellectual bludgeon to argue that globalism was inevitable. Their favorite argument was (and is) that high technology just dictates globalism and there is nothing anyone can do about it. (This is creepily similar to the arguments made against liberal democracy by the far Right and far Left in the 1930's, when large-scale industry had supposedly abolished the individualist society and made collectivism inevitable.) Globalists argued first the (utterly absurd) line that the Net made physical place irrelevant, which carries the tacit implication that national borders are obsolete. They then conjured up a vague but dazzling vision of a futuristic world in which everything is so different that all merely traditional values are obsolete. Technology people are extremely naive about politics and easily sold on any agenda that gives them an exalted place in its theology. The globalist ideologues (most of whom don't really know much about technology) are suckers for the most preposterous projections of what technology will do, so they bring out the worst in each other perfectly.

The really dangerous thing about the cultural argument is that when made explicit, it became identical with the idea that anyone who didn't believe the fantasy "just didn't get it" and was therefore not worth listening to despite the logic of anything they might say. It's oddly like a religious sect where any criticism simply shows that the critic is not among the saved. This made the hype-world of the boom hermetic against criticism. These nerds have been living in a world apart for decades, anyway, and the idea that they were heroes of an irresistible future that outsiders couldn't understand was pure mind-candy for them. How could they resist it?

The dot-com crash has also revealed flaws in the new hero of the 90's: the entrepreneur. The basic problem with entrepreneurs is that because their companies are not just businesses to them but their principal creative expression in life, they have great difficulty being objective about them. Irrational faith in a great idea that the world doesn't recognize may be a good thing, but entrepreneurs also have irrational faith in dumb ideas simply because they are their own companies. They also have a suspicious love of being visionaries with other people's money. Most successful entrepreneurs are not visionaries anyway, just ordinary competent businessmen, but in the boom, they were all expected to become visionaries, leading to an artificial love of radical business ideas for their own sake.

Or, of course, the dressing up of ordinary ideas as radical ones. Prosaic 100-year-old business ideas (now called "models" for some reason; the use of pseudo-innovative terminology to disguise the lack of real thinking is a classic warning sign) were dressed up as cutting-edge innovations. Take Amazon.com for instance: the place is a mail-order house, period. There is nothing fundamentally different about what they are doing from what Montgomery Ward or Sears Roebuck were doing 100 years ago. The fact that they use computers to take the orders is a nice incremental improvement in efficiency, like the one that occurred when they switched from mail to phone, but that's it.

A lot of people who took part in the dot-com fiasco made their bets on the following tacit logic: this is high-tech, high-tech makes money, therefore this will make money. But the bald truth is that a lot of dot-com companies were not really high-tech innovators at all. They purchased off-the-shelf technology (the Internet) that other people had invented and built, and then added absolutely nothing technologically innovative themselves. They were promoters, car salesmen, and English-majors playing at being engineers. In fact, I suspect they secretly loved this aspect of the web more than anything: it enabled people who hadn't had the discipline to sweat through an engineering or computer science degree get in on the high-tech boom. It even, I suspect, enabled them to believe that entrepreneurial panache was an economic activity in its own right, that the entrepreneurship itself, not just the product, was worth money. We can call this fake high-tech, an American tradition that goes back to the streamlined steam locomotives of the ‘30s. Its serious consequence was to suck up a lot of Silicon Valley's energy and capital and divert them from real technological innovation.

The sad thing is that a lot of Internet companies didn't have to fail, but blew their chances through arrogance and stupidity, attitudes that were encouraged by the boom atmosphere. For example, one buyproduce.com tried to create a wholesale online produce exchange. It sounded like a can't-lose idea, given how efficient the web is at linking people all around the world. But they had great difficulty getting wholesalers to sign up. Why? Because their system wasn't designed to cope with the fact that cancelled orders in the produce business don't just disappear, but do various other things. Or with the simple fact that different wholesalers have different codes for the various colors that vegetables come in! Now how hard would these requirements have been to learn if they had just done their basic homework? Not very. But if you hew to the philosophy that "the Internet changes everything," then there's no need to do your homework. Your idea is so brilliant that it is guaranteed to make money and mere execution details aren't that important. And of course there's certainly no need to take seriously the old ways of doing things. You should assume, instead, that a multi-billion dollar industry in the mid-1990s was doing everything wrong until you came along. It is a time-honored lesson of history that arrogance is a sign one is in trouble; it was right once again.

The even more revealing thing about this particular company is that produce wholesalers apparently eventually concluded that the humble telephone and fax machine would give them everything they wanted, and without paying a transaction fee. People have in their heads the tacit idea that the more advanced the technology, the more productive it will be. This just isn't so. What's productive, and what isn't, are empirical questions, to be found out be experience, not deduced out of thin air. People have just got to get it into their thick heads that higher-tech isn't always better. A helicopter may not be the best way to deliver groceries.

The fundamental lesson of the dot-com crash is very simple: the economics of the new economy are not new. They are exactly the same as the economics of the old. I challenge anyone to tell me how they are different. There is no new economy. Now that the boom is over, we may hope for the gradual deflation of some of the intellectual corruptions it caused. We can expect:

1. An end to the arrogant religion of "the market is always right."

2. A dent in the religion of "higher tech is always more efficient."

3. An end to the normalization of getting rich quick.

4. An end to the idea that economic growth requires conceptual revolutions.

But what I will enjoy most is an end to the idea that technology is hip.

Postscript: I predict some angry hate-mail from readers who will see me as talking down their 401-K's. Tough luck, guys. You bet on an arrogant gasbag of hype and you lost. I also predict a lot of people calling me a hypocrite for dissing the Internet on the Internet. Well, I never said it wasn't good for magazines like FrontPage; it is. Now it's not really any of your business, but I should let you know that FrontPage doesn't make a lot of money, not that it's meant to. The truth is its own reward. If you want to verify my analysis of buyproduce.com, the Wall Street Journal published a similar story on them. For more on my own misadventures in Silicon Valley, see my piece "Valhalla of the Idiots Savant" on vdare.com.

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