A debate has begun between a fellow, who has a potent economics background, and I.  We are discussing the allocation of resources - such as capital, land and labor.  It is well settled in basic economics that a fundamental shift in the allocation of resources leads to an introduction of new financial instruments to accommodate the change.  The reason is the need to generate the money to facilitate development of capital, which then can accommodate the technological shifts that, from time to time, radically change the consumer-based economic landscape.

To wit: During the period of 1900 - 1920 there was a dramatic introduction of new technologies: electricity, cars, the telephone, airplanes and radio.  To manufacture the product, you do what is necessary to get the capital to facilitate the manufacture. 

The money borrowed requires some kind of guarantee.  This "promissory note" is guaranteed by the prospect of consumers purchasing the goods the new facility will manufacture.  Messrs. Henry Ford and Thomas Edison , for instance, had new technologies that required new capital to bring those technologies to the consumer market. 

Financial instruments that supported the building of the facilities to manufacture these goods were sound when applied by those who knew how to market the technology, itself, to the mass consumer market.  Ford created the assembly line to build the cars he sold to the workers who helped to assemble them.  Edison built the power plants that made it possible to deliver the electricity to consumers who bought the light bulb and the Edison (call it a record player). 

So there came a shift in capital. It was no longer the grain silo; it now was the new factories and the new machines in the factories. The shift of labor resources was dramatic, and it created an entirely new consumer class, supported by the new capital, and the money that flowed to that capital continued to grow because there was a product generated by the symbiosis of the three elements of production.

New industries spawned still newer industries.  Capital was generated and reinvested.  All the while, the financial instruments continued to support newer and more radical investments that were, eventually, no longer guaranteed by a product. 

When radical technological shifts occur, it becomes necessary for there to be a period of economic adjustment.  Many are comparing our present economic situation with the start of the Great Depression .  It feels that way, but it is not.  There has not been the multitude of technological shifts to impact our society in the same fashion.  However, let us not underestimate the dramatic change that has happened.

Let us look to 1975. 1975 is 30 years after the introduction of ENIAC:  The Electronic Numerator, Integrator And Calculator. I have heard the acronym is actually “computer” and not “calculator”, but when I was studying mainframe programming, the term “calculator” was applied.

From 1975 to 1985 we witnessed a ten-year period of gestation during which the microcomputer was slowly introduced to the market for office-based and home-based platforms that were mildly functional and even entertaining.

By the time the mid-1980's was in view, the microcomputer was in nearly every US school, and it was present in many homes. It was only one year later, in 1986, domain name registrations started happening among the larger companies.

The technological shift that has been imbued by the now-ubiquitous computer has been revolutionary. It required new hardware manufacturers to emerge to create the electronic components of the growing computer market. There was the need for new types of cellophane to contain protect the sensitive electronic components from static discharges. There was the need for new manufacturing for monitors, keyboards, mice, cords, cameras, metal chips and silicon chips, modems, and much more.

Once again, as in the early 20th Century, a dramatic shift in the allocation of financial resources to a new type of capital had begun. Labor was reassigned, once again, to handle the new manufacturing and the support industries that grew with the computer age.

Ten years after the computer had become a legitimate consumer commodity, the incipient Internet explosion was underway. Computers were not just an accounting or typing tool, now they were becoming exchange systems across a vast network that, requiring capital to continue to develop, encouraged investment by selling advertising space.

Here is the problem: There was plenty of land, but no product was being developed. Monetization works as far as it goes for generating short-term revenues, but the long-term promise is not genuine; it cannot be real so long as there is not a more solid capital foundation. So domains had become financial instruments with little in the way of vertebrae of land, labor and capital.

In 2001, much as in 1929, the overvalued sites and advertising space began to vaporize. Money that had been poorly invested – investments that were presumed to enhance the value of real capital - was lost permanently. The period of adjustment took about three to four years, but new investments came from still newer sources and, in 2005, the domain industry was broiling with an influx of investment and the exchange of still newer money.

In the meantime, the broader economy was suffering the same fate the Internet had already endured, a fate the Internet was about to repeat. This curious phenomenon is known as monetization without real capitalization. Without genuine capital, there can be no permanent value. Money that is generated has no value when there is nothing to back the note.

Fiduciary instruments being proffered to the world had little capital, land and labor behind them. So the artificial monetary value that was being written on paper, online and in the broader economy, was growing. But there was no real value behind it. The process is akin to printing bank notes without the gold to support the value of the note. Gold, being a capital item, is a product of land and labor. More notes against the same piece of gold drives down the real value of the note.

Eventually, the consumer was running out of available credit to purchase the products produced by the land and labor. The same amount of capital could no longer sustain the inflated monetization, be that in the real estate market or in domains. All three elements of a sound economy were beginning to separate. Instead of the symbiosis of land, labor and capital, there was capital or land or labor. They must work together for there to be a growth of value.

The synthetic increase in the value of capital, which required greater and greater financial outlays, eventually absorbed the inflow of money and vaporized it. The dollar began to decline, and the domain industry, which was again suffering under the lash of valueless capital – such as PPC – would soon follow.

In 2007, at the T.R.A.F.F.I.C. East show, Mr. Steve Forbes predicted there would be another blood bath to come. He promulgated that if the Federal Reserve did not tighten monetary policy, capital would continue to flow in an artificially enhanced stream of valueless money. This would lead to another collapse, he said, within a year.

Well, the Federal Reserve loosened monetary policy, and almost exactly one year later, as though Mr. Forbes had set an economic alarm clock, the next calamitous vaporization of money happened. The naked value of capital was exposed. It was far less than the notes guaranteed it to be.

Technological shifts will always lead to a fundamental change in the way land, labor and capital are applied. What will not change is the interaction between land, labor and capital. The instruments of investment may change, but the value of the money supporting it must be real. It does not matter that capital is a piece of property, which property requires labor to mine silver or grow lettuce. It does not matter that capital is a piece of online real estate that can produce quality traffic that purchases real products and services, thus mining the consumer market appropriately.

What matters is remembering the fundamentals of theory in a consumer-based and capitalist economy; and those fundamentals will never change, regardless of how the technologies evolve.