During the 1990s there were three back-to-back events that stimulated investment in information technology: telecommunications deregulation in 1996, the “year 2K” problem in 1998-99, and the “dot com” boom in 1999-2000.The resulting investment boom led to a dramatic run-up of stock prices for information technology companies. Many IT companies listed their stocks on NASDAQ. The following figure depicts the cumulative rate of return on the NASDAQ and the S&P500 during most of the 1990s. Note how closely the two indices track each other up until January of 1999, at which point NASDAQ took off on its roller coaster ride. Eventually it came crashing back, but it is interesting to observe that the total return on the two markets over the eight years depicted in the figure ended up being about the same.
This figure actually understates the magnitude of technology firms on stock market performance, since a significant part of the S&P return
was also driven by technology stocks. In December 1990, the technology component of the S&P was only 6.5 percent; by March, 2000, it was over 34 percent. By July 2001, it was about 17 percent. A prominent Silicon Valley venture capitalist described the dramatic run-up
in technology stocks as the “greatest legal creation of wealth in human history.” As subsequent events showed, not all of it was legal and not all of it was wealth. But the fact that only a few companies succeeded capitalizing on the Internet boom does not mean that there was no social value in the investment that took place during 1999-2001. Indeed, quite the opposite is true. One can interpret Figure 1 as showing something quite different from the usual interpretation, namely, that competition worked very well during this period, so that much of the social gain from Internet technology ended up being passed along to consumers, leaving little surplus in the hands of investors. Clearly the world changed dramatically in just a few short years. Email has become the communication tool of choice for many organizations. The World Wide Web, once just a scientific curiosum, has now become an indispensable tool for information workers. Instant messaging has changed the way our children communicate and is beginning to affect business communication. Many macroeconomists attribute the increase in productivity growth in the late 1990s to the investment in IT during the first half of that decade.
If this is true, then it is very good news, since it suggest we have yet to reap the benefits of the IT investment of the late 1990s.
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