"According to tried and tested measures, Wall Street today is more over-valued than at any time in the past 150 years. In September 1929, just before the crash, the price-earnings ratio for the S & P index (the main share index at that time) calculated on a backward moving average of earnings, reached 33. That was far higher than at the other two great market peaks of the past century, in 1901 and 1966. Until the 1990s, these three dates were the distant outliers in the history of that crucial ratio: in all threee cases the markets went on to suffer prolonged (and, in 1929, catastrophic) slumps. In January the price-earnings ratio, calculated on the same basis, soared to 44. And this week, after three months of extraordinary turbulence, it was once again at about that level" (Economist 25th March 2000)

The figures are amazing - literally gobsmacking. Microsoft is said to be worth more than Canada. What can this mean? Microsoft is a firm owned by the world's richest man, Bill Gates, and provides the standard Windows applications service to millions of personal computer users. But Canada is a country where nearly thirty million people live and work. Who knows what wealth its surface area of nearly 10 million square kilometres contains? Likewise Amazon.com is said to be worth more than Texaco,an oil company that has made pots of money for the lucky capitalists that own it. Amazon has yet to turn in a profit. We have to ask - who is Microsoft worth more than Canada for - or Amazon more than Texaco?

The answer is - for the capitalist class, that's who. You can buy workplaces in Canada, but you can't yet buy a piece of paper that entitles you to feed off people getting on with their lives, raising families, reading books and listening to music in Canada. And, if you're only interest is in making money, that's what counts. These obscene valuations are justified by what is called the new economic paradigm. As the Economist goes on to point out, "Every bubble is a new era, it seems".So here we go again. Larry Elliott agreed in the Guardian,"They would do well to ponder four little words the four most dangerous words in finance. This time it's different." Let's have a closer look at it.

We'll just take two honest journalistic attempts to sum up the 'new economy' people. Martin Wolf, in his regular Financial Times column asks the question "What is the new' economy" in an article entitled 'Putting the paradigm to the test'. He answers himself, "For the economist there are three core propositions to examine: that advanced economies are less inflation-prone and more stable; that the world economy is on the brink of an innovation-driven 'long boom'; and, most radical of all. that markets will be transformed forever." Quite a claim! Meanwhile the Economist on October 23rd 1999 discusses two versions of the new paradigm (Beyond the business cycle). "One says that the country's long-term growth rate has shifted upwards. The other says that the old pattern of boom and bust has disappeared." Now the alert reader will understand right away that the two writers seem to be talking about two completely different theories. These have points of similarity, but that's because they both basically share an optimistic outlook for capitalism. If this 'new economy paradigm' is such a big deal, where is the seminal article in the academic literature that sets out the bare bones? Why is it such an elusive concept?

The reason is because the notion of a new economy has not been developed by professional bourgeois economists. The reason it has been elaborated is for the most exalted and noble cause that there can be in a capitalist world. It has been drawn up to make money. In past years Warren Buffet has been the pin-up of stock exchange punters. His forecasts have persistently beaten the market average.He's what's called a 'value' investor. That meams he ferrets out shares where he thinks the firm is underperforming and could declare serious profits. Now he's in trouble, according to the Financial Times. On March 4th they reported, "All across the world, 'value' investors such as Mr. Buffet and Mr. Dye are in trouble because their penchant for identifying companies whose worth is not yet reflected in the share price has latterly delivered sub-standard returns. The name of today's game is momentum - chasing what goes up, not what looks cheap. Momentum favours the 'new economy, value the 'old'." Momentum means following the herd.

When Keynes told us about the 'animal spirits' of the entrepreneurs, he didn't explain the animals whose spirits they incarnated were sheep! The FT goes on "In the interests of job security, most (fund managers) therefore stay close to the herd, which in practice means close to the stock marker indices." Everyone is tracking everyone else - surely the essence of a financial bubble! The trouble with new economy strategy is that chasing what goes up is what makes the shares go up even further. We now have a situation where people are buying because shares are going up - and shares are going up because people are buying them. That is the classic definition of a bubble. The bubble bursts because shares start going down because people are selling them - and people are selling them because they are going down. The FT's leader is entitled 'Two against the herd'. In a bubble it is not advisable to go against the herd instinct. At the time of the South Sea bubble in the early eighteenth century many commentators were well aware that it would all end in tears. So what? Jill Clark, a Hansard fund manager, outs it like this, "Everyone is saying the internet bubble will burst. But you can't afford not to be in it. There's no point staying with traditional stocks". She has a point. As long as you get out before the collapse you can sit back and count your winnings. That was Isaac Newton's instinct - a man after all who knew that what goes up must come down. He went in to South Sea shares, made a few bob and came out. Markets continued to soar. He went in again - and lost the lot. He commented gloomily afterwards, "I can predict the movement of the heavens, but not the madness of the people." Now here's a quote from 12 March 2000 (Observer) One pension fund manager says to another "You've gotta buy them (IT stocks). "Why?" asks the other. Because, because....because everybody else is." reponds the first. Has any progress been made?

More recently we had the bubble of pyramid schemes in Albania. Millions of Albanians were well aware that they were a massive swindle, but they were desperate. The restoration of capitalism had nuked the real economy and destroyed the chance of making even a modest livelihood from honest toil. While the paper chase of money whirled through the economy it would have been stupid NOT to have cut yourself a slice of the action. The basic problem was like a game of pass the parcel - when to get out. Inevitably the insiders knew when the music was going to stop and the mass of ordinary Albanians did not. We are now living in the middle of a financial bubble in IT shares. Many commentators are aware of it and warn of the dangers. But still people are making pots of money, long after we would have expected the bubble to burst.

