Book: The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterwards
Author: Michael J. Mandel
Publisher: Basic Books
Book: The New Gilded Age: The New Yorker Looks at the Culture of Affluence
Editor: David Remnick
Publisher: Random House
How can something that felt so real seem like such a distant memory? Last spring's crash changed the Internet economy as we knew it. It's not just that the NASDAQ is down from its peaks or that fewer 28-year-olds have plans to retire by their thirtieth birthday. Rather, there is a palpable sense that the first round of growth associated with the new economy is over. What everyone wonders is, What's next — for markets, for startups, and for us?
These two books appear at the same time, and although they can't be more different, they both offer some perspective on our fears about the future. The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterwards, has a title (and an argument) that's about as grim as you can ask for.
The second book, The New Gilded Age, is a wonderfully readable collection of profiles from the New Yorker — profiles of people, places, and moments associated with the rise of the new economy. Talk about fast history! Even though most of the articles have appeared in the magazine recently, they have the feel of dispatches from a time gone by. David Remnick may not have intended to edit a history text of the new economy, but that's how this book reads.
Don't Worry, Be Unhappy
If the new economy had a birth certificate, it would be stamped August 9, 1995. That's the date when Netscape Communications completed its IPO. The real significance of the Netscape transaction, argues Michael J. Mandel, economics editor at Business Week, wasn't just that such a young company was able to go public, or that Jim Clark, its founder, became a rich man overnight. The significance was that a ragtag outfit of young engineers had touched the lives of millions of people — and had reshaped the competitive environment. "A company that had not existed two years earlier was challenging the largest and most powerful software company in the world, Microsoft, and its leader, Bill Gates," Mandel writes. "And Gates responded by putting his company into hyperdrive."
This Netscape effect defines the underlying logic of the Internet boom. The key, Mandel says, is to understand the role of the financial markets as a driver of change. The stock market didn't go up because technology moved so fast — technology moved so fast because the stock market was prepared to go up. "The stock market is not simply an innocent bystander in the New Economy," Mandel writes. "Rather, with the rise of risk capital, the market has become the critical nexus of economic growth and innovation."
The logic goes something like this: The explosive growth of venture capital created an opportunity for technology startups with big ideas to get a shot at realizing their dreams. The willingness of the public equity markets to embrace those ideas through IPOs brought even more money into the process — and persuaded the smartest people in the economy to join the startup game. As more and more startups took shape, big, established companies had no choice but to respond to the threat — which meant spending lots of money on technology. That spending created an even more attractive climate for startups. The result was dramatic gains in productivity, low inflation — and good times for all.
So what's the problem? Well, what goes up can indeed come down — and when this new system begins to unravel, Mandel warns, the self-reinforcing logic that created prosperity can unleash misery: "The key point is that the role of innovation in the economy has changed. Where it once was a steadying influence, damping the swings in the business cycle, now it accentuates them. Rather than moderating the next recession, innovation will make it worse. Rather than providing a floor for the economy, technological change — or the sudden lack of it — will open a trap door."
It is a grim vision — a digital dustbowl. But before you become alarmed, consider something else. The title of the book wildly exaggerates Mandel's arguments. He spends as much time hedging his bets about the likelihood of a depression as he does making his case. "The picture of the Internet Depression that I lay out in this chapter," he writes at one point, "should be regarded as drawn lightly in pencil rather than in ink."
What's more, there's evidence that the economy has begun an adjustment that will allow for a less-than-cataclysmic response to tougher times. As one of my Fast Company colleagues, senior editor George Anders, recently pointed out in a debate with Mandel on ABCnews.com, the new economy has demonstrated a capacity to fix its problems faster, and with less anguish, than the steel industry or the auto industry ever did.
But you don't have to join Mandel's bandwagon of doom in order to appreciate the power and the value of his book. For anyone who wants to understand how the first round of the new economy took shape and how to wrestle with the macroeconomic challenges facing us in the second round, a great place to start is The Coming Internet Depression.
