(FORTUNE Magazine) – Remember the book Dow 36,000, the one that argued that stocks were still wildly undervalued? Go on, admit it: You were intrigued. If you didn't buy a copy, chances are you flipped through the pages. The book, published in late 1999, scarily close to what turned out to be the market's peak, was just one of many superbullish theories on the economy and its mind-numbing potential. And though few of us bought the arguments wholesale, many wondered if they could afford to ignore them. At the time, it seemed like everything in the economy had changed. Traditional principles of profit and loss were diminished, even ridiculed. We focused instead on the promise of new technologies--the Internet, wireless communications, nanotechnology, whatever. Millions of investors bid against one another for a chance to own their little piece of the future.

Alas, it turns out that the world hadn't changed so much after all. Some of the highest-flying companies have become modern-day Icaruses, and the miracle economy looks less miraculous by the day. Now some fear that we're on the precipice of a really nasty recession. So far--knock on wood--the worst hasn't happened. But we're still getting mixed signals from the economy. On the one hand, housing is strong, new jobless claims have fallen sharply, and inflation remains tame. On the other, factory output is contracting, companies have cut back on spending, and gas prices are surging. Some think a recovery has already begun; others see signs of further collapse. It seems people have reverted to their underlying personalities as they look ahead to the second half of the year and beyond--for some the glass is half empty, for others half full.

It's not easy to cut through all the noise and confusion to get a fix on this new, post-bubble era we've entered. So FORTUNE asked some of our leading economic thinkers to do the work for us.

Robert Shiller Professor of economics, Yale University

When Alan Greenspan first used the term "irrational exuberance" in 1996, he was referring to a briefing he had received from Yale's Shiller. Shiller at the time was concerned that the market was overvalued and headed for a nasty fall. During the ensuing years, as the market went up and up, Shiller stuck to his guns and became the subject of good-natured merriment on Wall Street. Now, after one of the most significant market corrections in modern times, his steady judgment is no longer the subject of humor and is winning newfound respect. Here are his thoughts on the post-bubble economy.

There's been nothing quite as dramatic as what we've just lived through, perhaps with the exception of 1929. When I bring that up people say I'm a doomsayer. But I don't think the aftermath of this bubble will be as severe as the aftermath of 1929. It will be more like the late '60s.

After a long period of denial, we're waking up to the bubble. But there's still more waking up to do. I hope I'm wrong, but I think the market is still on the way down. You can see it in the rally of the past few weeks. There's a sense that we're back on track, and people don't want to be left out of the next big market move. Assuming that this rally also fizzles--and I think it will--and then the next rally fizzles, again and again, disappointment will set in.

I think people will eventually come around to the view that new technology is absolutely wonderful, but it's not making me money in the stock market. Look at the auto industry. When autos became widely accepted, there was a huge boom in the stock market and then a shakeout. Many years later we have giant automakers and they're producing lots of cars, but the companies themselves aren't that highly valued. There's a lot of competition, and they aren't making huge profits. That's what's likely to happen to tech companies. Competition will mean they're going to have trouble making big profits.

Of course technology is extremely exciting. It always has been. The technology that has been developed, particularly with the Internet, is very transformative. As we go on, there will be new, exciting things, but the stock market won't capture all the value created. So I don't think we'll go back to where we were in the market for a long time. The Nasdaq is going to disappoint, and it may not be back over 5000 for another 20 or 30 years.

It reminds me of the movie 2001: A Space Odyssey and the whole era when that came out. If you look at that movie, released in 1968, everyone really exaggerated the rate of technological progress. The opening scene was a big space station where people were walking around, and it looked like a giant city. For me it's symbolic. In the late '60s people had an exaggerated impression of space. They talked a lot about how space technology was going to drive everything. Some even dreamed about building trains that would run on the moon. It was a national obsession.

Our awakening to the realities of technology doesn't just apply to the Nasdaq, though. I think the broad market could move sideways for ten or even 20 years. Maybe by the year 2020 the Dow could still trade at 10,000. I'm not forecasting that--who can afford to?--but historically it's a plausible value for the Dow. People haven't really studied the data and don't appreciate that that kind of thing can happen when stocks are extremely highly valued.

We're in for a sober period, a more chastened and humble era. People have been saying, "Everyone owns stock, so they're all thinking like stockholders." But when a person looks at his portfolio and says, "Well, I've only got $20,000 worth of stock," he'll see that's not going to make him rich. Then people will focus on what's truly important to their future, their lifetime earnings. And maybe they'll think, "I ought to join a union to protect that." I can see that dawning on people. And in this new realism, we may see the birth of a new labor movement.

We focus so much on the market, it's like a game, perhaps the national pastime. On the way up it's a lot of fun to pay attention to a rising market. But in a sour market, the continual exposure to it may have a perverse effect on demand for stocks. People will be pained by the depressing news. They may decide they'd rather sit out and watch.

It's already happening, at least with the Nasdaq. So I think there will be a whole new story that captures our attention. We're going to see alternative kinds of investment vehicles made possible in part by the Internet and computer technology. We may see Websites selling all sorts of hedging and risk-management vehicles. Twenty years from now, we'll have forgotten all about the Dow. It'll be at 10,000, but nobody will care, because there will be other kinds of things to invest in.

