Anatomy of a Crash

Why did high_tech stock market values fall so far in the last year-and-a-half? What does the crash of the NASDAQ (and of smaller IT exchanges around the world) tell us about the future of the "new economy"? As we move away from those events, a clearer assessment is possible.

Conventional wisdom holds that the NASDAQ crash exposed the "new economy" as a conjuring trick of smoke and mirrors. It incarnated the irrational exuberance that often breaks out as a boom peaks and did not deliver deeper permanent changes in the economy. A more likely explanation, however, is that the NASDAQ crashed because it became clear that dominant market positions in high tech_based businesses were not sources of profits unless accompanied by substantial barriers to entry for new potential competitors--and that such barriers to entry were becoming remarkably hard to create.

Over a wide range of activities, the dominant effect of the "new economy" has been to make competition more effective, not to create new advantages based upon economies of scale. The high-tech crash was thus the result of a realization by investors that the "new economy" was, in most sectors and for most firms, unlikely to lead to large quasi_rent type profits from established market positions, but rather to heightened competition and reduced margins.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/tkzmS6d;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.