From: Thomas Frank
To: Wen Stephenson
Subject: Beyond the Bubble
It appears that the myth of
the Internet as this historic democratizing force, "leveling the playing field"
and all that, has been exposed, at least when it comes to financial markets.
(It's also been exposed when it comes to national politics -- just look at the
negligible effect of the Net on the last election -- but that's another story,
as you well know.) In other words, far from "democratizing the market" and
"leveling the playing field," it looks more and more as though the new media
associated with the Internet bubble -- the 24-hour cable outlets like CNBC and
CNNfn, as well as the Motley Fool, TheStreet.com, et al., and the online
trading firms -- instead gave rise to "new demagogues" (in the form of venture
capitalists, investment bankers, analysts, and business journalists), and
enabled them, as never before, to manipulate the investing public. I'm curious
to hear your reaction to this premise. I also want to push a little further and
ask, is there truly something about the Internet itself, as a medium, that fed
the bubble? It's common to speak of stock-market bubbles as "feedback loops,"
and we hear about how the Internet IPO frenzy "fed off of itself." Was
something genuinely new going on here?
That's an interesting interpretation of the dot-com mania. Let me address it by
first taking a step back. The fantasy of "democratization" through market
forces didn't commence with the Internet. In fact, market-driven
democratization was probably the most pervasive cultural theme of the 90s,
something that cropped up in many different fields (advertising, journalism,
pop music, suburban development, etc.), often without any reference to the
Internet at all. It is also important when talking about this stuff to keep in
mind that what really went on in the New Economy 90s was not democratic: Wealth
became more unequal, blue-collar people lost power in the workplace, the
welfare state was discredited, and the corporation became the most powerful
institution on earth.
Founding editor of The Baffler magazine and a contributing editor of
Harper's, Frank is the author of One Market Under God: Extreme
Capitalism, Market Populism, and the End of Economic Democracy (2000) and
The Conquest of Cool: Business Culture, Counterculture, and the Rise of Hip
Consumerism (1997). He holds a Ph.D. in history from the University of
Chicago. This interview was conducted via email by Wen Stephenson, managing
editor of FRONTLINE's website, between August and December 2001.
Strictly in terms of the stock market, "democratization" had been the dominant
narrative several years before the Internet was noticed by the business world
in 1995. The great bull market had been going since 1991, and already we had
seen the appearance of a whole genre of journalism that hailed mutual funds as
an irresistible force of financial democracy; we had several books by Peter
Lynch asserting that the common man was a better investor than Wall Street
professionals; we had the media frenzy over the Beardstown Ladies (an
investment club made up of small-town grandmas); and we had Joseph Nocera's
book A Piece of the Action: How the Middle Class Joined the Money Class,
probably the best researched example of the "democratization" thesis ever to
appear. That came out in 1994.
And it wasn't new even then. Democracy through investing seems to be a
recurring dream of the financial industry, cropping up whenever a really
impressive bull market is burning up the charts -- the 1920s, the 1960s, the
1990s. After all, you can't have much of a bull market without mass
participation, and you can't have mass participation without the general public
feeling secure about participating. The other reason Wall Street periodically
spins such elaborate fantasies of democratization is that it looks forward to a
world where the common people have come around to their way of thinking, have
bought shares and are ready to agree that corporate taxes have to be lowered,
that Social Security has to be privatized, that the unions have to be busted
and the work outsourced, that the regulations have to be rolled back, that
environmentalism is a crock.
Wall Street really doesn't welcome economic democracy, as the term is
properly understood -- a more equal distribution of wealth, powerful labor
unions, an elaborate social safety net, a well-paid working class, and so on.
But during the 90s it made a great show of embracing a sort of cultural
democracy, always announcing their belief that the People knew best, that the
little guys are finally claiming all the big percentage gains for themselves,
that they're humiliating the hated WASPs, that they're pouring down the marbled
halls of Wall Street and whipping the "smart money." This is a vision of
"revolution" that Wall Street holds dear, that it encourages, that it brought
to life for us in a hundred different brokerage TV commercials in the late
So when the Internet did finally come along, it was simply plugged into this
existing storyline. You mention two of the ways in which this was done: Trading
and researching online. These are important, of course, but I suspect their
impact has been exaggerated.
The Internet's greatest impact, in my opinion, was as a symbol and as an
investment. Everywhere one turned in the 90s one heard how the Internet had
brought more social advance in a few years than ever before in history, how
this miraculous, mysterious device had empowered people to a degree that was
basically incomprehensible, how it had inverted the old hierarchies of boss and
worker, of first-world and third-world. This was God Himself coming down to
earth and telling us that markets were democracies; that the corporate way was
the only way; that regulation and taxation were fundamentally wrong; that
organized labor was obsolete; that free trade was the one true path. It was
capitalism's second coming. It was opportunity incarnate.
