From: Thomas Frank
To: Wen Stephenson
Date: 1/24/2002
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.

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 1990s.

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 TheGlobe.com?

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 very foolish.

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 obvious culprits.

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 particular http://www.gilder.com/AmericanSpectatorArticles/WarEcon.htm.)

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.