The New Economy Is Both Destructive And Creative

Karl Marx understood depression etiology--something that modern economists seem to have forgotten ("The Next Downturn," Cover Story, Oct. 9). Marx wrote: "In these crises, a great part not only of the existing products but also of the previously created productive forces, are...destroyed."

In other words, depressions occur as a New Economy annihilates an Old Economy during a period of creative destruction. Depressions originate from widespread Old Economy destruction, not from New Economy cyclicality.

The Great Depression of the 1930s typifies creative destruction depressions. The New Economy at that time included such industries as automobiles and farm tractors. These two new inventions served to destroy rural Old Economy jobs--which had made up a third of all U.S. jobs in the 1920s. The elimination of farmers' markets for horses and horse feed by the automobile combined with the mechanization of agriculture to leave millions of rural economy workers without the income necessary to repay their loans or buy New Economy products. When New Economy inventions slash the income of a third of all workers, you will have a depression every time, regardless of monetary policy.

Today we have a new creative destruction cycle triggered by the invention of the Internet. New Economy Internet communication can easily bypass the middlemen now clogging all Old Economy, Industrial Age production and distribution methods. Perhaps one-third of all workers now face the same fate as farmers faced in the 1920s. It will be the lost income and unpaid debt of the Old Economy workers whose jobs are destroyed by the New Economy that will ultimately pull down the New Economy from behind.

John A. Frisch


Author Michael J. Mandel is right: A steep economic decline--nay, a severe crash--in the near future is inevitable. In spite of all the fancy financial footwork of the Fed and the money-market manipulators, and in spite of all the "New Economy" talk, such as IPOs, VCs, and global-this-and-tech-that, risk is still risk; investment is still investment; and the minute we forget the bottom line--the price-earnings ratio--everything else is only a modern market variation of a 1920s Ponzi scheme.

Never mind the railroad boom of the late 1800s, the mining stocks of the early 1900s, or the 1930s Depression. Think back to the Dutch tulip mania of 1633-37, the British South Sea Co. bubble of 1711-20, or the French Louisiana Co., among many others. And remember, too, the 50-to-60-year Kondratieff business cycle may still be lurking around out there somewhere: Perfect storms do happen.

History has a remarkable way of repeating itself, but then, as Thucydides, the Greek historian, wrote ca. 425 BC, "human nature being what it is, [we] continue to make the same old mistakes over and over again."

Frederic A. C. Lister

Nauheim, Germany

I fail to understand the value or benefit of scaring millions of investors already nervous from markets that have already corrected so sharply during the year. To note that author Michael J. Mandel made a prescient call on the New Economy way back in 1995 fails to lend credibility to his assumption-laden doomsday predictions.

Mandel errs in the treatment of a decade of breakneck innovation. It's as if all of the factors that created the world's recent productivity gains would somehow be jettisoned into a black hole and businesses will have nothing to build on in the future.

To the contrary, an analyst might assume that what we experienced in the 1990s was only the tip of a large iceberg--and that broadband, photonics, and biotech are in their infancy, or that transactions between companies that once took a week to complete now occur in seconds between servers and without human hands touching so much as a telephone. Not only is this remarkable progress not going to disappear, but it will get replicated countless times around the world.

Instead of a present-day equivalent of a 1929 crash-like depression, Mandel may have to settle for economic growth more moderate than 4% a year and a stock market that returns less than 25% per annum. Nothing exciting about that, which means no one is going to write a book about it.

Suleyman Tombul


Before it's here, it's on the Bloomberg Terminal.