The assertion that the bubble will never burst, that it will just keep on growing for ever and ever - is the basic hallmark of the new economy paradigm. We've been here before. There were elements of a bubble in the stock exchange boom of the 1920s before the Wall Street crash. The 'new economy' theory is a product of market euphoria. Others know better. Paul Warburg commented in March 1929, "History, which has a painful way of repeating itself, has taught mankind that spectacular over-expansion invariably end in over-contraction and distress." At the time he was a lone voice. After all, the boom HAD gone on longer than it was reasonable to expect. And didn't we have infinite new markets for the brand new technology of cars and consumer electronics? After all we were a long way from every household having a car or a vacuum cleaner in 1929.

That is why reputable economists like Paul Krugman, when they see speculators dipping in again and trousering yet more paper wealth, gets jittery against their basic gut instinct that this has all got to end up in tears. "It's now four years of productivity growth that is substantially above what you saw before, and it's starting to get a bit long to be just a blip," he comments. "It looks like there's an underlying improvement. A reasonable guess now is a one percentage point gain (in productivtiy) which is a big difference." It certainly would be. Since the first industrial revolution in 1780 the British economy has exhibited a trend rate of growth of between 2-2 1/2%. It seems to be built into its karma. We'll check out later whether earth-shaking changes are in preparation in the real economy. But a trend rate of growth is extraordinarily difficult to work out. The basic problem is disentangling trend from cycle. Obvious bad depression years are stripped out. The trouble with that is that capitalism moves in cycles. The fact remains that, though there has been investment in the computer-related sector of the US economy since 1991, it didn't translate into productivity growth till 1996. And the USA only closed its output gap the following year. The output gap is the difference between the notional trand rate of growth and the losses caused by economic crises, which are built in to capitalist development.

But let's have a look at poor old Warren Buffet, down to his last few billions because of his stock market mistakes. Is he right and the other lot wrong? They are all wrong. There are no fundamentals for share prices to stick to or deviate from. Shares don't have an inherent value. They are just pieces of paper. True, a share is supposed to represent part ownership of a firm. But the price of the shares systematically differs from the value of the underlying assets owned by the firm - property and buildings, machinery and supplies of raw materials and half-finished stuff. A share's sole function is to allow its owner to make money. What it's 'worth' depends entirely on how much money it can make you. You can get that money in two ways. You can sit back and watch the dividends plop onto your mat. Or you can sell the bit of paper for more than you bought it. But why would anyone be prepared to give you more? Only because they expect dividends to get bigger in future. As Robert Kuttner comments in his article on the speculative bubble in Business Week 17 April, "At some point however a stock price has to reflect earnings. And earnings plainly cannot justify present multiples."

So under capitalism weird items such as fork lift trucks and PCs become capital. That is to say the ownership of the means of making a living (means of production) enables their owners to appropriate the unpaid labour of others.. This property is attributed to the things themselves in their existence as capital. These days the ownership of the means of production takes the form of the ownership of shares. The occult property of pieces of coloured paper providing an income stream is increasingly taken for granted. This unpaid labour of the working class, surplus value, is divided up into manufacturer's profit and a general rate of interest. This same rate of interest will be paid to claims on the government debt. So if you buy gilt- edged securities (which I doubt if you ever do) you naturally expect interest as a 'reward'. If you nip down the local building society and open an Individual Saving Account, you expect to get interest. It's the way of the world. You neither know nor care where the interest is coming from.

Marx called pieces of paper whose 'value' depends entirely on what you expect to get out of them fictitious capital. If the value of shares is fictitious there is always the possibility of a bubble developing. We now have a situation where price/earnings ratios of some internet stocks is over 130. The elastic is stretched to breaking point. This means you would have to be blessed with virtually eternal life to get your money back in dividends. So why hold on to the share? Because you think it will go up further. Why? Because everyone else thinks the same. But at some point share prices have got to be based on expected future profitability.

Now the 'new economy paradigm' people argue that the internet and associated technologies are enormously beneficial and represent a dramatic change in the way we all live. They are probably right (We deal with this later on). So what? Since when has being beneficial to society earned anyone wads of money under capitalism? When has being useful ever been a reason for anything other than being exploited?

Media attention has centred around the sums involved in the IPOs (Initial Public Offers), as stock exchange flotations are called these days. These are cooked up by characters called venture capitalists. Despite the present Labour government's prostration towards the risk-loving bucaneering spirit of free enterprise that the notion 'venture capitalist' conjures up, in Britain these people have mainly been involved in financing Management Buy Outs (MBOs). The point about this sort of financial manipulation, of course, is that the enterprise already exists. All the money does is pay for the firm to change hands. No new investment for industry is provided!

In the States venture capitalists have been prominent as the Svengalis who set up the internet.com companies for sale to a greedy public. In 1999 venture capitalists organised $50 billion to be pumped into the internet.com flotations. Where did it all go? It went to power the vertiginous climb of internet-related shares. In a situation where most shares (so-called old economy shares) were drifting down, rich pickings were to be had in the internet share bubble. Shares were often up to a hundred times oversubscribed. Elementary supply and demand analysis would suggest that if there are hundred times more buyers than sellers share prices would soar out of sight, which they duly did. But they provide a bucking bronco ride in the thinly trade, fevered atmosphere of the NASDAQ and other smaller and dodgier stock exchanges.NASDAQ is the nursery of the internet companies' shares. They get transplanted to the main exchanges when they get bigger. NASDAQ soared by 43% in the last three months of 1999 alone. But it's a white knuckle ride. The Goldman Sachs index of European internet stocks went up five times over in six months last year, then fell 40% in a couple of weeks. Socialist Appeal readers and millions of others will have been delighted to see the repellent duo at the head of Lastminute.com get their come-uppance. Their shares soared on take-off and then crashed below their initial 'valuation'.Only 29,000 people have ever bought anything from Lastminute.com. Its declared revenue was £2.6 million, of which it paid out £195,000 on commissions. But there's plenty more where they came from. Michael Kraland, who stagged (that is bought and immediately resold shares in a Dutch internet company - World Online - observes "That was a story of greed if I ever saw one.This is a blow for the hot air market".

