SYNOPSIS: The late, great IPO craze may've been the greatest hoax in Business history

Whenever I start to get blasÚ about today's amazing business world, I pull out my copy of John Kenneth Galbraith's "New Industrial State," published in 1967. It's a reminder of how thoroughly the economy has defied the old conventional wisdom.

Not that Mr. Galbraith was expressing the consensus of the economics profession. On the contrary, throughout the book he expressed contempt for his colleagues, with their na´ve belief that market forces still mattered. But his message -- that planning by huge corporations was increasingly supplanting the chaos of the market system, that capitalism was becoming indistinguishable from socialism -- found wide favor. When Mr. Galbraith wrote that "the entrepreneur no longer exists as an individual in the mature industrial enterprise," when he spoke of the "euthanasia of stockholder power," many people -- living, let us remember in Mr. Galbraith's defense, in an era when General Motors was the very model of a major modern manufacturer -- nodded their heads in agreement.

Which brings us to Amazon.com.

Over the last couple of weeks questions about the prospects for the world's most visible e-tailer have once again roiled the markets. An analyst at Lehman Brothers has warned that Amazon may run out of cash early next year; other analysts have leapt to the firm's defense. I'm not going to get into the middle of this fight. Isn't it amazing, though, that Amazon has become a household name, that last year Time named founder Jeff Bezos Person of the Year -- and that we still don't know whether Amazon, or for that matter any dot-com, has a viable business model?

But that is actually the point. Amazon's business strategy -- to lose money for an extended period while building a market position -- is not all that unusual. In fact, it's exactly what Japanese companies did in their export markets during the 70's and 80's, when Japan's economy seemed an unstoppable juggernaut. Information technology, with its powerful increasing returns -- the more people who use a product, the more useful it becomes -- may have made it even more necessary than it used to be to lose money now in order to make it later. But the strategy per se isn't new.

What is new is the sight of Amazon and other companies pursuing a full-scale go-for-broke strategy right from the start, losing hundreds of millions before anyone is even sure that there is money to be made in their businesses. When Mr. Galbraith was writing, it seemed obvious that only large, well-established companies with plenty of profits from their existing businesses could afford to make big bets on the future. When people thought about private-sector innovation, they had in mind I.B.M.'s development of the 360 series of computers, or Boeing's development of the 747. In fact, as little as six or seven years ago the common view was that Japanese companies would steadily gain the technological upper hand over their American rivals because only the Japanese -- not faced with annoying pressure to satisfy the financial markets -- could afford to take the long view, and ignore short-term losses.

But in the last few years our stock market has proved willing and eager to finance brand-new companies with highly speculative business plans that require years of losses before anyone will know whether they make sense. In fact, even companies that could afford to finance their innovations out of profits on older businesses prefer to spin off the sexiest projects as semi-independent companies, in order to benefit from that enthusiasm.

How did this happen? I suspect that the emergence of our innovation-friendly finance markets was less inevitable than many people imagine. And it is by no means certain that the new era will last. For a while almost every I.P.O. was enthusiastically welcomed by markets willing to imagine that every new company might be the next Microsoft. That euphoria has faded; but will it eventually be replaced by cynicism, by the demand that new businesses show an actual profit before they can raise large sums of money?

Amazon may be the test case. If the company proves the pessimists wrong, the golden age of the individual entrepreneur will certainly go on for a while longer. If Amazon really does go under, we may be headed back to the era when only big companies could afford to make big innovations.

Originally published in The New York Times, 7.2.00