It was December 1996 when Alan Greenspan, chairman of the Federal Reserve Board, first questioned if “irrational exuberance” had pushed stock prices too far, too fast.

Although his comment sent the market into a brief plunge, history proved Greenspan dead wrong. Stocks didn’t drop. They soared, with an unprecedented fever for technology shares pushing the market onto double-digit gains for three straight years.

Turns out that economists, even the most highly respected ones, often tend to underestimate just how much a vigorous economy can grow. It’s Greenspan, along with his well established and oft-quoted cadre of economic naysayers, to which Rational Exuberance (HarperCollins Publishers, $24.95) seems to be addressed. Written by Michael J. Mandel, chief economist at BusinessWeek, the book is an unabashed endorsement of “exuberant growth,” the groundbreaking, revolutionary and oftentimes disruptive advancement that propels mankind onto rocky new eras of discovery and achievement. Electricity, flight and the microprocessor, for example, didn’t just improve life, but changed the very notion of what is possible on Earth.

Technology is good; stagnation is bad. Seems logical enough. Yet most economists, it turns out, tend to give short-shrift to technology’s role in economic growth. They primarily focus on capital accumulation, Mandel suggests, not the technological innovation from which progress is actually born. “Imagine that growth is like a cherry pie,” he writes. “What the economics profession [does] is specialize in making the crust — an essential part of the pie, but not the tastiest and most nutritious part.”

Among those on his “Enemies of Growth” list is Paul Krugman, the notoriously left-wing New York Times columnist whom Mandel blasts for repeatedly attacking technology, despite the gains it has brought in living standards for rich and poor alike. Liberals, environmentalists and deficit hawks also make Mandel’s list, although curiously, so does free-markets advocate Milton Friedman, whom Mandel chides for “ignoring technology.” It’s a flimsy and unfounded criticism that the book, written for a non-scholarly audience, could have done without.

You quickly get the feeling that if Mandel weren’t writing for BusinessWeek, he’d be tinkering around with circuit boards in a Palo Alto garage himself. Mandel isn’t just a technological cheerleader. He’s an outright evangelist, which explains why an entire chapter is dedicated to highlighting the advancements he expects to develop into the next big thing. And although solar power, nanotechnology and biotech are among the developments cited, Mandel provides far too few real-world examples of the promising upstarts he so passionately champions. More specific examples would have made the book a bit more engaging to us non-economists who’d actually like to capitalize on the hot new trends.

Most compelling is Mandel’s spirited defense of financial markets, which have been uniformly vilified since the tech bust and subsequent bear plunge. It’s the “high performance” tools such as venture capital, junk bonds and stock options, Mandel points out, that bear the risk inherent in the always-unpredictable business of technological development. Because risks are now regularly securitized — that is, carved up and distributed among any number of willing investors — even an Enron- or WorldCom-sized blowup isn’t significant enough to disrupt the entire market machine. He also correctly points out the proper role of government, writing that “it’s a mistake to ask government bureaucrats and politicians to get involved in the actual development of new products — decisions will be made for the wrong reasons.”

Given how much Mandel purportedly supports free enterprise, it’s downright bizarre that his plan for economic prosperity — what he calls his “coalition for exuberant growth” — feels like a deeply scrubbed version of the New Deal. He criticizes regulation that slows broadband rollout, for example, yet applauds the patently statist Sherman Antitrust act as “reform legislation.” His calls for “improving the safety net,” namely, providing health insurance for the unemployed and unemployment insurance for all, is a bloated bureaucracy in the making. If Mandel thinks innovators can send humans into outer space, why doesn’t he believe they can create an affordable health insurance plan without government’s all too often clumsy hand?

The history of America is built on achievement. And considering that most economists dismiss technology’s role in economic growth, one has to admire Mandel’s moxie. His optimism is downright infectious. And it’s good to think big. It’s good to shoot for the stars, to set the bar as high as it will go. So while Rational Exuberance might not fully succeed as a playbook, it’s a darn good pep talk — and worthy of a summertime skim.

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Jonathan Hoenig

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund (

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