The Observer published the profiles of forty millionaires under thirty. Most of them had been 'worth' nothing a couple of years ago, and could well be 'worth' nothing again in a couple of years' time. And what are they doing with all this largesse pouring into their laps (coming their way, remember, because the paper price of their shares is somewhere in the stratosphere)? Why, they're dashing out to buy more internet shares to drive the price up even higher. Tim Perkins is a successful venture capitalist in California. He is a worried man. "Can the stock market value of all these companies continue" he asks. "I don't think so. I think it's a bubble". He points that some firms are spending too much on advertising. (Lastminute.com spends a fifth of its revenue on ads. "I don't think there's going to be enough money in the pool for all these companies on their second and third trips to the well". In fact three quarters of internet.coms in the States are currently trading below their issues price.

But this is not self-contained stupidity. It's spilling out into the rest of the financial system. Now over the past year or so most shares have gone down. The continued rise of the Dow in the Sates and the FTSE over here has been propelled by speculation in 'new economy shares'. Whitbread has been a big name brewer in this country for over two hundred years. They have been ejected from the FTSE by outfits we've never heard of, and very often who've never turned in a profit. In comes Baltimore Technology with monthly sales of £2 million and losses of £3 million. Out goes Whitbread with sales of £250 million and profits of £30 million. But Baltimore's shares are worth more! Thames Water has also been given the bum's rush for the same reason. Presumably even in the new economy people will go for a beer after work or take a shower now and again. How will firms like Whitbread respond to de-listing? It's not just prestige. It affects their chances of raising external finance. Why, they'll have to show a bit more 'added value' on their share price to get back in. That probably means the chop coming to a local near you that doesn't make enough money. The 'new economy' bubble is distorting the whole flow of funds throughout the economy.

If the Stock Exchange goes up shareholders feel richer. They can run out and buy houses, holidays in Florida, yachts and executive jets with the extra - except that it's not quite like money in the bank. New economy theorists know that American consumers are saving NOTHING, they're actually eating up their savings in a spending spree. Household borrowing went up 27% in the last quarter of 199 alone - all based on the rising price of paper. They argue that it doesn't matter for. rising assets match rising liabilities. As long as the stock exchange keeps booming, they're right. But the price of shares are purely paper assets which can collapse at any time, while the debts are fixed and unalterable as the mind of Mephistopheles.

When paper asset prices collapse, that has knock-on effects on the rest of the economy. Japanese land prices went up seven times over in the 1980s. Banks bought land as an asset to cover an incautious lending spree. After land prices collapsed the banks have rumbled along for the past ten years on the brink of ruin. The bursting of the bubble has delivered a huge psychological and real blow to the economy, resulting in ten years of recession for the world's second largest economy

So long as the real economy continues to deliver in terms of growth, profits and dividends the bubble is unlikely to burst. Contrary to the popular opinion, the 1929 Wall Street crash did not come out of a clear blue sky. It was an indicator that a downturn in production was already under way. The panic and destruction of paper wealth, followed by a sustained onslaught on the banks that led 9,000 out of 30,000 to close their doors forever, fed the collapse in the real economy. "The collapse of production took place...well before the stock market crash. Industrial production fell from 127 in June to 122 in September, 117 in October, 106 in November and 99 in December. Specifically automobile production declined from 660,000 units in March 1929 to 440,000 in August, 416.000 in September, 319,000 in October, 169,500 in November and 92,500 in December". (Kindelberger 'Manias, panics and crashes')

From a marxist perspective there are two possible mistakes in sizing up stock exchange movements. One is to see them as a faithful reflection of the 'real economy'. But the American Dow Jones index has gone from 1,000 to over 12,000 since 1983. While profits have recovered over the period, they haven't gone up twelve times over since then. The other possible error is to see share price movements as completely detatched from the process of surplus value extraction. There IS a connection. A bubble in one part of the economy, such as the stock exchange, swells paper assets, and allows holders to borrow more using their 'wealth' as a collateral. A meltdown on the exchanges destroys this paper wealth and knocks on to the rest of the economy.

This is quite possible even when wealth seems to be more soundly based. Nothing is more solid than the bricks and mortar of your house. If you 'own' your house I imagine you bought it to keep the rain off your head. Yet this can also be an appreciating asset. Its value can be fictitious . In London last year house prices rose by about a half, As far as is known the price of slapping mortar on to bricks went up by nowhere near that amount. And when this bubble bursts, as it surely will and as it did the last time ten years ago, the wretched owners will be faced with 'negative equity - the depreciation of the paper price of an apparently solid real asset.

An IT revolution on the way?

OK, so there's a lot of froth on the top of the economy, and some of the schemes for making money are just plain daft. Is there anything interesting going on beneath? Just take a look at a nineteenth century railway map of the country. How did they ever think they would make money out of some of the lines they were building? Take the water cress line between Alton and Arlesford, two villages on the Hampshire downs, kept alive by volunteers and DAAs as a labour of love, certainly not for profit. Even a hundred years ago it only ever made money for about one month in the year, ferrying water cress to the London markets. It was a bad idea. That does not mean railways were a bad idea. Railways were a lot of people's gravy train one hundred and fifty years ago. Speculation leading to ruin is an inevitable feature of capitalism, an unplanned system where what people want can only be found out by offering it to them first and seeing whether they buy it.

The current boom based around the internet and linked technologies could be as important as railways were back then. We just don't know yet. For the record, Robert Gordon of NorthWestern University thinks we have a way to go "I believe that the inventions of the late 19th century and early 20th century were mor fundamental creators of productivity than the electronic- internet era of today" he declares.

