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Best Business Books 2004: The Bubble

Reconsidering the Boom and the Bust

As Internet companies began to implode in large numbers during the final months of 2000, an early warning sign of the extent of their difficulties was a Wall Street Journal story about the failure of a European e-tailer, headlined "'s Collapse Further Darkens E-Tailing Picture." The implication was gloom and doom, and it was prescient. reported that at least 210 Internet companies folded in the year 2000. By December 27, 2001, the Journal reported that the "Dot-Com Death Toll" had more than doubled, to 537. The "bubble" had popped.

The giddy inflation and grim deflation of the Internet bubble had major effects on the broader stock market and the U.S. and world economies. In its aftermath, the bubble continues to influence the way people think about business, technology, markets, and growth. Even now, three years after that crescendo of bad news, it can be difficult to separate the myths from the realities.

Business journalists, historians, academics, and consultants will be analyzing the bubble and its effects for years to come. Two recent books take very different approaches to making sense of the debacle. One -- Origins of the Crash: The Great Bubble and Its Undoing, by business journalist Roger Lowenstein (Penguin Press, 2004) -- views the bubble as a morality tale. Another, more interesting, book -- Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think, by Business Week Chief Economics Editor Michael J. Mandel (HarperBusiness, 2004) -- uses the bubble as a backdrop for an examination of its significance for technological growth.

Neither book provides a comprehensive framework for sorting out what went on, and neither sufficiently addresses the potential future effects of the Internet. But a few facts can be asserted: One is that the failures of the Internet companies themselves were not such a big deal by some standard business and economic measures -- it was the ripple effects, which grew to tsunami-like proportions, that make the bubble's memory so painful. Another is that the bursting of the bubble changed, often in overly negative ways, the way many businesspeople and others think about the impact of the Internet on business and the economy as a whole. Indeed, in my view, the visions of some of the most ambitious Web pioneers of the 1990s may ultimately be vindicated, although it will happen in ways that they could not foresee.

Self-Defeating Excess
Lowenstein's Origins of the Crash allocates many pages to corporate scandals. Talking little about the dot-coms, it instead examines the few but huge failures that made the front covers of major magazines around the world. Although some of these companies, notably Enron and WorldCom, were related in some ways to the Internet phenomenon -- or at least to Wall Street's bubble-induced and untested valuation models -- the demise of these companies had little to do with the Internet itself. Lowenstein reveals details of excessive executive compensation, stock option abuse, naive shareholders, overly friendly auditors, and the era's hyperfocus on short-term financial gain.

The excruciating detail that Lowenstein provides about the collapse of once-major corporations reflects great shame on American business. He explains complex financial reporting in admirably simple terms, but sometimes at the expense of important nuances: It is always easier to second-guess accounting decisions after the fact. And in many respects, he tars all the companies that failed with the same brush. Certainly there were huge abuses such as he describes, but it seems unfair to imply that U.S. corporate management was rotten to the core.

In time we will know even more intimate details of these mega-failures, as a result of the lawsuits currently under way or still to come, but so far it appears that the lack of integrity and the excessive greed were concentrated in a fairly small number of senior executives. A large corporation has thousands of senior managers; most of them were victims, not beneficiaries.

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