Intel Meets Alan Greenspan.

• Author: ZOAKOS, CRITON M.
• Position: Federal Reserve

Has the Federal Reserve grown too small for its britches?

In the first-century A.D., the prototypes of two different kinds of steam engines had been constructed in Ptolemaic Alexandria capable of converting steam pressure to kinetic energy. Despite these marvelous inventions, however, neither the Hellenistic empires nor the Roman Empire developed industries based on locomotives, steamboats, or steam turbines. Their metallurgy, precision measuring methods, and related technologies were adequate to the task, if we are to judge by their weapons. The two solitary prototypes of steam engines remained an idle curiosity for the entertainment of courtesans and priests.

In other words, no demand, "excess" or otherwise, existed for the technology of steam power because no entrepreneurial classes demanded it. The only effective demand in that economy was what courtesans and priests fancied for their personal edification, plus the minimal amounts of rye, leeks, and garlic needed to feed their peasants and their armies. The demand for these basic foodstuffs was never in "excess" but always in admirably perfect balance with the infinitely elastic supply of fixed-technology slave labor -- a central banker's dream situation.

What is the lesson for the Federal Reserve? If it wishes to eradicate the "imbalances" between supply and demand for new-technology goods and services, it must eradicate the entrepreneurial classes that are in the habit of running ahead of themselves in their mad dash to improve our lot with new technologies.

Put differently, growth of demand for semiconductors today is running at 40 percent for the next two years, and this is expected to double in the next three to four years. The entrepreneurial classes are clamoring for semiconductors, especially the kinds needed to operate optical fiber and wireless broadband. Compared to the potential supply of semiconductors, this is clearly an "imbalance." The Fed proposes to redress the imbalance by killing the demand of the entrepreneurial classes. The other option -- killing the entrepreneurial classes themselves -- was rendered unfeasible by political developments 300 years ago (whereupon the steam engine was, at long last, allowed to proceed). So, the Fed threatens to raise interest rates, and the equity markets reach for their smelling salts. Intel Corporation, however, begs to differ. It proposes to redress the imbalance by raising the potential supply of semiconductors. It plops down $2...