What is happening at the moment? The boom that began in the States in 1991 was looking pretty pathetic until 1995 in terms of growth and productivity. Then it took off. Growth has been faster in the USA since any time since the end of the post-War 'Golden Age' in 1974. Productivity is advancing at around 2.2% a year, very fast by the standards of recent decades, but again not restoring the full employment years after World War II. By way of comparison productivity went up by 2.6% between 1950 and 1972, then stagnated at 1.1% increase from 1972 to 1995. These figures are from Robert Gordon. Commenting on them, Martin Wolf stated in the Financial Times, "Productivity growth in the production of computers has risen from 18% a year between 1972 and 1995 to 42% a year since 1995. This...explains all the structural improvements in productivity growth in durable goods as a whole from 1.1% a year between 1972 and 1995 to 6,8% a year thereafter. The computer has brought about a productivity miracle - in the production of computers."! The statistical breakdown shows a stagnant economy with an almost completely self contained super-sector in IT. Gordon sums it up, "There was really, when I looked at it, a really striking result; if you take out the computers and other technology stuff there's no acceleration (in productivity)."

As for the American jobs boom, well they still have 4% unemployment after nine years of growth. The States is just 'celebrating' a dreadful statistic - the two millionth American to be banged up by the system. Imprisonment accounts for practically half the difference in statistics with Europe on unemployment. 60% is made up by demography - the USA has a younger population, particularly among the Latinos. Young workers joining the labour force for the first time have needs, of course - and that drives the economy forward. In a sense their own needs provides them with the jobs that help fulfill them. The Clinton workfare programme has driven untold hundreds of thousands off the rolls - no point signing on if they won't give you anything. And finally the beginnings of a policy, not spelt out but starting to happen all the same, in parts of Europe of providing for early retirement for older unskilled male workers that the system can no longer use, distorts the figures to make the USA look good. These older workers in some western European countries may not have a job, but they are adequately looked after.

Western Europe is on the rebound from years of sustained deflation, partly the results of the strategy to kick start European monetary integration around the restrictive Maastricht criteria. But if the US boom turns to bust, as we predict it will, that's curtains for the European recovery. One of the characteristics of the past two decades has been the way the cycle has drifted out of synchronisation between the capitalist powers. Countries always have their own particular economic problems to deal with, of course. The burden of German reunification is a good example. And the fact is that large parts of the world are or have been in recession since 1997 - East Asia, Latin America and sub-Saharan Africa for instance. We are talking of the fate of hundreds of millions of people here.

The milder downturns that afflicted the great post-War boom period from 1948-1973 were also often out of synch. This meant two things. First that there was not a single dramatic downturn in the world economy with the crisis of all feeding the crisis of each. But it also meant that capitalist nations didn't all boom together, causing an upward spiral in production. The first generalised crisis of the system was in 1973-74. It was not an 'oil crisis', as it has been labelled. But the quadrupling of oil prices in a few days was an important element. For everyone uses oil. That was why the downturn was across the board. Professor Oswald of Warwick University has been banging on for years about the price of oil. He is right. The collapse in prices or much of the 1990s was an enormous free gift to the industrialised economies. The specific oil supply element within the 1973-74 crisis made the downturn (which would have happened at about that time anyway) much worse. In exactly way the advanced countries have had what economists call a favourable shock for most of the last ten years. But now oil prices are going up and staying up, threatening to choke off the boom as it moves into the overheating stage. How much this has powered the 1990s upswing is difficult to quantify.

Let's get back to the broader picture. Get one thing straight for starters. Capitalists don't 'make' computers for their own sake or for ours. They didn't use to 'make' railway lines for their own sake either. They get them made to make money. What they need is profitable markets. If they've got that, they'll employ workers with shovels or with JCBs, whatever is more profitable. Technology is a tool. Humanity has always used tools on nature since the stone age. That is how we differentiate ourselves from other animals - by working on nature with tools. We will show that capitalism is not a technically driven system, it is a profit-driven system. However there are eras of capitalist development with their own characteristics, which are often stamped upon them by the clusters of technology taken up and used by the system at that time - such as the 'railway age'.

Let us look at the railway age in a little more detail. The conventional wisdom is that this provided a revolution in transporting goods, and so hugely expanded the activities of capitalism. All this came about from a few lucky inventions. In fact the railways were less of a quantum leap in transport technology than the canals that preceded them. Canals were not just a matter of slog, though there was plenty of slog. Armies of navvies were mobilised for the digging. This fact shows how far the separation of the labourer from their means of subsistence had gone - the destruction of the livelihood of small farmer and handicrafts worker was a precondition for the mobilisation of workers prepared to go anywhere for a wage. You can't just dig a ditch from London to Birmingham, wait for it to rain and call it the Grand Union. Mapping and surveying assume an advance in science and precision instrument-making. The same techniques were tapped in to for railway mania. In fact canals were part of an era where water power was turned to industrial use. A horse dragging a canal boat could haul a hundred times as much a load as on a cart. Though canal boats amble along, as a system they are like a chain of buckets, able to move huge quantities of produce to the oceans and to distant continents compared with anything that had gone before. Let's add another point to our list - there was no point moving in having the apparatus to shift huge quantities of stuff unless youv'e got the stuff to shift, and buyers at the other end of the line. That presupposes a certain development of the social division of labour, of the market, in short of the capitalist mode of production.

It is difficult to visualise how much railways captured the imagination of contemporaries. Before their invention for a million years no human had ever moved at more than ten miles an hour, the speed of a galloping horse. To them the velocities of trains were like space travel to us. Look at Turner's 'Steam and speed' in the National Gallery. Yet this is a painting of a train crossing Maidenhead bridge bang in the centre of what is now boring commuterland. The technology did not come out of the blue. Steam engines had been used to pump water out of mines for over a century. True, these were beam action engines. But rotary motion was hardly a novelty. After all it was the basis for the mechanisation of spinning, the central technology of the first industrial revolution. James Watt had patented the rotary steam engine in the 1780s

Nor were rails new. Horse drawn 'tramlines' had been in use in mines for over a century for hauling heavy weights. The main limits to the technology was the wearing out of pig iron rails in heavy use. The problem was overcome at about the same time as the Rocket trial by the independent development of the wrought iron process. The trials for the Stockton-Darlington line was a competition of several more or less viable prototypes.