Chris Zook Director of Bain & Co. and head of its Worldwide Strategy Practice

It's hard to find a company or CEO that hasn't crossed paths with Zook. Head of Bain & Co.'s worldwide strategy practice, Zook has spent his career advising firms on how to develop their strategic plans. Zook's recently published book, Profit From the Core--Growth Strategy in an Era of Turbulence, takes on the problem of setting corporate direction in an era of many competing opportunities and demands.

We've just experienced an era of massive, rapid growth where business seemed easy. During the next few years we're going to witness a "perfect storm" brewing for many companies as three dangerous forces collide: high growth expectations with companies facing a slowdown, severe penalties for shortfall as boards dump experienced CEOs and shareholders dump stocks at record rates, and profits that are harder to come by. I see the game getting rougher for firms just as the goal posts are being moved back, and the penalty for missing a goal will be more severe than ever.

So many companies have overreached for growth--Lucent, Gillette, Amazon, Priceline--the list goes on. They've grown too quickly, overextended themselves, and lost profitability. Since 85% of companies are still forecasting earnings and revenues at levels that only l0% have achieved historically, we can expect more and more shortfalls. And that will create a lot of corporate identity crises.

Companies have to return to their core and ask the hard questions about their distinct strengths like never before. It's a time for focus and specialization. And we'll see an era in which companies profit from their core. Boards and shareholders will be more discerning, questioning departures from that strategy with a new skepticism. Focused, dominant companies that grow their core methodically and fast will be valued more than ever.

Compare Dell and Compaq, for instance. Just weeks ago Dell became the No. 1 PC company in the world, overtaking Compaq and showing an accelerated rate of market-share gain in its core products. Dell has focused relentlessly on productivity growth in its PC business, driving inventory down to just a couple of days while Compaq is up closer to 60 days. By doing that, Dell has raised its return on capital to huge levels that Compaq can't begin to match. Over the past ten years Dell has earned a cumulative profit of $7.3 billion, while Compaq has lost $1.8 billion. This has fueled a reinvestment gap between the two that is widening over time.

Yet as this was going on, rather than repair its core, Compaq chose to invest far from it. Compaq purchased the enormous service business from Digital, bought Tandem Computers, and even made a $100 million investment in biotechnology last October. By contrast, Dell has avoided major acquisitions, choosing to focus on acquiring customers one at a time and improving its cost position. Dell knows who it is and what its core is, while Compaq has gone through a series of midlife crises, trying to discern what it wants to be and losing precious time with each new identity crisis.

So how can firms avoid a midlife crisis today? First, go back and rigorously identify your core business. Ask what is your strength and what areas you have to be in to defend your core. Before undertaking any new growth initiatives, management has to decide whether they've fully mined growth potential from their core business. And if the answer is yes, the core has been fully exploited, they better take another look.

Firms have to take an inventory of growth prospects around their core and ask, Does this initiative strengthen my core? Am I going to win? Will this project use the company's strengths--the existing customer base, personal relationships, knowledge, and facilities? Finally, will this initiative bring attractive, sustainable profits? That's the recipe for success in this era. It's hard, and it takes discipline.

Hal Varian Dean of the School of Information Management and Systems and professor of economics, University of California at Berkeley

When Varian's book Information Rules came out in 1998 the new economy seemed to be changing all the rules. Varian reminded us that technology changes but basic economics does not. He encouraged firms to adopt new technology but not to abandon the basic rules of business surrounding investment and profitability.

The way I look at it, the tech industry experienced three positive demand shocks: telecom deregulation in 1996, the ephemeral Y2K in 1998-99, and Internet mania into the year 2000. We had these positive shock waves hitting one after the other and overlapping, all during a big investment boom. As the shock waves faded, supply was far ahead of demand, and companies are now trying to absorb the investments they made and figure out ways to create efficiencies. I think we'll see a slow period in IT investment for awhile. And when it recovers, IT investment will grow at a more reasonable 8% or 10%, not the 30% rates we saw in the late '90s.

Investing in IT is different from investing in a lot of other capital goods. I like to call it the fungibility characteristic of IT. With most capital it's only good for one thing, and if that market doesn't materialize, you're stuck. But look at things like disk farms, fiber optics, or generic PCs. That equipment is easily redeployed. You may set up a big database to trade MP3 files on the Web, and if that market doesn't materialize, you can redeploy it to storing supermarket scanner data. From the viewpoint of the economy, it's not a lost investment.

The main question is where are we in terms of integrating this technology into our economy. Are we 90% along, 50%, 10%? If you want my opinion, I'd say we're only 15% of the way. There are a lot of benefits yet to come. We've seen things happening in some industries, and as others imitate, we'll get more benefits.

