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Anvar Alikhan

The Great Internet Crash of 2001?

As Robert Solow once said, economists have managed to successfully predict 12 out of the last 4 recessions. And now, once again, somebody's predicting a tech-led crash around the corner.

What makes one sit up and take notice, though, is the fact that this particular economist, Michael J Mandel, has long been an optimist on the New Economy. In fact, he was one of the first people to recognise the New Economy, to explain it, and to understand its implications.

As early as 1995 Mandel (also the economic editor of BusinessWeek, by the way) had picked up something that most economists wouldn't realise till much, much later: the fact that something new was happening in the US economy; that technology had taken over as its driving engine; and that it was leading to an unprecedented curve of productivity-led growth.

But, now in his scary new best-seller, The Coming Internet Depression, Mandel points out that the tech cycle must inevitably end. And when that happens, we will be hit by its downside, which we know nothing about -- for the simple reason that we've never experienced anything like it so far.

Mandel's central argument is basically this: the New Economy is not merely a technology revolution, but a financial revolution as well -- because of the never-before role played by the venture capital funds. But the thing is that venture capital funds are notoriously sensitive to the economy and the stock market. And that is what makes the current scenario so volatile.

So far what we have seen of the tech cycle is a long, low-inflation boom, with soaring tech spending, rapid innovation, productivity-led growth, and a buoyant stock market -- which, in turn, generates more funds for more innovation.

Yes, it's been just one great big, happy, virtuous cycle. So far.

But the thing is the pace of innovation is tied in to the growth of the economy and the stock market. So if the technology sector slows down -- as it is already showing signs of doing -- that virtuous circle could suddenly turn vicious.

A falling stock market will lead to a drying up of venture capital funding. This will lead, successively, to slower technological innovation, slower productivity growth, and a further drop in the stock markets. Investment will fall; inflation and unemployment will rise.

As long as US monetary policy responds to the downturn smartly, says Mandel, things can be kept in control. But if the policy-makers get blind-sided -- if they botch their footwork -- that downturn could easily spin out of control, and become - aaarghhhh! - The Great Internet Depression.

All this, of course, is a worst-case scenario. It involves everything that could possibly go wrong, going wrong. But the possibility is there, Mandel insists.

Not everybody agrees with Mandel's predictions, though. There are enough very smart analysts, economists, CEOs and tech gurus out there who believe -- thank God! - that the kind of generalised tech melt-down that he describes is unlikely to happen. They point out, for instance, that in today's era of e-business, technology purchases are no longer "desirables" for a company, but basic essentials for competitive survival. They point out that we are still only in the early stages of an explosion in technology innovation brought on by the Internet. They point out that the New Economy has, in any case, proved itself to be amazingly resilient, having successfully come through body-slams like the 1994 Mexican peso crisis, the 1997 Asian market collapse, and this year's Nasdaq collapse. And so on…

So where do we go from here?

In the '70s Alvin Toffler, in the confident after-glow of Future Shock, wrote a terrifying little book called Eco-spasm. In it he argued, very credibly, that what the central banks of the world had done was to build up defence systems aimed at protecting us from a repeat of the Great Depression of 1930s. But they were just a Maginot Line, he said, completely obsolete in today's world of hot money flows, instant global communications, borderless multinational corporations, etc.

Hence, Toffler predicted, the next time a depression loomed, it would hurtle out of control and result in a cataclysmic "Eco-Spasm", that would throw us all back, quite literally, into the Dark Ages. (He even recommended a "Post-Eco-Spasm Survival Kit", which included, among other things, a bicycle, a rifle, lots of ammo, and as many gold Krugerrands as you could stuff into your money-belt.)

It was all so convincing, so vivid, that for weeks after that I would open the morning paper with trembling hands, in case it should announce the first portents of the coming Eco-Spasm. But mercifully, of course, we're all still here, relatively un-convulsed.

May it please God that -- despite Michael J Mandel's impressive track record as a New Economy guru -- the predictions of The Coming Internet Depression should pass by us equally harmlessly

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