Another characteristic of railway technology was that its full significance was not grasped by contemporaries. Hauling heavy loads was already possible by canal, though trains did it faster and more flexibly. In fact the new system of railways was used to crack the monopoly power and monopoly prices of the canal system by duplicating their routes. The pioneers did not visualise that they would make more money by moving millions of people long distances. Nor that in, doing so, they were breaking down the parochial peasant-like attitude of people who never moved more than a few miles from their place of birth throughout their lives. How could thirty million people have left Europe from 1815 to 1930 without the railways to take them from the interior to the ports and from the New World ports of continents unknown? How could three continents have been peopled by workers in that time without the railways? Nobody thought at the Stockton-Darlington trials that the main significance of the new technology was to create a national and international labour market and accelerate the destruction of pre-capitalist forms of production all over Europe - but that was what it did. Railway mania shared the delusion of the dot.com merchants that they would clear up. There were the Nasdaq shares of their age. The Economist comments (April 1st 2000) "As with railway, stock markets currently seem to think that internet firms will be the ones that reap the biggest rewards. But consumers and old-economy firms, from cars to chemicals, that use B2B e-commerce to reorganise themselves are likely to gain most. The overall rate of profits may be little changed, but profits will be redistributed."

Let's move on. The car was a Franco-German invention developed in the 1880s and destined to transform the way we live now. By the time of the First World War it was still a luxury in Europe. But the yanks were making waves. In 1908 a model T Ford cost $850, but by 1916 that was down to $360. In the meantime sales had multiplied fifty times over. Ford's market share had gone up from 10-60% over the period. At the turn of the century there were 57 Stateside companies making cars. Shortly after the War that had settled down to the big three - Ford, GM and Chrysler that still dominate the US market. What Ford had pioneered was not car production. Plenty of other people could do that. He had pioneered mass production of cars using the assembly line. That was how he got costs and prices down. Particularly among farmers, there was a need under capitalism to get their crops to the market; that is for a hardy vehicle to get to the railhead with a load. The Model T fitted the bill. The car boomed on in the 1920s boom as the central technological innovation, tugging behind it rubber, road building and the skyscraper as the cluster of associated technologies. By 1929 car density per thousand of the population in the USA was at a level it did not attain till the 1960s in Western Europe. Hopefully this is enough to dispel the notion that the history of innovation is just a matter of good ideas coming up. It's profitable markets capitalists respond to!

That's enough ancient history. The reason for reprising these old stories is to look at what is happening now with a sense of perspective. The first point to make is that there is a clear distinction between invention, coming up with a technically viable idea and innovation, gearing it up so money can be made. Often the processes are separated by decades in time. And the path of the first generation of money makers is not always strewn with roses. Amazon.com is entirely a virtual shop. It only exists on the internet. Yet for delivery it shares a technology which was pioneered by Sears over a century ago. The products are delivered by post. After the instantaneous transmission of information over the web, your book is delivered by a postal worker walking up your front door path at about three miles an hour. As a result Amazon had to give up taking orders for the latest Delia Smith ten days before Christmas because they couldn't deliver as the postal services were in chaos, partly because of local industrial action by postal workers. Your only chance not to disappoint auntie was to resort to old technology by nipping down to W.H. Smiths. It should be emphasised that the purpose of this article is not to take the mick out of the new economy. Our point is that it will frequently go down blind alleys and follow up false leads.

The first power looms continually broke down. They seemed slower than a skilled hand loom weaver. Yet forty years later they had driven that skill to the brink of extinction. We raise the innovation of the power loom, because it shows that technology is not neutral. It was deployed to destroy the bargaining power of the hand loom weavers. When we read of the destrucion of their livelihood in Marx's Capital, we tend to assume that they had existed in like numbers for centuries. In fact they were largely a creation of the mechanisation of spinning, which made cloth cheap enough to undercut local production at the other end of the earth. This turned Lancashire into the world's first export processing zone. It also gave the hand loom weavers a position as the then aristocracy of labour, celebrating 'Saint Monday' in drunkenness and leisure, rather than serving the needs of the capitalist class. The technology of the power loom was devised to destroy their industrial muscle.

The big mainframe computers of the 1950s were sneered at as they seemed to need more staff to service than the manual forms of record keeping they were designed to replace. It remains the case that, at the task they were intended to do, they may be no quicker. An experienced library assistant twenty years ago could probably match a reader card to a book card as fast as their present day equivalent can match up the corresponding bar-codes with a scanner. The benefits to management are all the extra information they garner. All too often this information is about the productivity of the worker - and how management can increase it

For that was the first wave of tasks taken over by computerisation. So far from being the high tech stuff of science fiction, it was the low tech labour of the filing clerk that was being replaced. Then industrial workers got it in the neck with robotisation. Routine, and not so routine, assembly line operations could be replicated and workers replaced. The broad outlines of the present wave of IT are now in place. One reason so many internet shares have never declared a profit is, though internet technology has so many useful applications, it is not obvious how firms can make money out of them. The talk is all of using the internet as a giant marketplace. Business to consumer applications are spreading fast, but the talk is mainly of wine, CDs and books. The fact is the internet has still not overtaken its century old predecessor, the catalogue. Sears Roebuck targeted American farmers' need for sewing machines. They were able to use the post, which was another unintended spin-off from the development of a national railway network. Now most readers know already what you might buy from a mail order list. There are a whole raft of other things you would be reluctant to buy unseen.

