These new and less experienced players concentrated in particular on shares that are quoted on the technology oriented Nasdaq exchange, which greatly influenced the pricing of similar shares around the world. While more professional and institutional investors accounted for 90 per cent of trading on the New York exchange, during the stock market boom around half of Nasdaq’s turnover came from private individuals. Studies also indicate that companies, analysts and banks had incentives to use somewhat questionable means of attracting inexperienced investors to buy shares in new enterprises. Lacking an adequate cash flow, many new technology companies were dependent on raising money from new share issues to pay their employees and procure equipment. That in turn called for a high share valuation. This gave managements an inducement to “doctor” reports and statements about their company’s future performance. The disclosures about WorldCom and Enron clearly show how an environment developed in which managements also stood to gain from stretching the accounting regulations in order to meet market expectations. It also looks as though the same environment left its mark on the large corporations’ auditors, who likewise needed to modify the extent and direction of their services in order to generate income and profits and survive in the new economy. In certain respects it amounted to breaking the law. In other instances it was the law that was not sufficiently clear or extensive. Analysts and investment banks that earned money by arranging share issues evidently lacked an incentive to make a critical appraisal of corporate reports and statements.

With excessive euphoria, the expansion of the capital stock may go too far. Sizeable investments are made in sectors that will never yield the expected return. The subsequent adjustment accordingly involves a marked fall-off in investment activity and thus a weak development of demand. Both the excessive investment earlier and the inevitable correction of asset prices contribute to this. The setback can also lead to problems in the financial system in general. Much of what the Austrian School had done was forgotten during the half-century of regulation from the crisis in the 1930s to the 1970s. Political economy was dominated instead by Keynesianism. It may also be the case that the efficient market hypothesis has been interpreted too freely. This theory largely amounts to a warning that the market is basically the best judge of a share’s real value. Under normal conditions that is probably true. When a bubble has got under way, however, the market’s normal information processing tends to be disrupted and prices are driven instead by impenetrable forces of a psychological nature. In many respects the financial turbulence in the 1980s and ‘90s was a rude awakening for many economists, decision makers in economic policy, authorities, representatives of the business and banking communities and people in general. I find it important to underscore how broad was this lack of insight into how financial problems arise. One cannot single out a person or group as being solely responsible for how things took a turn for the worse.