Almost nobody will deny that the stock market developed a bubble in the last years of the 20th century. Consider famous episodes such as the market's inability to figure out that 3Com was the majority owner of Palm, the maker of handheld computers, the dizzying heights reached by the Nasdaq Composite index as it exploded in late 1999, more than doubling in value in the year up to its late-winter 2000 peak, and the huge bath taken by investors in the Nasdaq from February 2000 to September 2002 as the index lost three-quarters of its value. All this happened, even though the long-awaited recession proved shallower than anyone had forecast and trend productivity growth proved faster than even the most zealous boosters of the "new economy" had dared project. It is next to impossible to interpret these events within the context of a rational-expectations model, in which stock prices provide the best possible forecasts of future values. Only those who want their colleagues to doubt their own rationality even try.

The interesting thing about the late-1990s stock market bubble, however, is how short it was. Conventional histories start with the excitement produced by the initial public offering of Netscape, the internet company, in 1995. But the stock market was not then in a bubble. Those who invested in the Nasdaq in March 1995 and then shadowed the index have earned real returns averaging 9.3 per cent per year; those who invested in the Nasdaq in September 1995 - the month after Netscape's IPO - have earned 7.3 per cent annually since. Compare this with the average 8.8 per cent real return on the Nasdaq since the start of the 1970s, and it is clear there is no evidence that the Netscape-mad market of 1995 was significantly overvalued.