Quality is very difficult to monitor from a distance. Nor does the net provide a perfect market. Price differentials on the web are as wide as those you see in high street shops. Again the problem is assassing quality. Business to consumer sales are predicted to rise to a tenth of all consumer purcheses in ten years time in this country. In Europe they may go up fron $5 - $400 billion over the period 1998-2003. Business to business trade is more significant The real revolution in the near future is likely to be in business to business transactions. This is set to rise from $1,000- $2,500 billion globally over the next three years. Even with B2B there are problems. Quality is difficult to assess and confirm over the net except in the case of 'commodities' such as crude oil or bulk chemicals with a pretty short checklist of possible characteristics.

Internet trading will shake out whole layers of the 4 million distribution workers in this country. It will also lead to capitalists carrying much lower levels of stocks. A saving of £37 billion for the system as a whole in under five years is one quoted statistic. Stocks are the equivalent of money tied up doing nothing. Their reduction is a clear gain for the system. These gains could be extraordinary. Cars is a $1 trillion a year industry. These cars hang around an average 60- 100 days before being sold. That's a lot of money sitting around. If these slack times can be drastically trimmed or eliminated outright there will be big benefits - but they won't be benefits for internet companies.

But in an unplanned system stocks are also a buffer. In the real world firms do not chuck commodities out onto the markets, see if they sell, and put the price up or down accordingly, as they re conceived of as doing in economics textbooks. For advance warning management watch whether stocks of finished goods are building up or running down. Without a reserve of stocks firms really would be at the mercy of sudden market movements.

Internet trading should also save business time and money on procurement costs. BT (which is very bullish about the prospects) believes it can knock £633 million off its £5.7 billion bill, while transaction costs (the cost of shopping) may drop by 90%.

Some futurists have raised the question as to whether the whole trend towards the concentration of capital recognised in the Communist Manifesto as being a basic tendency in capitalist development can be thrown into reverse. We have already shown that new technologies spawn pioneering companies in their infancy before the big boys emerge, consolidate and gobble them up. You can't get much bigger than Microsoft. These prophets of capitalism predict that firms will experience a verrtical disintegration as they are able to trawl around for supplies on the net. Frankly, it's far too early to tell. In the past for security of supplies and all sorts of other reasons big firms decided to make things in house rather than tender out for them. Brewers own pubs to sell their beer. In some cases they also own hop fields. The argument is that they won't need to do this any more because they can contract for a steady supply of inputs on the internet. See what they are trying to do. They call it supply chain management, Firms are trying to plan for the future - just what they accuse socialists of aiming at. Just what they tell us is impossible. Under capitalism they're right. Capitalism is an unplanned system. No firm knows what the others are up to, partly because what other firms do depend on what THEY do. Imagine a string of drivers in a fog, all carefully keeping their distance from the vehicle in front. They all imagine there's somebody out there ahead of the mist with clear road in front of them. But, under capitalism, no firm has that vision of the future.

This gives the lie to the assertion by Alec Nove in 'The economics of feasible socialism' that socialist planning is impossible because of the need to calculate the 'coefficients' between a vast number of commodities. "In the USSR at this time there are 12 million identifiably different products (disaggregated down to specific types of ball bearings, designs of cloth, size of brown shoe and so on)" He quotes Antonov as asserting, "Mathematicians have calculated that in order to draft an accurate and fully inteegrated plan for material supply just for the Ukraine for one year requires the labour of the entire world's population for 10 million years." The thinking behind this critique is as follows. Since an increase in the production of ball bearings will presumably require the application of more labour, the extra workers will buy more cheese (among many other different things). There is therefore a coefficient between ball bearing production and the making of cheese. Before we can plan the economy we have to work out the coefficients between at least 12 million products. This shows a fundamental misunderstanding as to what planning is. It does not just consist of a meeting of a Central Planning Board who then issue instructions to millions of workers telling them exactly what to do. Planning is impossible without feedback between producers and active involvement of the workers in the planning process. Capitalism is already making the link between firms on the internet. It is putting in place the infrastructure whereby plan iterations could be communicated between all the firms.

We have established that IT is the leading sector of a new period in the history of capitalism, just as water power and canals, steam and railways, steel production, electricity generation. cars and other technologies have provide the leading edge to capitalist development in the past. What about the rest of the economy. What are the feedback effects? Combined and uneven development is a permanent feature of capitalist progress. This unevenness pervades between industries and between regions. Lancashire was the heartland of the first industrial revolution. It was also the first rust bowl of industrial decline. |New England, home of traditional textile manufacture in the States, went into decline as the mid West around Chicago and Detroit as the focus of manufacturing moved to cars and consumer electronics. Now these regions are seen as being in irretrievable ruin as Silicon Valley booms.

Who will benefit from the new technology? Stock exchange punters think it will be IT companies. A hundred and fifty years ago they thought it would be railway companies. This was the meaning of the railway manias of the nineteenth century. But railway companies did not benefit for long. The rest of the capitalist economy permanently benefited from the improved communication network the railways provided. By the end of the century they were regarded as boring utilities not entitled to more than a modest return on their outlays. Even capitalist politicians threatened them with nationalisation if they abused their monopoly power.

The information superhighway will go like the permanent way. It will be infrastructure for other firms to make money out of. How will the benefits be passed through to the rest of the system? The pioneer internet firms attract no brand loyalty. There is no notion more alien to brand loyalty than surfing the net for a bargain. Entry barriers are very lower and will get still lower as the technology matures.

Capitalists aim to maximise profits. But not everyone can make more profit than everyone else, even though they all strive to do just that. Precisely the attempt by individual capitalists to make more than their fellows will bring about a tendency within the system for the rate of profit to equalise across firms and across industries. How does this process come about? It is a jerky convulsive tendency achieved through chance fortunes and brutal bankruptcies, and through the restless movement of capital in search of a fast buck. |It leaves whole obsolescent industries stranded and local communities left to rot. Capitalists will dive in where there's money to be made and pull out when the going gets sticky. When one makes a wedge, the first comer is likely to be trampled to death by the ones behind. Capital movements constantly overshoot and emit speculative bubbles like the lava of a volcano. 'Order' is achieved through anarchy.

