Tiny Bubbles.

• Author: Hazlett, Thomas W.
• Position: Grumblings about America's "bubble economy," - old money and the vision thing

Old money and the vision thing

In the mid-1980s, the United States struggled to keep pace with the Japanese industrial juggernaut. The conventional wisdom went something like this: American capitalism was preoccupied with short-term results. We should follow the lead set by the Land of the Rising Sun, where managers were committed to the long haul. Hence, they made better - i.e., more farsighted - investments and routinely offered lifetime employment opportunities. American firms, in contrast, rewarded executives based on quarterly reports, leading them to ignore the long run and to abandon workers at the drop of an investment analyst's downgrade.

Nippon envy, of course, crashed with the Nikkei Index, which struggles to stay airborne at around 18,000 after soaring upwards of 39,000 a decade ago. The very rigidities lauded as the backbone of Japanese capitalism held the country in the consumer electronics epoch just as the world raced to embrace the dawning era of digital networks.

But note the shift in the contemporary conventional wisdom in the United States: Now, say critics, American capital markets are way too speculative, wildly tossing investment dollars at any cockamamie "dot-com" IPO, whether the company makes money or not.

The grumblings about America's "bubble economy," as The Economist likes to call it, are ubiquitous. The old-line pillars at the country club and scruffy intellectuals at sidewalk cafes alike bemoan those wacky Wall Street valuations. "No earnings!" exclaims the clubber. "Paper wealth!" shrieks the intellectual. Both unwittingly point to the most dynamic and progressive element of modern American capitalism: its ability to liquidate obsolete investments at warp speed in favor of promising new ideas. In an era in which so many innovations are being hatched, the transition is awesome to behold.

An online bookstore operated via a Web page? Amazon.com, whose equity value appreciated 966 percent per share in 1998, found itself worth more in January 1999 than all other bookstores in America combined. Wireless telecommunications operator Teligent is worth $4 billion at its NASDAQ share price on July 28, 1999 - a staggering 1,681 multiple of sales. Some believe that paying 36 times earnings - the average Standard & Poor's price/earnings ratio - makes stocks outrageously expensive, but others are willing to toss the dice.

This is phenomenal to many, irresponsible to some, the prelude to a crash to others. What is curious...