So would the bubble itself have been as inflated if not for the role the
Internet played in the flow of information and communication. Is that one way
in which "technology and finance feed off of each other"?
Did the Internet itself contribute to the stock market bubble of the 1990s?
Only to a small extent. In reality, both the Internet and the soaring stock
market were caused by the same factor -- the rush of money seeking higher
returns from a new wave of innovations. Risk capital funded the dotcoms and the
new telecom companies. Risk capital also poured into the stock market, hoping
to get a piece of high returns.
My second question is about the term "new economy." Obviously, the debate
over this concept -- whether there is such a thing as a New Economy -- has been
going on for some time, as you well know, 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 it's 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. Now, you've had a few things to say about the "new economy" over the
past five years or so. How large a role would you say the "new economy"
thinking really played in the Internet boom and bust?
Many people misunderstood the true nature of the New Economy. They assumed that
the Information Revolution and the Internet had eliminated recessions, and that
the economy and the stock markets were now on a permanent upward trajectory.
In some cases this was explicit, when journalists would write about the end of
the business cycle. In other cases it was implicit, when market analysts and
corporate executives would predict 20 percent growth in revenues as far as the
eye could see.
But they completely missed the point. The New Economy is more risky than the
Old Economy, not less. There is a lot more reliance on innovation and
high-risk investments to drive growth, which is great when the innovations pan
out. But when big gambles, such as the dotcoms, fail to pay off, then the whole
Actually, this is probably the biggest mistake that investors made. Because
they didn't understand the high-volatility nature of the New Economy, they took
far bigger risks than they should. They didn't realize that by investing in new
initial public offerings, they were effectively taking the same risks that
venture capitalists do -- which means facing the possibility that a lot of your
investments will go bust.
You make a good point here about individual investors acting like venture
capitalists -- it's a point that we've been hearing a lot. But I can't help
wondering, in this particular case, if you aren't letting the VCs themselves
(and the investment banking community) off the hook, and placing too much blame
on the public. Weren't VCs (and the investment bankers doing the underwriting)
pushing many of these dotcoms to go public far too early in the game -- IPOs
taking place at what would normally have been a first-round or mezzanine round
of funding? Weren't they in fact exploiting the public's willingness to take
If someone offers to sell me a lottery ticket, is that exploitation? No. People
wanted a piece of these deals, they begged for a piece of these deals. I would
much much rather err on the side of encouraging people to take risks, rather
than discouraging them.
What do you think we've learned, or failed to learn, about the Internet's
real importance? And what might this suggest about the true cost of the
Internet bubble, not just in economic terms, but in social and even political
terms? That is, what was the "opportunity cost," so to speak, of lavishing so
much money, energy, and media attention on the Net economy? Now that 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, when Netscape went public?
With any new technology, there's a process of experimenting, of trying to
understand where it is useful and where it isn't, and figuring out how to apply
it. It's often very hard to predict what the ultimate applications of a new
technology will be.
Part of the genius of the American New Economy -- and one of our great
advantages over Europe and Asia -- is that it permits an accelerated rate of
experimentation with a new technology like the Internet. The availability of
capital meant that we could try a lot of different approaches at once, to see
which ones worked.
Here's what we found out. First, the Internet has only an incremental benefit
as a channel for retailing. Ultimately, retailing is mostly about producing and
moving around goods as efficiently as possible, and the Internet doesn't bring
all that much to the party. Thus, the great dotcom experiment -- moving all
manners of retailing onto the Web -- turned out to be mostly a failure.
But we also learned that one of the biggest virtues of the Internet is that it
revolutionizes the transmission and manipulation of information. We have not
fully exploited this yet, but I think that over the next ten years, the
Internet will transform those industries which are primarily about moving bits
and bytes around. That includes media, financial services, and a large portion
of health care.
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