Those Were the .Com Days

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
Price: $24

Book: The New Gilded Age: The New Yorker Looks at the Culture of Affluence
Editor: David Remnick
Publisher: Random House
Price: $26.95

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."