Let Bygones Be Bygones
If The Coming Internet Depression offers grim arguments and hard-core analysis, The New Gilded Age plays more like a greatest-hits soundtrack for the new economy. The New Yorker, a magazine born just before the Great Depression, has done an amazing job of bringing its signature journalism to the zeitgeist of the Internet age. This collection of articles offers serious profiles of big-time moguls and thinkers. It also profiles some of the oddball characters that only the Internet boom could have created. My favorite: Larissa MacFarquhar's piece on Jason McCabe Calacanis, founder of the Silicon Alley Reporter, a young kid who seems willing to say and do anything for attention. (It is fitting testimony to the temporary insanity of the Internet age that Calacanis's profile appears before those of Bill Gates, Alan Greenspan, and Martha Stewart.)
The overall effect of reading these articles is an appreciation of just how drunk we were during the dotcom daze — and how hard it's going to be to get rid of the hangover. What's still true about the Internet economy when it comes to how you build great companies or how you create value? And what was never true about the Internet economy? Which "new rules" of competition do we have to discard as being misguided, naive, or flat-out wrong? Those are some of the questions that any reader of these New Yorker pieces will be left to ponder.
To me, the most compelling article in this compelling collection is John Cassidy's profile of Mary Meeker, the Morgan Stanley Dean Witter analyst who was made famous (and rich) by the Internet boom. The piece, called "The Woman in the Bubble," was published in April 1999 — about a year before the bubble burst. But even back then, Cassidy paints a portrait of Meeker as an evangelist who was getting uncomfortable with her religion, as a true believer who was beginning to have some doubts about her faith. Early in the piece, Cassidy describes the IPO (led by Meeker) for priceline.com — a company that had been operating for less than a year and that had achieved a market value of $11 billion. And yet, even at such a triumphant moment, Meeker tells Cassidy, "I think we will have a big correction in Internet stocks sometime this year."
By the end of the profile, Meeker's disgust with Internet excess is palpable. She talks to Cassidy about some of her meetings with startup-company CEOs: "They were unbelievably arrogant about how successful they were going to be, and they were unbelievably arrogant about the valuations they wanted to achieve on their I.P.O. I was just pissed. I was like, 'Come on, guys.' " Meeker says that she sensed a huge gulf between first-generation Internet entrepreneurs and those leading the second wave. "The first generation was like, 'Hey, isn't this great! I'm a billionaire! Well that's kind of embarrassing. What am I going to do with all this stuff?' The next generation is saying, 'Well if he's a billionaire, then I've got to be a billionaire.' With every I.P.O., the envelope is pushed a little further. At some point, you have to scream 'uncle.' "
The anguish that you heard last spring on Wall Street was the sound of the new economy screaming uncle. The issue before us now is what comes next. Can we keep what's been so powerful about Internet-inspired innovation, and discard what's been so dubious? Can we have change-the-world creativity without out-of-this-world stock markets? Can we have visionary leadership without ego-driven delusions of grandeur? Those are the questions that will occupy us for the next five years. Far from depressing, the search for answers should be quite a ride.
Sidebar: Cheat Sheet
Too depressed about the end of the boom to read these books? A few highlights from The Coming Internet Depression.
Not All Booms Are Created Equal. "Between the middle of 1995 and the middle of 2000, about 45% of the rise in the market value of the S&P 500 came from the tech sector. Just four companies — Intel, Microsoft, Cisco, and America Online — were responsible for an increase of more than $1 trillion in market value.... "
The Netscape Effect. In the four years before the Netscape IPO, GDP grew at an annual rate of 3%. In the four years after the IPO, GDP grew at an annual rate of 4.3%.
High-Flying Analogy. "If the Old Economy was an automobile, the New Economy is an airplane. In an automobile, if anything unexpected happens, the natural and correct response is to put on the brakes. But just as an airplane needs a certain airspeed in order to stay aloft, so the New Economy needs fast growth in order for high-risk investment in innovation to be worthwhile. And just as pilots have to learn how to deal with a stalled and falling plane by the counterintuitive maneuver of pointing the nose to the ground and accelerating, policymakers have to learn how to go against their instincts by cutting [interest] rates when inflation goes up."
A version of this article appeared in the December 2000 issue of Fast Company magazine.