So naturally we wanted a piece of it. Whether you used an online brokerage or
not, the great investing strategy of the 1990s was to buy into those brands,
those products, that had the greatest rapport with the masses. And what was
more down-with-the-people than Amazon? Than eBay? Than E*Trade? Than
You ask whether the dotcom mania was the product of a few "new demagogues."
Maybe it was, in certain very particular cases (i.e., Jim Cramer picked this
stock rather than that stock). But I think the blame has to be spread more
widely. After all, the worshipful tech chorus of the late-1990s sang out from
Time magazine and the MIT economics department and the Heritage and Cato
institutes and the floor of Congress and The Wall Street Journal just as
loudly as it did from Wired or Merrill Lynch or CNBC. The entire
American establishment puffed for this one all together. How so many got the
story so wrong is the real cultural question here.
My second question is about the term "new economy." Now, obviously, the
debate over this concept has been going on for some time -- whether in fact
there is such a thing as a New Economy -- and we're not going to resolve it
here. I'm more interested in the rhetoric of the "new economy." It's
become a kind of cliché that the "new economy" thinking drove the
Internet boom and that the concept has been revealed as hollow now that the
bubble has burst. This is where the dancers on the dotcom grave seem to be
dancing most gleefully. You wouldn't happen to be one of those people, would
you? What role do you think the "new economy" thinking really played in the
Internet boom and bust?
Theories that we had entered a "New Economy" mainly hinged on a lot of
millennial ideas, all of which implied that the historical problems of
free-market capitalism had been solved by technology -- and that therefore
government regulation, taxes, labor unions, etc. were no longer needed. As it
happened, these theories were mostly invented and trumpeted by people who
already believed that government regulation, taxes, labor unions, etc.
were bad things. Among other things, they told us that the business cycle had
been suspended, that tech companies now enjoyed perfect information, that the
economy could no longer be measured, that brands were more important than
anything else, that entrepreneurs were near-divine figures who should not be
restricted in any way, that old ways of valuing property and businesses and
stocks were no longer meaningful, that options would make up for lost wages,
and so on.
This was clearly more ideological than it was factual; more of a
quasi-religious phenomenon than a description of what was going on in the
world. Yes, there was technological advance in the 90s, as there has always
been. But the really big change, in my opinion, was the widespread acceptance
of an idea I call "market populism," the increasing conviction of a huge swath
of Americans (journalists, politicians, and above all business leaders) that
laissez-faire, free-market capitalism was the quintessence of human freedom;
that markets expressed the popular will in a manner that government could never
do; and that business would inevitably and rightfully triumph over its enemies
-- the welfare and regulatory state, organized labor, and social critics. This
cultural change is how I define the "New Economy."
The "New Economy" was Newsweek proclaiming that "the market 'R' us" and
hailing billionaires as heroic figures for whom the nation played a "Fanfare
for the Common Man"; it was Tom Peters declaring white-collar tech workers to
be the new, righteous working class, while blue-collar workers were now the
"parasites"; it was Peter Schwartz saluting The Long Boom, the
arrival of permanent prosperity; it was Fast Company raving about "Free
Agent Nation," a place where the market would see to the welfare of workers far
more effectively than any dusty old bodies like labor unions or professional
groups; it was IBM comparing itself to God, and Merrill Lynch advising us to
"worship" the makers of computers.
Does it have an effect on stock prices when business people start to take
ideological fantasies like these as fact? Definitely. A perfect example is the
career of George Gilder. The guy started out as a Republican ideologue, a
member of the Christian right who spent the 80s writing a series of
entrepreneur-worshiping books and speeches for Ronald Reagan. Then he turned to
Silicon Valley, and made himself into a very highly respected technology
writer. He is the source for several of the daffiest "New Economy" motifs: his
famous comparison of microchips to cathedrals; his faith that the microchip, by
its nature, subverted hierarchy of all kinds; his notion that technology has
allowed us somehow to transcend matter itself. But his central theme has always
been heavily ideological: the virtue of free markets, the saintliness of
entrepreneurs, and the viciousness of big government and social criticism. At
any rate, in the late 90s this same Gilder became the hottest stock picker of
them all, publishing a tout sheet called the "Gilder Technology Report" whose
smallest endorsement of a company would send its prices through the ceiling.
People respected his calls on companies because he was the most fervid
ideologue of them all.
Let me also say a word about what you call "the dancers on the dotcom grave,"
or the "schadenfreude" that they are constantly lamenting in The Wall Street
Journal. No one is happy when hard times return. The people who are hurt
worst in such scenarios are always the small investors who got in at the very
end, and also the workers at the very bottom of the corporate flowchart, who
lose their jobs. Many close friends of mine were badly hurt by the collapse --
they bought in at the very top, just like the gurus told them to do -- so it's
hardly a subject for levity around my house.
