Clash of Old, New Economies May Have No Winners.

DESPITE the Nasdaq's selloff last week, it's still dramatically outpacing the Dow Jones Industrial Average, which has plummeted 15 percent since reaching its record high on Jan. 14. This new trend in the U.S. stock market is even more unsettling than the indiscriminate bull market of the past nine-plus years.

The sort of big established companies with lots of profits that make up the Dow find themselves lunging toward a bear market, while the newer, smaller companies that make up the Nasdaq are still seeing their stock prices rally, no matter how much money they lose. This is exactly the opposite of the way a stock. market is meant to function. So why is it functioning this way?

One explanation, widely offered, is that the markets have finally wised up to the fact that the Old Economy and New Economy are no longer uneasy partners, but enemies, in the miraculous U.S. economic expansion.

Moreover, investors are now treating the struggle between Old Economy and New Economy companies more and more as a zero sum game. By their handling of capital they seem to be saying, more or less, that a dollar increase in the expected future profitability of a New Economy enterprise implies a dollar decrease in the future profitability of an Old Economy business. Good news for Amazon.com Inc. and eBay Inc. is bad news for Wal-Mart Stores Inc. and Sotheby's Holdings Inc.

Goodbye, profits

That is, the markets have finally bought the argument that Silicon Valley futurologists have been making for the past six years: Bricks-and-mortar businesses will not be forced to co-exist with their Internet cousins but will be devoured by them.

This new way of thinking about the Internet revolution may not be entirely insane. Old bricks-and-mortar businesses obviously find their profit margins reduced by Internet competitors, and therefore should be less able to attract capital.

But the new way of thinking isn't entirely sane either. The reduction in Old Economy profits does not imply anything about New Economy profits. It is not merely the profits of Old Economy firms that are threatened by the Internet. It is corporate profits, period.

This is especially true of the New Economy firms with the best-known brand names, those involved in e-commerce. Take Amazon.com. The company behaves more like a charity than a business, selling books at, or below, cost. (There has never been a better time to be a best-selling author.)

Amazon.com's astonishing stock market success -- its shares are up about 3,800 percent since going public in May 1997 -- is premised on the belief that after some indefinite period, the dust will settle on the Internet boom, and Amazon.com will be among the few companies left standing. Then, presumably, it will cease to sell New York Times bestsellers at cost.

But the success of Amazon.com is itself evidence against its core beliefs about the way its business will one day work. After all, customers previously believed loyal to independent bookstores and to Barnes & Noble Inc. were happy to drop their old-fashioned merchants once Amazon.com offered them an easier, cheaper way to buy books. And you'd expect an e-customer to be even less loyal than a bricks-and-mortar customer, as it is so easy for the Internet buyer to shop around.

And why should the newly acclimated mass of e-customers have anything like the inertia of bricks-and-mortar customers? Amazon.com has taught them to be disloyal shoppers.

Better mousetraps

Given this, and the absence of any of the old-fashioned barriers to entry for would-be competitors, it will be impossible for Amazon.com to price much profit into its products. The same argument can be made for virtually every e-merchant. And if the merchants cannot find profits, the businesses that serve the merchants won't either.

Today the stock markets are saying that the New Economy will spawn new businesses that are not less but more profitable than the Old Economy ones they replace. It's hard to say why New Economy investors believe this. Perhaps they are -- as University of Michigan psychiatrist Randolph M. Nesse has proposed --heavier-than-average users of anti-depressant drugs. Or perhaps they assume that any company that builds a better mousetrap, as Internet companies often do, must be paid well for it.

But there is a paradox at the heart of the Internet: It builds better mousetraps that don't pay very well. It increases efficiency at the same time it eliminates the possibility of profit. It has created a social and economic revolution on the scale of the Industrial Revolution, with no real economic justification.

Then again, perhaps investors don't believe anything at all about the New Economy. They just think other people do.

Michael Lewis, the author of "Liar's Poker" and "The New New Thing," is a columnist for Bloomberg News.