Mark Thornton on the tech bubble (2000)

Dear Investors Business Daily:

In "Are Boom- Bust Cycles Gone Forever?" (08-23-00, p. A10) a strong case is made that the business cycle is dying, if not dead. Once again the "new economy" mantra of technology, globalization and government management of the economy has raised its ugly head.

The same mantra was common in the U.S. during the 1960s when Keynesian "counter- cyclical fiscal policy" was in charge of the business cycle while American high tech companies expanded around the globe. Then came the stagflation of the 1970s. The Japanese boom of the 1980s was said to be due to its "managed economy" that allowed Japanese industry to dominate world markets. The Japanese bust of the 1990s followed. And who can forget the "Roaring 20s" when America's new technology (radios, cars, planes, refrigerators, motion pictures, etc.) had the world in awe. Economist Irving Fisher declared a "permanent prosperity" right before the stock market crash of 1929 and the Great Depression.

Technology cannot kill the business cycle. In fact, technology is the mechanism that traps capital in unsustainable and premature investment projects. Entrepreneurs are lured by artificially low or stable interest rates during the "boom" phase of the business cycle only to see their plans go bust as interest rates and inflation increase.

Clearly FED chief Alan Greenspan understands that monetary instability is the key to the cycle and he has recently stated his knowledge of the Austrian business cycle theory to Congress. But knowing the problem and solving it are two different things. Knowledge of economic theory does not allow bureaucrats to solve the problems of government inefficiency, taxation, business regulation and price controls.

The business cycle will not die until money and credit are purely market-based institutions, rather than government bureaucracies that supply, control, and regulate. While such a radical change of institutions is an unlikely event in the near future, requiems for the death of the business cycle might serve as a good forecast for what is.

~ Mark Thornton, letter-to-the-editor sent to IBD, never published, August, 2010