During the DotCom bust in the early 2000s, I remember having a conversation with my father about market valuation. I was about 20 at the time and I was trying to understand how Internet startups had tanked the stock markets. He made two points that have firmly wedged themselves into my core beliefs. The first was the why about the DotCom bust (the shiny bauble effect) and the second was a fundamental fallacy of modern economics.
My father summarized the DotCom bust as this – technology generation gap. His, and previous, generations went from tubes to microprocessors – mainframes that filled entire floors to desktops in your living room. Compared to future generations who will exit the birth canal able to hack the gibson, there was a massive knowledge gap between tangible Tech products/services of the early 90s, derivatives of decades long development and enculturation, and the Internet products of the late 90s, derivatives of hype, heated O2 and cocaine (notable mentions aside).
He explained that no one wanted to miss out on the next Microsoft, EMC or Dell, so they invested in companies without little to no information on their business model other than the words “Internet” and “Startup.” This was facilitated by major brokerage firms and banks that were leveraging the Internet as the first iteration of micro-lending (sans altruism) – companies who make money whether their investments succeed or fail. Investment firms and banks were able to directly tap into household incomes, bypassing pension plans and accounting departments and any hope of rational behavior. (see also, Real Estate bust of 2006).
His second point was a question I have been grappling with ever since – “Why must markets values perpetually grow?” He told me how he learned about Zero Growth Economics during his college years, and how outside of that economics class he has yet to see the theory discussed, much less practiced. To my father, the theory made perfect sense – we live in a world of finite resources, so how can we have an economic model that requires unlimited growth to be sustainable? The answer he came to, “We can’t and we’ve been faking the numbers for decades to hide from that fact.” (see also, Fractional Reserve Banking/HFT trades)
That was it, the internet had accelerated market trend data past the point which regulatory agencies and Wall Street could hide the figures. As population and energy needs continue to grow, we must fold Earth’s resources into more and more complex structures to meet the demand. The more complex the structure, the more variables that can affect the integrity, the more likely the structure will suffer a debilitating defect and collapse. If modern economists treated their theories a little bit more like their siblings in Hard Sciences (biology, chemistry, etc), we would not be surprised when the structures fail… in fact we would have assumed failure from the outset and prepared the subsequent versions to take its place. (see also, Drug and Chemical development)
10 years later and my father and I are still waiting to see this concept breach the mainstream consciousness, but until then – I’ll be talking about it here.
Next up, analogies, Web 3.0 and how to avoid Sean Connery’s The Matrix mistake.