It had already seen waves after waves of innovation and new product, each demonstrating the same cycle of innovation, enterprise creation, proliferation of alternative approaches, and the eventual winnowing of the unsuccessful approaches.
The only thing truly novel about the dot.com boom of the '90s was the degree to which, toward the end of the bubble, novice venture capitalists, ignorant or scornful of the accumulated venture capital lore of the Valley, began pouring money into bubble ventures in violation of the rules and expectations of the established venture community.
The '90s dot.com bubble was no more or less than another entrepreneurial cycle, but one that showed a particular exaggeration as novice venture player began to convince themselves that they were in completely new territory, one in which they old rules did not apply at all.
One of the things they began to disregard is the need for a balance between aggressiveness in business with the maintenance of a fundamentally workable overall framework for business.
It is no coincidence that the companies that have attracted attention lately for fraud and misrepresentation have also been the ones noted for cutthroat attitudes toward their employees, suppliers, and competitors.
Managers encouraged to win at any cost find it very hard to forgo illegal and fraudulent methods, particularly when they suspect their rivals within and without their own firm are resorting to such. If everybody else promises the sky to obtain capital, and gets away with it, it's hard to constrain yourself to earthbound cash flows when you make your own pitch.
Looking back on this era, some commentators claim to see the end of capitalism, or at least American-style entrepreneurial venture capitalism, in the fall of the dot.coms. Others call for the creation of exotic or ultrarestrictive regulatory systems to prevent a recurrence of the era. Such conclusions misunderstand what has gone on.
It is no coincidence that Adam Smith, the author of "The Wealth of Nations" and the first systematic analyst of the market economy, previously authored a book called "A Theory of Moral Sentiments."
Smith was not an economic reductionist. For him, as with most other perceptive students of market behavior, the market economy only made sense when embedded in the larger framework of a society with moral rules fairly and objectively enforced.
Historians pinpoint the moment at which the Anglosphere really began to pull ahead of other Northwestern European nations is the point at which English courts acquired a reputation for treating a foreigner with equal fairness to a native.
One of the principal critiques of alternative theories of the state is that by trying to do many things for which it is not suited, government inevitably neglects the basic tasks for which it is suited.
Indeed, it is worth noting that Enron, WorldCom, and a number of the other firms most noted for massive fraud operated in highly regulated market areas. Regulation, as opposed to enforcement of laws against fraud and misrepresentation, increases the hazard of fraud and misrepresentation, by raising the stakes for political manipulation. Increased disclosure requirements, beyond a reasonable level, actually aid fraud by hiding the significant data in a sea of irrelevant information.
The entrepreneurial market economy is a remarkably self-correcting system, provided that the system is protected against simple fraud. The problem has not been the concept of the watchman state, but the distraction of the watchman.
As the remaining rats are caught, the venture engine will resume its normal operation. Institutional funds still need to put a portion of their capital into venture areas; venture funds need to invest in new companies and areas in order to maintain the breadth of their portfolios.
Given the size and scope of the fraud, it may be a good idea for the Bush Administration to organize a systematic look at the problems of honesty in corporate governance. But rather than an exercise in populist demagoguery, it would be worth their while to look at some of the larger questions. If too little attention is given to dividend return, as opposed to share price, perhaps it is because capital gains taxation makes dividends uneconomic.
If managers focus entirely on maximization of short-term profit, to the exclusion of other values, perhaps it is because recent legal doctrines now permit a company to be sued even if it returns a profit, on the theory that some other course of action might have returned a larger profit.
Perhaps it even makes sense to reduce, rather than enlarge, the disclosures of risks in an investment, and concentrate on the most likely of such risks (which were the ones that in fact typically caused the fall of the dot.coms.)
Some commentators act as if the dot.com bubble was typical of the workings of venture capital and entrepreneurism. It is rather the case where the hard-won lessons of venture capital were thrown out of the window, to the detriment of entrepreneurism.
In fixing the problems that have occurred, we would do best to look at those accumulated lessons, and concentrate on reinforcing the simple but essential rules of trust, fair dealing, and objective adjudication that have worked in the past and are needed more than ever now.
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