The markets may not be madly high, merely reflecting the worldwide reduction of risk to capitalby RW Johnson / October 20, 1999 / Leave a comment
The markets, everyone says, are madly high. The Dow, which in 1980 was below 800, is still well over 11,000. The FTSE 100, which surmounted 2,000 only at the beginning of the decade, is over 6,000 despite its recent fall. Yet no one believes that British production or profits have trebled since 1990-let alone that the production and profits of US industry have multiplied 13 times since 1980. The price/earnings ratio (the ratio of a share’s price to the dividend paid on that share) has just kept on rising. Quite soon, the argument runs, there has to be an almighty crash, as fundamentals reassert themselves. Of course economists pooh-pooh the stock market as an indicator of anything. But what is different now is that US consumption is higher than total US wages, which means that people are consuming their stock market gains. This means that when the market turns down and those gains disappear, there will be a large reduction in US demand, causing a slump in other economies and a world recession.
Apocalyptic though this may sound, it is merely the current conventional wisdom. Yet there are other, less gloomy pieces of history to consider, too. One such derives from the Bolshevik academic, Nikolai Kondratiev (right), who originated the theory of capitalist long cycles. Suitably refined, this theory is now widely accepted: apart from the short-term business cycle, a longer cycle exists which depends on the dynamism resulting from the introduction of new technologies. Thus the great boom periods of capitalism are the steam age, the age of the motor car, the age of computers and so on. Today, a new industrial age may be under way-the information economy based on the internet, software, multimedia and digital technology. America is the unchallenged leader in this revolution, which is why the US economy has so hugely outperformed both Europe and Japan in the 1990s. In the first period of a new industrial age-before its innovations become generalised-profitability is very high. The US stock market may simply be reflecting this fact.
Microsoft, a company which didn’t exist 20 years ago, is now more valuable than any company in history. To a degree that even capitalist propagandists could hardly credit, the system has continued to recreate and re-invent itself (and creatively to destroy the huge ossified capital accretions deriving from previous cycles).
In 1990, things looked very different. In the previous…