SYNOPSIS: Even today's upstarts can be tomorrow's IBMs.

Hold your horsemen! Last week the market guru James J. Cramer, once famed for his boundless optimism about tech stocks, declared himself, yes, disillusioned with the sector. He detailed his disappointment with the "four horsemen" of tech: Dell, Microsoft, Intel and Cisco.

But in the same week an article in Business Week Online also spoke of the "four horsemen of the new economy" Cisco again, but the others were Oracle, EMC and Sun. Aside from the fact that most people probably have no idea what these companies do (I'm a bit blurry myself), the interesting thing is that while Mr. Cramer's list is dominated by companies associated with PC's, the other list is all about computer networks. And that suggests an interpretation not only of Mr. Cramer's loss of faith but of the broader disillusionment of investors, a disillusionment that has pushed the Nasdaq down more than 20 percent from its summer highs. Think of it as the revenge of Joseph Schumpeter.

In recent years Schumpeter, an Austrian economist who moved to Harvard between the wars, has become a sort of new-economy icon. That status owes something to his early work; the young Schumpeter, writing before World War I, was the first major economist to recognize that continual technological change is part of what capitalism is all about. But most of his modern reputation rests on a single phrase that he introduced late in his career, when he referred in passing to technology as a force of "creative destruction."

One suspects that people in the business world like that phrase mainly for the wrong reasons because it makes what they do sound a lot more glamorous than it really is, or because it seems to excuse the hardships and injustices that markets often inflict. (It's no accident that Schumpeter is a favorite of right- wing publications like Forbes.) But misused as it is, the phrase is still perfect: new technologies do indeed destroy as well as create. In particular, each new technology destroys or at least diminishes the value of old skills and old market positions.

But do investors and their gurus really appreciate what that implies? Only a few months ago they clearly didn't. They were (rightly) excited about all the creation going on, but they forgot about the destruction bit. Or maybe they thought that destruction happened only to old- economy companies.

The reason tech companies sometimes have such high ratios of value to earnings is that investors have learned very well the lesson of Microsoft and Intel: that technology markets tend to be winner-takes-all, and a company that gets an early advantage in a new technology may well be able to translate that advantage into a sustained, lucrative monopoly. So investors were willing to pay very high prices for companies with some prospect of becoming the next Microsoft.

The tech slump last spring came when people began to realize that not every tech company is going to be another Microsoft, and also that dominating a market in which nobody is ever going to make any money is no prize. But the winners who had already taken all companies that had established dominant positions in important markets and were earning real money from those positions continued to be valued at many times their earnings.

What's happened now is that disappointing earnings at some of those old new-economy companies have reminded investors that creative destruction is not confined to the dinosaurs. A small company with an edge in an exciting technology like fiber optics or wireless networks might well be the next Intel, but Intel itself may be the next I.B.M., a company whose dominance in one technology became a lot less valuable as still newer technologies took center stage.

What does that say about the current tech slump? It cuts both ways. There is a good case to be made that the market reaction is overdone, that investors have allowed disappointing results at old new-economy companies to overshadow the remarkable things still happening in new new- economy companies.

On the other hand, the realization that tech companies are mortal, too, should limit the price that investors are willing to pay even for companies with a very bright near future. The same breathless pace of technological progress that has made it possible for major companies to emerge out of nowhere also means that those companies may have only a brief moment in the sun.

Originally published in The New York Times, 10.8.00