Kendall,
Irwin Stelzer's article nicely illustrates the dark side of a phenomenon I've been thinking about a lot in recent years: the relationship between speculative manias and economic innovation. I'm interested in this because the commercial development of the Internet would lag far behind today's levels if the flow of capital had been dictated by prudent, rational, "value" investors -- for example, 90 percent of the talking heads who appear on CNBC, CNNfn, and Bloomberg Television. The rational argument is that Net companies are massively overvalued, that they don't warrant the flood of dollars the market has showered upon them. And, in a sense, they're right, because many of these companies are going to fail and leave the shareholders empty-handed. And yet, on the other hand, the tidal wave of capital sloshing into these companies will keep them afloat long enough to give us remarkable new technologies that will persist after these companies fail, providing a new and far more efficient economic infrastructure than we've ever had in all of human history. The history of economic progress is littered with companies that innovated, boomed, failed -- and left behind its innovations for others to take up and benefit from.
Oddly enough, putting money into Internet companies that have market caps in the billions, with annual sales under $20 million and losses at least twice that, may at one and the same time be irrational when viewed as investment in companies and rational when viewed as an investment in our overall economy.
One consequence of today's speculative mania is that many good "old-economy" companies are being deprived of capital, forced even into partial liquidations. Stelzer offers an excellent description of this phenomenon from the vantage point of the old economy. It's a painful story. But we also must appreciate the context of "creative destruction" (as Greenspan often says, following Schumpeter) within which this transfer of capital is occurring.
The question that intrigues me is this: are we speculators, with our hot money, in fact doing more to build our overall economy than even Warren Buffett, with his deep commitments to the companies he owns? Conventional wisdom would likely say this is an absurd notion, that it is stable investment in good companies that builds economies, not speculative manias. But, in this case, I have my doubts about the conventional wisdom. When is speculation investment, and when is investment an "entombing" of capital? |
