Lewis and Clark did not become rich as a result of their exploration efforts. Neither did Carson, Bridger or Jed Smith. But the men who came later with the capital and the entrepreneurial know-how. . .the Vanderbilts, Stanfords, and Crockers. . .did.

There is a lesson from history here. Those who deride the enthusiasm for the Internet and the massive speculation of the last two years by investors in Internet startups as a misguided mania, a bubble of speculation, should pay attention to history.

The point is, it was not the original explorers who benefited the most from their efforts…rather it was the entrepreneurs and capital risk-takers who followed and who learned how to profit in the new lands. The same is unfolding in front of our eyes as the frontiers of technology are being explored.

The rapid adaptation of the Internet and related technology into our personal and business lives is making us a more productive society. Increased productivity plays a huge role in shaping our economic lives.

All eyes will be on the Federal Reserve Board when it meets to consider its next move on the interest rate checkerboard. If the Fed senses a return of inflationary pressures, they have the option of raising interest rates. An increase in interest rates acts as a brake on the economy…and puts a damper on the stock market.

Central to their consideration will be wage growth. Traditional demand-side economic reasoning holds that wage growth signals an increase in inflation as businesses are forced to raise prices to maintain profit margins.

However, if wages grow and the growth is offset by comparable gains in productivity, businesses can maintain profit margins without raising prices. Despite pervasive and highly publicized labor shortages and historically tight labor markets throughout the nation, wage growth, while steady, is not accelerating overall. Moreover, robust and accelerating productivity is neutralizing the impact of higher worker compensation on employer costs. Most recent evidence on wages and productivity should provide sufficient assurance for the Federal Reserve Board that the tight labor market will not be the source of inflationary pressure.

One principal reason real wage growth is remaining tame is that employers are not willing to offer higher wages to attract workers and are instead investing more in labor saving methods and equipment. It is precisely the strong gains of business investment-especially hi-tech investment, which is contributing over 80% to the growth of gross domestic investment-that is driving the productivity surge.

The older, demand focused, school of economic thought is having a hard time adjusting to the fact that an economy can grow faster than historical averages, and do so with full employment and rising wages…without the scourge of inflation.

Real business people understand the positive impact of technology on business and the economy. They share the same fear as the stock market that the Fed's mistaken efforts to depress the economy will also depress worker productivity.

If the Fed continues to do battle with non-existent inflation by stomping on economic growth, what they are really doing is knocking down the productivity boom that has been central to this prosperity. Investment-creating productivity, however, is a supply-side function that is mainly ignored by policymakers. Should productivity weaken, companies will not be able to absorb the very pay hikes they have recently handed out. Hence profits will fall, or at least slow.

That is not the case yet, because profits are rising. On an S&P 500 basis, business earnings are up more than 20%.

Keep your eye on the Internet and the new technology. The explorers who opened that new frontier may not be around, but their efforts will impact us all.

Contact Saperston Asset Management Inc. at: willard@saperston.com

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