It has been argued that the IT boom will cause cyclical fluctuations of the economy to be less severe since it's all part of the service sector. From the marxist point of view there is no unified service sector. The category includes productive activities such as driving a bus or writing a computer programme and unproductive activities such as bond dealer and security guard. Some parts of the service sector produce surplus value for the bosses while others do not. In fact the IT sector gives the lie to the notion that there is a weightless economy alongside the metal-bashing old economy. The services they provide are critically dependent on the hardware, as services always are. In fact IT is dependent on massive investment, as you would expect the newest sector capitalism is colonising to be. The new technology sector has high start up costs and often displays increasing returns to scale. The more you bang out, the cheaper each one is. That makes a compelling case that bigger is better. So, to get ahead, you have to invest a lot up front. But investment is the first thing for the chop in a recession - and of course everyone cutting their investment planned at the same time is what makes the recession worse. Already the basic feedstock industry of the 'new economy' - microprocessors - has shown that it exhibits a permanent tendency to excess capacity.

Into the upwave?

A question Trotsky often addressed was, "through what stage are we passing?" It is a vital question for socialists, and one that it is quite difficult to answer at present. The key to understanding the present period is to disentangle where we are in the cycle of boom and slump, and the nature of the longer period of capitalist development the cycle is lodged within. As we have seen the new economy paradigm people extrapolate quite plausible assumptions about IT-driven productivity as a trend from the present to the future and apply them to conclude that the present period is not the overheating stage of the cycle when boom turns to bust. They're quite wrong, of course. The boom - slump cycle will be with us as long as capitalism. Marxists have a well-articulated theory of the cycle. It is true that the severity of downturns and the storminess of booms take their character from the longer period of capitalist development within which they are embedded. And nobody can deny that there are special 'ages' of capitalist development, each with their own characteristics. For Socialist Appeal it is vital that we understand that the period from about 1948 to 1973-74 was a golden age, for workers in the advanced capitalist countries at least. This was a unique period of virtually full employment and continually rising living standards for workers. in the advanced capitalist countries at least. This age deeply marked the consciousness of the workers who lived through those times, and continues to scar their thinking today. It was a period when revolutionary endeavour seemed futile because the system could deliver the goods. It is equally important for marxists to understand that the golden age is definitively at an end. For the record we believe we are at that point where boom is turning to bust. We are quite prepared to countenance the notion that the internet-related revolution is taking us to a new technological age.

But though each period of capitalist development is different, it would be entirely wrong to see us living though a series of predetermined ages, using the analogy with the boom - slump cycle.That was first done by the Russian non-marxist economic thinker Kondratiev. Trotsky responded to his ideas in his article 'The curve of capitalist development' He wrote, "Kondratiev's attempt to invest epochs labeled by him as major cycles with the same 'rigidly lawful rhythm' that is observable in minor cycles. It is an obviously false generalisation from a formal analogy. The periodic recurrence of minor cycles is conditioned by the internal dynamics of capitalist forces and manifests itself always and everywhere once the market comes into existence. As regards the large segments of the capitalist curve of development......their character and duration are determined not by the internal interplay of capitalist forces but by those external conditions through whose channel capitalist development flows." As the alert reader will recognise, the new economy people are selling us a new Kondratiev wave powered by IT

Never the less the case for long waves in capitalist development are plausible. According to some, we had a previous long boom golden age , freakishly from 1850-73, almost exactly a century before the twentieth century golden age. This was followed by the 'great depression from' 1873-96. This was followed by another upwave for the quarter century through to the end of the first world war. Then we have an interwar downwave, followed by the golden age after the Second World War and the depressed period after 1974..

Guess what? If the clocks are set right we can kiss the bad times goodbye and move into a future twenty-five years of long boom. Kondratiev did not actually propose a mechanism setting off his long waves. In some of his writings there is an emphasis on epochs of deflation leading to a spurt of gold prospecting for the monetary metal. The search for gold was an important impulse for nineteenth century capitalism. The California gold rush not only inaugurated a new world boom after the crises of the revolution year of 1848; it also introduced capitalism to the Pacific rim, now the dynamic epicentre of high tech capitalism. Likewise it was gold that brought capitalism to South Africa in the closing years of the century, But it's a little far-fetched to see gold rushes as a catalyst in the last century of paper money.

Kondratiev had a serious problem in collecting hard economic data on the earlier periods of capitalism he was trying to include in his schema. The material simply didn't and doesn't exist. He was forced to use price data instead. But just because prices were depressed, that doesn't necessarily mean that the real economy was suffering. That is the point made in Saul's book 'The myth of the great depression 1873-96'. It tells us something of the factual fog that reputable economic historians working on the period 1873-96, always seen as a great depression by contemporaries, can find it nothing of the sort a hundred years later. In fact for the first two cycles, Kondratiev had only evidence for one country. Before 1850 Britain was the only country that had industrialised and therefore enjoyed the water and steam ages alone. That hardly gives the theory a global sweep! Ironically the same criticism can be made of the present 'upswing'. Even in the minds of the new economy paradigm people, it is confined to the United States - and is an aspiration rather than a reality elsewhere. Maddison surveys the literature in his'Dynamic forces in capitalist development' and sums up, "My basic conclusion is that the existence of long-term rhythmic movements in economic activity are not proven".

