The good old New Economy Featured

9:41am EDT July 22, 2002

My fascination with the Internet and dot-com fever got me wondering whether there are any parallels in history to the introduction of a breakthrough technology and a subsequent flurry of investment in related speculative ventures.

So I turned, you guessed it, to the Internet, to see if I could find out.

I launched a search that ended up at www.eh.net, a site that deals with economic history. There, a surfer can pose a question that is forwarded to academic and business types who study these things. It turns out that today’s Rollerblading, techno-geek entrepreneurs share a lot in common with some earlier entrepreneurs.

“When railroads were first built, there was a speculative mania in railroad shares,” says Jack A. Goldstone from the University of California at Davis. “Railroad companies came out of nowhere, promising to exploit the new technology and return vast riches to their investors, and it raised public and private capital by the bucket load. There was also a frenzy of wasted capital as rail companies built duplicate or unprofitable lines, where traffic didn’t meet anticipated demands.

“Many companies went bust — I think ‘boom and bust’ is a perfect description of the new technology cycle. People did better buying US Steel, which supplied the raw material for rails, cars and locomotives. Similar to buying Cisco Systems today instead of dot-coms.”

Charles Abbott at the University of Iowa offers this: “John Train, who writes books about the great stock pickers, has pointed out that, rather than buying rail shares during the rail boom, another shrewd tactic would have been to buy land in Chicago, since so many of the railroads funneled economic activity into Chicago. More generally, John Train recommends downtown parking lots in the capital city of the fastest growing company in the world.”

“There were other beneficiaries to the railroad boom, retailers such as Sears and Montgomery Ward, who were able to reduce costs to rural customers,” says Jim Bessen, of Research on Innovation in Boston.

And there are other interesting views. Jerry Dwyer, research department, Federal Reserve Bank of Atlanta, says: “If you look at the histories of the automobile industry, you’ll see that there were many different firms initially, and the number declined dramatically over time. Interestingly, it turns out that the wealth of someone who invested in General Motors in 1912 increased a multiple of the wealth increase by those who invested in other car companies or stocks in general from 1912 to 1938. $100 in GM stock in 1912 became roughly $70,000 by 1938. Not bad.”

Louis Johnston in the department of economics at Saint John’s University, says, “A good parallel to the Internet stock boom might be utility stocks in the 1920s. I’ve had my economic history students read a couple of chapters in John Kenneth Galbraith’s “The Great Crash,” and suggested to them that they substitute “Internet” for “utilities” and see what happens. They see a lot of similarities.”

Keith Poole, professor of politics and political economy and research director of the Donald H. Jones Center for Entrepreneurship at the Graduate School of Industrial Administration at Carnegie-Mellon University, has a Web page, www.k7moa.gsia.cum.edu, that is chock full of fascinating information about the early days of the railroads, particularly the role they played in making the United States economy the largest in the world by about 1890.

So there are lots of similarities, except that it would have been tough getting all that information by train. Ray Marano, himself a train conductor and engineer for the Lionel Railroad in his youth, is associate editor of SBN magazine. Reach him at rmarano@sbnnet.com or down by the tracks looking for the next technology boom.