Bubble to Bubble, Dust to Dust
So far, this century has been a delight. From tech bubble to tech bubble in scarcely 10 years.
On our recent trip to China, all of a sudden we felt 10 years younger. For in the coffee bars of China’s futuristic cities were entrepreneurs, dreamers and lunatics who still thought it was 1999. A group of young techies filled us in: “We don’t worry about profitability. We can worry about that later. We want traffic. Because we know we can monetize the traffic on the stock market.” Here were people who still believed they could take eyeballs to the bank.
And they were right; once again, investors react to the Internet as though it were a toxic mushroom. Just look at Youku. It’s a Chinese version of YouTube. It had revenues of only $60 million last year. Yet, investors drove the stock up so high the company was valued at $7 billion. Renren, billed as “China’s Facebook,” produced similar hallucinatory effects. With revenues – not profits – of just $76 million, its value rose to $9 billion.
In the Occident too, the ‘social media wave’ is making financial history, if not profits. Last week, Pandora, a loss-making on-line music site, rose more than 60%, before falling back.
The trouble with edgy technology is that something edgier comes along soon after. So capitalizing a tech company at more than a few times earnings is usually a mistake. But the conceits of the worldwide web go far beyond p/e ratios. Ten years ago, people had such high hopes they could barely talk about it without running out of oxygen. George Gilder, in his book Telecosm announced a new economy “based on a new sphere of cornucopian radiance – reality unmassed and unmasked, leaving only the promethian light.”
Gilder thought he could see the promethian light shining through the undersea cables laid by a company called Global Crossing. He urged investors to buy. The stock had traded over $60 during the tech bubble of the late ’90s. By the middle of 2002, you could buy it for 6 cents.
Another Internet visionary, Michael Saylor, chairman of MicroStrategy, said he was on a mission to purge “ignorance from the planet.” He said his company was leading a “crusade for intelligence.” In a contest between intelligence and ignorance, we know how to bet. On March 20, 2000, Saylor admitted that he had cooked his company’s books. Investors lost $11 billion. Saylor, personally, lost $6.1 billion – more than anyone had ever lost in a single day’s trading.
Behind the huge losses were cosmic delusions. Digitized knowledge was supposed to make us all smarter and richer. Computing power doubled every 18 months; true believers thought the rate of innovation and GDP growth should speed up too. But did it?
Just the opposite. For starters, the promethean light was harmful to jobs. Larry Summers explained, in The Financial Times, what the Internet did to the book trade. First, Amazon undermined bookstores. And then, e-books undermined the kind made of trees. Between writing a word and reading it there were fewer middlemen. Thousands of jobs disappeared. In other industries too productivity rose, but fewer employees were needed. In 2000, America had 113,899,000 full time jobs. Ten years later it had 112,618, 000.
Real GDP growth declined too. The US government accumulated $8 trillion in deficits, but GDP only rose $4 trillion. Adjust for inflation properly and America’s real GDP per capita went backwards for the entire decade – the first time ever recorded. In real terms, house prices and stock prices too, both declined.
What went wrong? Why didn’t computer-equipped Wall Street allocate capital to businesses that could grow wealth and create jobs? Why didn’t entrepreneurs and scientists use the worldwide web to invent new technology and new sources of prosperity? Why didn’t investors use the knowledge at their fingertips to avoid dead-end investment in mortgage backed derivatives and housing?
Digital progress is not the same as real progress. And digital knowledge is a far cry from actually knowing anything useful. Besides, it’s not knowledge that makes the world go around, anyway. It’s ignorance. How many people would have bought Global Crossing if they had known what would happen? How many innovations would be aborted if people knew how they would work out? How many marriages would be cancelled; how many movie tickets would go unsold? If you could look into the future and know your whole life in every intimate detail…how many people would blow their brains out rather than sit through a re-run? People hustle and take chances only because they don’t know how it will turn out.
As for making people smarter, a report in last week’s press tells us that the typical teenager spends 13 hours a day on some form of electronic device. Another report tells us that his IQ will go down if he watches dumb programming. Today, there are 600 million people on Facebook and 175 million on Twitter. Knowledge is there aplenty. You can go there, if you like, and find out what a congressman’s crotch looks like.
Facebook and Twitter have not yet gone public. But secondary market trading suggests that Facebook would fetch a price of more than $75 billion and Twitter as much as $8 billion. As for their real value to the human race, they’re probably not worth a damn.