But if any motor for long waves can be found it is usually sought in clusters of technological innovations suggested by the economist Schumpeter. Marxists are not technological determinists. We understand that what is critical for capitalism is profitable markets. We understand the separation of the process of devising a technically viable new producer - invention- from finding something commercially viable - innovation. It is Clive Sinclair's personal tragedy that he does not. You would expect inventions to be a random drip feed into the economy. You might be right. The fact that innovations come in clusters show that economic conditions have to be right for inventions to be applied. In fact the economist Mensch argues that depression conditions accelerate innovation of fundamentally new 'basic' technologies. It has been shown that the early 1930s were an extraordinarily innovative period for capitalism. We also understand that the third arm of innovation - diffusion of the new technology can only happen when capitalism is good and ready for it. Attempts to link ages of upswing with new technologies have not met with a good fit. The rotary action steam engine was invented by James Watt in the 1780s. Its most significant application - to railways - was thirty years later. Steel production was pioneered in the 1850s. Mass production had to wait twenty years. The motor car was developed in the 1880s but not mass produced for twenty years.

This is not surprising. Electricity generation was developed as an alternative to using piped coal gas to light homes. For decades Victorian factories were still designed on the traditional model with different activities on different floors, all serviced by a steam engine in the basement. This of course made assemble line production impossible and consumed huge amounts of labour time moving half finished parts from floor to floor. It took a new generation of capitalists such as Henry Ford to work out the possibility of using local electric motors to power assembly lines on a flat single storey shop floor.

Much of the technology that gave the great post-War boom its stimulus was actually developed in the early 1930s. In fact the golden age from 1948 to 1973 was powered by technology whose possibilities were well known. The VW Beetle was developed by 1937. All the electrical goods and plastics and artificial fibres were already there waiting for capitalists to make money out of them. What was needed was the conditions for profitable markets to emerge. The nature of innovation during this period was characteristic of a boom. Innovation was add-on: accretional. The modern family car is much more fuel efficient comfortable and less prone to corrosion than a 1948 Morris Minor. Yet the Minor is the prototype small family car. While in depressions their fellows go to the wall. some capitalists make forced marches into unknown technologies in search of survival.

Finally, of course, many of the most important discoveries are not motivated by the profit motive. This is particularly true of 'basic science', the bedrock of scientific understanding without obvious practical (that is, commercial) application. Even scientific research in Universities is carefully monitored by bodies such as the Science Research Council, to ensure that science is useful to the monopolies. Albert Einstein was not funded by any conglomerate to do his research on relativity. It is likely that if he had submitted an application to any centre of scientific excellence to investigate the proposition perhaps that space is curved, he would have got a dusty answer. Civil aviation is critically dependent on air traffic control, in turn based on radar. Radar was developed in the 1920s. Its military significance was soon picked up on. For decades it was regarded as having no commercial applications. Likewise the computer was regarded as an invention with recondite 'number crunching' applications such as code-breaking at Bletchley Park. Jewkes wrote a book on significant inventions in 1950. It did not include the computer. The second edition ten years later had to remedy this error. Significance takes time to assess.

IT is the future. But there's something new about the product. The nature of producing most things is that it costs more to bang out more stuff. But the internet deals in information. Any amount of people can consult this information without it costing anything extra. All the information is like a radio programme that anyone can tune in to. So why should we be charged? In fact internet companies are finding it difficult to make money for that very reason They can't stop people consulting the internet for free.Internet technology is stretching capitalism to its limit. The internet is an inherently co-operative venture put together my millions of enthusiasts who just want to help other people or put their point of view. and don't expect to be paid. Capitalism has found it difficult to colonise this environment. Information is a public good. It is too cheap to distribute to be worth monitoring. It should be treated as a public good - distributed free. But how can capitalism make money out of that?

This paradox was predicted nearly one hundred and fifty years ago.

"The theft of alien labour time, on which the present wealth is based, appears a miserable foundationin the face of this new one, created by large scale industry itself. As soon as labour in the direct form has ceased to be the great well-spring of wealth, labour time ceases and must cease to be its measure, and hence exchange value must cease to be the measure of use value. The surplus labour of the mass has ceased to be the condition for the development of general wealth, just as the non-labour of the few, for the development of the general powers of the human head. With that, production based on exchange value breaks down, and the direct material production process is stripped of the form of penury and antithesis. The free development of individualities, and hence not the reduction of necessary labour time so as to posit surplus labour, but general reduction of the necessary labour of society to a minimum, which then corresponds to the artistic, scientific etc. development of the individuals set free, and with the means created, for all of them." (Karl Marx, Grundrisse)

Realistic capitalist economists know the internet frenzy is a speculative bubble. But they hope for a soft landing to let the rest of the economy down gently. Fat chance! The whole point about a bubble is that it is not a self-contained monstrosity, but enters the bloodstream of the whole economy and infects it. For instance people use inflated share prices as collateral to boost their borrowing. As for the 'new economy' the Jouranal of Economic Perspectives puts it well, "The interaction of profits, investment, credit and financial markets is an enduring feature of market economies that plays a central role in business cycles." No change there, then.

Is capitalism developing the productive forces or not? The internet was not pioneered by capitalists. Famously, it was given a flying start by 'nerds' uninterested in making money. But doesn't capitalism at least allow productive forces to bud and flower? Capitalism is a dynamic system. It is because it is dynamic that it is unstable. If development was impossible, then crises also would never happen. But internet technology is a perfect fit for the socialist future. Now we can plan the economy. Now we have the information to craft exactly what people need. Now that information is so cheap, it is pointless metering it. It should be free. But how can they make a profit out of that? Compared with the potential capitalism is an enormous roadblock to a harmonious and prosperous future.

Capitalism has taken us to the threshold of abundance and slammed the door in our face. Instead of artistic and scientific development of individual potential, under capitalism internet technology has given us a new outlet for greed and huckstering. Will Hutton comments in the Observer (March 12th) "What we are seeing writ large is just how important the stock market as a signalling mechanism for business activity, and how extraordinarily volatile, hysterical. irrational and short term its judgments are. But then, it's a human institution organised around free market principles, so you would expect nothing less." He continues, "The gigantic correction, when it comes, will so puncture the financial system's balance sheet that it will be unable for a period to finance even normal levels of business activity." He may well be right. Let' hope workers learn from bitter experience.