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The End of Irrationality

Alan Greenspan started it. In a speech to the American Enterprise Institute on December 5, 1996, he made his infamous “Irrational Exuberance” quip. Ever since, 'irrationality' has been the sound bite for the economy and financial market. First, the 'irrational' technology bulls and their corrupt Wall Street accomplices consumed billions of dollars of capital while driving the NASDAQ from 1500 to 5000. Now, the 'irrational' bears have closed the capital markets for technology while driving the NASDAQ back down to 1500.

The irrationality stops now.

The cycle we have just witnessed is nothing new. The boom-to-bust cycle has repeated many times over the past two hundred years. New technology fuels this cycle. Since the first commercial steam engine, the economic promise of a new technology attracts too much capital. The result is a boom and inevitably boom turns to bust. The previous boom-bust cycle happened from 1980 – 1984 with the introduction of personal computers. Previous boom-bust cycles, on the scale of the Internet cycle, have happened with the automobile, railroads and canals.

The real economic impact of new technology is not seen until after the bust. Growth is built on top of the technologies and companies that survive this cycle. In fact, this is the function of the boom-bust cycle. The boom feeds a burst of innovation and competition as differing versions of the new technology compete in market. The boom accelerates the maturation of new technology through this process of hyper-competition. The capital starvation of the bust forces a switch from technological innovation to economic innovation.

It is the application of the new technologies, not the development of the technologies themselves, which spur sustainable economic growth. The technological-driven growth following boom-bust cycles is both robust and rational. In the decades following the invention the boom/bust cycle, industries form, populations migrate, social structures transform, and a new class of wealth creators emerge.

Contrary to popular belief, the role of technology in driving economic growth and wealth creation was not just recently discovered by Paul Romer and the Chicago school of economics. The great Viennese economist, Fredrick Hayek and Joseph Schumpeter, did not first discover it. The critical role of new technology in creating wealth has been well understood by entrepreneurs and their financial backers since the beginning of the Industrial revolution for two hundred years.

Occasionally, a bust is exacerbated by disastrous monetary policy mistakes, as in 1932 in the US and the late 1980's in Japan. While people of good faith can argue over the wisdom of fiat monetary policy, there is no evidence of disastrous monetary policy today.

Throughout the Internet boom-bust cycle business productivity continued to increase. Unemployment rose to no higher than 6% during the recession. Inflation is low and the threat of deflation has been eliminated. Interest rates are low. The US dollar is beginning to return to a healthier level. Household incomes and household debt service are growing at the same rate. The economic recovery has slowly begun and it promises robust growth.

Enough of the technological utopians promising a New Economy untouched by the messiness of free market capitalism! Enough of economic doomsayers threatening the collapse of the western economy! The era of irrationality is over and a new era wealth creation has begun. The shamans and hucksters of boom and doom have been replaced on center stage by the entrepreneur with vision and spirit.

Let the true Internet economic boom begin.
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