The real issue is, Who gets the blame? All this talk about "schadenfreude" is
just an attempt to direct public attention away from the real culprits -- the
people who puffed the bubble -- and onto their critics, on those who dared
question "New Economy" thinking. If we had all just believed, they tell
us now, everything would have been fine.
Besides, I find it most peculiar to hear all this whining about schadenfreude
from the same Wall Street Journal columnists who, only a year or two
ago, were using such ferocious language to declare people like me obsolete, our
ideas out of date, our work irrelevant, our failure to amass big money so very
laughable. Nobody talked about schadenfreude back in 1999, when you heard every
day from TV commercials how the Internet was going to tear your world apart,
create havoc, smash your old-fashioned business, crush the welfare state, strip
you of job security, and leave the hindmost to the devil.
In the last five years or so, what do you think we've learned, and/or failed
to learn, about the Internet's real importance? And what might this suggest
about the true costs of the Internet bubble, not just in economic terms, but in
social, political, even cultural terms? Another way of putting this might be,
what was the "opportunity cost" of lavishing so much money, energy, and media
attention on the dotcoms? Have we missed something? As the dust has settled
(and the economy has sunk into recession), can we see any more clearly what the
Internet's real value is? Are we any wiser than we were in 1995?
I don't know what the Internet's real importance will eventually turn out to
be. I myself use it to hunt for World War I memorabilia. I do know that it's
not the libertarian deity that it was presented as being; it's not some sort of
angry free-market god with zero tolerance for government regulation or labor
unions. Ironically, there is probably no better proof of the idiocy of markets
than the dotcom stock frenzy, in which investors poured such huge sums on such
tenuous enterprises. Far from being omniscient, markets can be very unfair and
But have we learned this lesson? Have we changed our ways? Are we ready to
secure economic democracy by turning to institutions other than unregulated
markets? No. At least, not if you read our newspapers and watch our TV
commentary. On Labor Day, two of the three newspapers I read regularly featured
op-ed columns that actually used that occasion to dismiss the labor movement as
irrelevant, unpopular, and in terminal decline. Our president has actually
managed to repeal the inheritance tax, one of the fundamental pillars of
progressive taxation. We have a government commission willing to distort any
set of figures to discredit Social Security. George Gilder still appears on TV
talk shows as a distinguished authority figure. Certain Ford dealers still give
customers gratis copies of The Millionaire Next Door, and certain CEOs
buy thousands of copies of Who Moved My Cheese? to cram down their
employees' throats. The authors of Dow 36,000 are routinely quoted in
the papers as experts on matters economic. When reporters are assigned to cover
a strike or a lockout, they still quote Wall Street analysts as experts on the
subject. And we have an entire cottage industry trying to pin the blame for the
recent stock market disaster on anything and anyone except for the
If there is one place where markets have failed us consistently and
disastrously, it's the marketplace of ideas.
Putting short-term predictions aside, as you look back over the past year or
18 months, what connection do you see between the dotcom crash and the current
economic and political climate? The whole story of the Internet economy has
been eclipsed by Sept. 11 and its aftermath (as well it should, at least for a
time), but to play a kind of "What If?" game, what shape do you think the
economy -- and the political debates about the economy -- would be in today if
the events of Sept. 11 had never taken place? That is, in terms of the economy
and economic policy, what's the more important story? On the flip-side, did
Sept. 11 change the way you think of the Internet, the New Economy, and the
recent history of the Internet bubble?
I'm not an economist, so I can't estimate the economic impact of Sept. 11 or
speculate about where we'd be if it hadn't happened. Culturally, though, it
certainly made all the ideological puffery of the 90s feel very, very distant.
For a few weeks after the terrorist attacks the world seemed a much more
hostile place, and the crazy optimism of the "New Economy" seemed like a period
piece, a relic from the far-away past.
In some ways the war climate has magnified the lessons of the dotcom collapse,
finally pulling the rug out from under some of the already-questionable
pro-corporate aspirations of the Bush administration. How can you salute
working-class people as heroes and yet also privatize Social Security? How can
you give vast "stimulus" handouts to corporate America while the common people,
who are expected to fight the war and rally to the flag, are being so visibly
screwed by the same corporations? Think Enron here.
But the war has also provided the free-market gang with a whole new arsenal of
weapons. Just recently the attorney general expressed the opinion that critics
of the administration are damaging our national "unity" and hence are giving
comfort to terrorists. In more fervid libertarian quarters, I have seen this
critique applied to those liberals who oppose the president's economic agenda.
They are said to be little better than terrorists themselves. (See in
Unsavory though it might seem, I believe this is the sentiment that will carry
the day. We are in a recession that seems to be a clear product of the zany
optimism of the dotcom days. Politically, those who hyped the "New Economy"--
who led us in all those prayers to Bill Gates and to the magic of deregulation
-- should be in serious trouble. They should lose elections. Those who
recognize the value of labor unions, regulation, and a strong welfare state
should win. But the war climate may well keep all those issues in the background.
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