Look at how slowly electricity impacted the economy. Paul David at Stanford examined the productivity effects of electricity and found that, while electricity was widely deployed in 1890, the effects didn't show up in any meaningful way until the 1920s. That's because the original model was to take a big factory and put a giant electrical motor at one end and drive all the equipment off of one shaft running down the center of the building. But with miniaturized motors you could change the flow of production and had much more flexibility. It took a long time to discover that. If you look today at supply-chain management, intranets, and other tools we have in place, it will take a long time to change business processes to take advantage of all those technologies. And there are plenty of companies that have barely begun that transition.

What's happened is that companies have got to the first stage. They've bought these big data-storage systems from DMC, Sun, and IBM, and they're storing data. But the task of really understanding and analyzing that data proceeds much more slowly. Take something that's been done for a while, like supermarket scanner data. That's had a big impact on inventory management, product placement, marketing expenses, and as a result, supermarkets have enjoyed considerable cost savings. We don't think of it as a sexy idea application. But it's in that kind of system--that can track transactions, analyze them, and improve them--where the potential lies.

I've been working on history lately, and one of the most interesting things to me has been the development of standardized parts in the U.S. You know, that took 130 years. A lot was purely mechanical difficulties to get the technology right, but then there were huge social and organizational problems. When the U.S. went to standardized gauge for railroad tracks, for instance, there were riots, because workers who transferred goods between different-gauge trains were going to be thrown out of their jobs. Today the airlines are an example of the same thing. They're all working on standardized e-ticketing. But travel agents are resisting, because they'll lose business.

We've entered a period of experimentation and refining. I think we'll see a fair amount of tinkering with business processes to get them working more smoothly, and that's going to be a slow, steady process. We're past the era of the category killer. Now we're in an era of relentless improvement, where a lot of small things will accumulate to be tremendously significant.

So you have to look beyond the current fluctuations to recognize that technology is going to keep getting cheaper, more powerful, and will be more widely used. The challenge will be to find all the little places where the use of IT will really pay off.

Michael Porter Professor, Harvard Business School

Porter is a busy man these days. During the heady days of the new economy some felt he was out of favor, as he remained a skeptic. New-economy consultants dubbed him a corporate-strategy "sourpuss." Yet today his views are more sought after than ever.

Believe it or not, the news is good on the U.S. economy. Just because there was an Internet bubble doesn't mean there will be an end to investment in the American economy, or throughout the rest of the world. For example, information technology spending as a percentage of the U.S. economy has been going up very steadily for 25 years and will continue to do so.

I'm not an expert on whether IT spending will recover in the third or fourth quarter, but I don't think we should feel like this is over. The best way to understand that is to recognize that the Internet era is not particularly new. It's the latest generation in the continual evolution of IT, an enduring long-term phenomenon that will go on for ten or 20 years at least. We're going through a classic cycle where people overdemanded, then overbuilt. Now they'll have to underbuy and underbuild until we get back to the trend line.

But you have to put that slowdown in context. The rest of our economic circumstances are very positive. Productivity growth has been remarkably strong. It seems to be widespread and better than many overseas economies. There's no other competitive power of any significance on the horizon. Even beyond the near future we're not threatened by Japan or by Germany. The U.S. remains a leader in all technologies that are dramatically impacting the world economy: health, bioscience, financial services, and IT.

What isn't yet recognized is that we're in a situation where, although unemployment will rise during this slowdown, the degree to which unemployment spikes up will be capped by very slow growth in the work force. On a net basis, there won't be appreciable numbers of new workers entering the force for a long time. That means most people of working age will have jobs, and tight labor conditions will put pressure on the corporate sector to look after employees. U.S. firms have a long history during ups and downs of hiring and firing, because there has always been a steady supply of labor. We're seeing a little of that behavior today, with companies announcing layoffs. But we'll gradually see a situation where companies have to hang on to their work force during cyclical downturns to capture growth later.

That bodes well for consumer spending and the whole process by which the skill level of our work force can improve. I think there's going to be a tendency for inequality to decrease as the skills ladder becomes easier to climb. Companies that are hiring will have to go the extra mile and find people who may not have the skills now but can develop them. This is a very important development for the cohesion of U.S. society.

My overall take on this bubble is that the U.S., unlike Japan, is an economy where adjustment processes occur very rapidly. The U.S. has already made adjustments. We've seen hundreds and hundreds of companies go bankrupt already since the peak of the Nasdaq. Contrast this with Japan. In Japan, companies don't go bankrupt, they get propped up. They don't lay off workers, and they don't move on. I think the U.S. is adjusting very rapidly, and that leads me to believe the recovery from this bubble will be short.

I'm quite optimistic about the robustness of our economy. I think we're relearning some fundamental truths. The most important is that the only thing that creates economic value is profitability. We experimented with all kinds of other thinking, and it's turned out to be wrong. It doesn't help that some firms also started fudging profitability, and that's being addressed. But in this post-bubble era, you're not going to see valuations move to the level they did in the late '90s. Valuations will be based on tougher measures of profitability. I think we have a stronger foundation for assessing value today.

Although most of the stock market fluctuation occurred only on paper, I saw the bubble era as tremendously bad for companies and their strategies. I think it led to mistake after mistake, and I see the burst bubble as a positive development--one that will keep us anchored in reality, focusing on basic principles of profit and cost efficiency, at least until next time, when a new generation forgets all this again.

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