4.00English2012/04/303Book This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs.

]]> The personal computer and the Internet were building blocks for the new economy that took form in the 1990s. Technology’s potential to create global markets, to make production and distribution more efficient, and to expand financial flows attracted hoards of innovators. At first, business’s introduction of computer technology did not measurably increase American economic productivity, to the bewilderment of government policymakers. By the end of the 1990s, however, productivity was increasing, giving hope that a new, sustained period of economic growth was at hand for most Americans.

The sense of optimism drew substantially on the astonishing gains of technology companies on U.S. stock markets — particularly startup companies linked to commerce over the Internet. American and foreign investors threw money at untested Internet companies at the end of the 1990s in search of what author Michael Lewis called “the new, new thing.”

Entrepreneurs perceiving a niche for a new software strategy or product might determine to create a business to meet that need. They might charge initial costs to their personal credit cards. Friends and families would be asked to help. And with the right connections, such as a degree from a leading U.S. university, the entrepreneurs might get an audience with some of the small, critically influential group of financiers called venture capitalists. These investors typically had made great wealth from earlier successes in technology markets and were on the lookout for new prospects. If they liked an entrepreneur’s idea, they would invest millions of dollars in advance funding in exchange for part ownership in the company.

If all continued to go well, the company would be launched. If it enjoyed early success — or even if it was only well promoted — the entrepreneur and the financial backers might be able to “take the company public,” selling shares of the company to the public on the stock market through an initial public offering (IPO).

Low interest rates helped the startup companies gather headway. The most fabulous of the success stories — such as the rise of Microsoft, Apple, America Online (AOL), and, later, eBay, Yahoo and other “dot-coms” (so named for the “.com” terminology incorporated in commercial Internet addresses) — created a euphoric mood among investors, who seemed willing to bet on any plausible “e-commerce” strategy, however chancy.

Federal Reserve Board Chairman Alan Greenspan warned of “irrational exuberance,” but that did not deflate the dot-com stock market bubble. In March 2000, the NASDAQ Composite Index, a measure of the U.S. stock market specializing in technology stock listings, had soared to over 5,000 — twice its level the year before. Typical of the new breed of companies was one called Pets.com, which offered cheap prices to customers ordering pet food online in the hope that growing numbers of consumer visits to its Web site would attract paying advertisers.

]]> The personal computer and the Internet were building blocks for the new economy that took form in the 1990s. Technology’s potential to create global markets, to make production and distribution more efficient, and to expand financial flows attracted hoards of innovators.

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