NCPA - National Center for Policy Analysis

Technology Stocks Simply Repeating Historical Pattern

December 14, 2000

Some economists are comparing the recent tumble in the technology sector to what happened in the early days of the automobile and railroad industries.

  • Many dot-com start-ups are now selling at 90 percent off their top prices -- in many cases reflecting their inability to create a thick enough market to ensure survival.
  • Similarly, in the 1890s -- a decade after the railroads had laid more track than any other decade in American history -- there were more miles in bankruptcy than in any previous decade.
  • Between 1904 and 1908, more than 240 companies entered the nascent automobile industry -- culminating in a shakeout in 1910 as many of those companies went out of business.

The lesson in all three cases seems to be that we tend to overinvest initially in breakthrough new technologies -- probably in the euphoria of the moment. This inevitably leads to overcapacity, bringing on fierce competition. Price-cutting ensues and the weaker companies are forced under -- leaving only those who have been able to weather the storm and build market share.

Overinvestment may seem wasteful. But the competition it creates results in companies developing wide varieties of new products in order to create their own niche markets. This is one of the strengths of American-style capitalism.

Source: Hal R. Varian (University of California at Berkeley), "Economic Scene: The Technology Sector's Rise and Fall Is a Tale as American as the Model T," New York Times, December 14, 2000.

 

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