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Rothbard and the Post–High-Tech Meltdown

Mises Daily: Monday, September 28, 2009 by

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Persistence of Memory
"Persistence of Memory" (1931)
Salvador Dalí (1904–1989)

Scholars well versed in the theories of the Austrian School of economics were able to present a unique and credible perspective of the dot-com bust and high-tech meltdown. The maestro at the Federal Reserve had created mechanisms whereby easy credit became available to players in high-tech and information-sector enterprises. Almost any business idea that could be classified as being in the high-tech or information sectors became eligible for such loans.

During the 1980s, there were several innovations in the telecommunications sector that supplied small business and the home market. These innovations enhanced productivity on the individual and commercial levels and gained the attention of government bureaucrats who saw an opportunity to "stimulate" the economy. The result was a malinvestment boom, as hordes of marginal entrepreneurs gained access to easy credit.

These high-tech and information-sector businesses were deeply interconnected. The same suppliers provided services or hardware to multiple players.

Easy credit given to marginal entrepreneurs directly bid up prices and indirectly affected multiple players in the industry, to their collective detriment. When the high-tech meltdown and dot-com bust began, the ramifications spread through the entire sector, resulting in a crash akin to that of 1929.

In his treatise on the Great Depression, Murray Rothbard showed that, unlike the laissez-faire approach, which led to a rapid recovery from the stock-market plunge of 1920 and 1921, the Hoover administration's interventionist approach worsened a bad economic situation by keeping wages high. Many of the survivors of the high-tech meltdown and dot-com bust took advice from the pages of Rothbard's treatise when they moved operations offshore to India and China.

India and China not only had large workforces with comprehensive technical educations, they also had the kind of economic foundation that many high-tech and information-sector companies needed: one with an absence of North American-style political participation. Entrepreneurs were free to go about their business and were not beholden to government officials who had generously opened the public purse to provide "investment revenue" or "a safety net."

Some Indian government officials have been accused of doing the opposite, that is, receiving money from technology companies. Whether or not some private revenue in fact has flowed in such a direction is a domestic matter in India. At least such behavior did not create price distortions and misleading market signals that caused entrepreneurs to malinvest on a massive scale.

The Sequel

In North America, there will likely be a sequel to the high-tech meltdown, this time in the green-tech sector. Several governments around the world are investing public funds into developing and implementing various forms of renewable-energy technology. Multiple companies have already received state funding and developed competing green energy technologies, mostly for generating electricity.

However, the economic downturn of 2008 has already caused one jurisdiction to revise electric-power projections. Several years ago, the public utility of Ontario, Canada, ran up a debt of $32 billion, forecast a shortfall of several thousand megawatts of electric power, and encouraged development of green technology. Then, on June 28, 2009, in a radio news brief of the Canadian Broadcasting Corporation, the Minister of Energy for Ontario announced the cancellation of two nuclear reactors due to high bid prices. The same news report also announced that the agency that oversees electric-power generation had discovered that they had excess generating capacity. It forecasted — perhaps more accurately this time — that "the situation would likely remain unchanged for the next five years." Ontario has since announced its intention to close several coal-fired power stations.

Many jurisdictions across North America and in several developed countries may discover that the economic downturn could reduce the demand for electric power. What will remain of the market may not be sufficient to sustain all of the companies currently working on renewable-energy production. Therefore, a market shakeout in the form of a green-tech meltdown is likely.

However, just as the maestro tried to restimulate the postmeltdown high-tech and information sectors, one or more national governments will probably try to restimulate failing green-tech. This approach has already failed. But the theory of Dr. Rothbard has succeeded in sustaining what remains of the postmeltdown high-tech and information sectors, albeit in India and China.