This article was written for the Spectator, a British magazine for which I had written regularly as a graduate student at Cambridge at the end of the 1960s.  Its argument that the bursting of the Tech Bubble only marked the end of the first half of the Digital Revolution, the fifth great wave of technological innovation, is confirmed by the accelerating digitalization of life – economic, social, cultural, political – that we observe today.


Since it has become clear that the IT Great Bubble of 1999-2000 is dead and not subject to resurrec­tion, information technology has become boring. The limitless promise of a New Internet-Enabled Web-Architected Economy where Everything Is Different appears to have failed. In the United States, the voices that now com­mand media attention range from that of Larry Ellison, founder and chairman of Oracle — whO is acting out his stated belief that innovation in IT is over by threatening and launching hostile takeover bids to consolidate markets by liquidating competitors — to Nick Carr, senior editor of the Harvard Business Review, whose May 2003 article summarised its message in its title: 'IT Doesn't Matter'.

The spectacular surge and collapse of `New Economy' share prices in recent years does, indeed, represent a turning point, and one of enormous economic sig­nificance. But Ellison and Carr and the host of like-sounding commentators miss the point so thoroughly that their laments call to mind the legendary comment by the great physicist Wolfgang Pauli on a draft that he was asked to review: 'This article is so bad, it isn't even wrong.'

Of course, in the bubble that has cele­brated every wave of transformational technology for 250 years, speculation funds too much infrastructure: during the 1880s, some 80,000 miles of railroad track were laid in the United States; in just the four years to 1897, about 40,000 went into bankruptcy. The stock market financed three railroad lines between New York and Chicago, enough to guarantee that none of them would ever make a profit. But the speculative insanity that has accompanied every wave of transforma­tional technology finances more than phys­ical infrastructure; it also finances a Darwinian frenzy of experimentation in what to do with the new networks.

To stay with the evolution of the American railway economy, by the end of the 1870s what had once been an adven­ture had been reduced to a predictable process: the standard gauge was estab­lished nationally, durable steel rails had replaced iron, telegraphic signalling sys­tems marched alongside the tracks. Building railroads had become . . boring. Which, of course, is why so many miles of them were built in the next decade. But it was just then — when the infrastructure could be taken for granted — that an inno­vative business genius named Theodore Vail constructed the first 'virtual' commer­cial network: Railway Express. By deploy­ing an information network that crossed system boundaries on top of the rail line, Vail could ensure that a package shipped from a manufacturer in New York could reach a customer in San Francisco. The result, to simplify only a bit, was the inven­tion of mail order by Sears Roebuck and Montgomery Ward, and the creation of an integrated continental market.

Building the railroads generated demand for steel and wheels and braking systems and telegraph stations and innova­tion throughout the entire supply chain. But the real economic revolution came after the railways had been built.

Similarly, some 50 years later, networks of electric power lines were constructed to deliver lighting to residential neighbour­hoods, demand for which alone could not deliver adequate return on investment. So local entrepreneurs established electrified amusement parks to consume power after the factories had closed and electric tram­lines to bring in the customers. On a national scale, General Electric reinvented itself in part as a consumer-goods company to design and market refrigerators and washing-machines that would absorb the supply of electrons that its dynamos were generating. And mass consumer markets for electric-powered appliances redoubled the economics of mass production that the automobile industry was, in parallel, demonstrating and extending. 

As in each of these previous periods, the Bubble of 1999-2000 marked the mid­point, not the end-point, of the wave. Since the mid-18th century there have been five of these great technology-driven waves of economic expansion that have successively transformed human existence. From the canals and turnpikes of the first Industrial Revolution through the construction of the car-and-oil economy that peaked in the West during the post-second-world-war golden age, by way of the railroad and electrification booms that successively drove economic growth during the 19th and early 20th centuries, each of these waves has stretched over two generations. The first phase has been devoted to build­ing out the physical infrastructure that embodies the technology; the second phase is when businessmen learn how to make money by exploiting the new net­works of commerce. (For a comprehensive and compelling analysis of these issues, I cannot recommend too highly the analyti­cal framework and schematic account pro­vided by Dr Carlota Perez in her recent book Technological Revolutions and Financial Capital)

The title of Dr Perez's book makes clear that the key to understanding the dynamics of technological transformation lies in the relationship between technological innova­tion and financial investment. As Schumpeter understood, but hardly explored in any depth, this is the crux of capitalism, where entrepreneurial initiative attracts sufficient funding to become eco­nomically meaningful. Yet at its inception, the story of how the modern economic world has been constructed begins with a paradox. For, by definition, it is not possi­ble to specify the return on incremental investment in innovation when the innova­tion itself requires the deployment of a network of nodes for it to have any eco­nomic use at all. What is the value of a stand-alone canal gate or a single fax machine? And, unlike the garage-sheltered activities of lone inventors, building net­works of water or steel or optical fibre costs staggering amounts of money. How is it that the most massive physical and finan­cial investments in history have been fund­ed in the face of fundamental ignorance?

The two components of the answer to the paradox could not be more different.

·  First, again and again, the great transfor­mations have been kick-started by state investment, variously rationalised by policies of national development and/or secu­rity (and often greased by bribery and fraud): examples are legion, from the building of the canals through the initial definition and deployment of the Internet. And, again and again, as deployment proceeds, stock-market investors have seen the promise — or the mirage — of commensurately staggering returns. From this point of view, stock-market speculators hijack programmes of infrastructure investment and turn them into vehicles for herd-following financial mania that can only, sooner or later, end in tears. But —when the bubble has burst — the canals have been dug, the tracks have been laid, the power plants have been built, the fibre is in the ground.

Where we stand today is, once again, in mid-passage. Not only have the networks been built and over-built, the alpha innova­tors have been sorted from the bubble-financed speculation. Three companies stand out as exemplars: Dell, Amazon and eBay. Dell has leveraged the Internet to cre­ate an assemble-and-ship-to-order model for capital and Consumer goods that operates profitably at priCe levels that no competitor can touch. Amazon has integrated a branded Internet portal with efficient delivery of micro-shipments to millions of homes, pro­gressively displacing the established distribu­tion model of delivering many like goods to a small number of locations (known as `stores'). And eBay has created a new trading market for goods that exists literally within the Internet.

These pioneers innovated because they wanted to . . . and because, in the cases of Amazon and eBay, unattainably specula­tive capital markets enabled them to do so. Their competitors, by contrast, have no choice: they must imitate the innovators in order to survive. This is why spending on information technology is bound to recov­er and why the economically relevant application of information technology will again drive economic growth throughout both the developed and the emerging mar­kets. Once again, this second phase of our generation's technological transformation will take some 20 years to play out. As before, it will also take continued techno­logical innovation to make the new appli­cations and business models easier and more cost-effective for the host of follow­ers to emulate and adopt. But as they inevitably do so, we — or. our children — will look out on a New Economy where, indeed, Everything Is Different.