New Economy

views updated May 21 2018

NEW ECONOMY

As the U.S. economy surged into overdrive between the mid-1990s and early 2000s, delivering skyrocketing profit margins and profound technological development, economists, business leaders, policy makers, and everyday observers debated the idea of a New Economy. Were there characteristics about the new economic environment that set it apart qualitatively from historical economic conditions? Had there been a fundamental break from the periodic disjunctions and crises of yesteryear? Was the development of new technologies, particularly sophisticated information technology (IT) and telecommunications breakthroughs, responsible for generating unprecedented—and, perhaps, unending—economic growth and prosperity? These and other questions generated fierce debate and passions, producing New Economy devotees and skeptics alike.

Some analysts warmly and enthusiastically embraced the idea of a New Economy, encouraging others to shed their antiquated Old Economy ways and adapt to the exciting and inevitable future. At the other extreme, critics scoffed at any thought of a New Economy and insisted that the engines driving the supposed new era were irrational exuberance over much-hyped new technologies, fueled by a strong up-swing in the business cycle and an extended bull market. Particularly following the tech-market bust in the early 2000s, sober analysts tended to situate themselves somewhere between the two extremes, holding that technological innovations had indeed produced substantial alterations in the productive engines of the U.S. economy, but eschewing the idea that traditional economic laws had been forever suspended.

DEFINING THE NEW ECONOMY

The concept of a New Economy wasn't born with the dot-com craze or the 1990s economic boom. The idea surfaced years earlier, particularly in the early 1980s when sophisticated computers began to effect sweeping changes both in the factory, where computer automation overhauled production processes, and in consumer markets, with households rapidly purchasing personal computers for their homes.

Pinpointing a clear definition of the New Economy was difficult, as so many commentators weighed in with various and often-contradictory definitions. For example, some viewed the entire economic spectrum as wholly transformed, while others conceived of the New Economy as a sector that coexisted with other, traditional economic sectors. Still others simply viewed the New Economy as a set of practices and approaches to doing business that was fundamentally distinguished from those of the Old Economy.

Loosely, however, the business sectors that the New Economy claims as its base include high-technology equipment and consumer products, e-commerce in all its forms, innovative IT-led financial services, high-tech telecommunications, and other IT goods and services. What follows are some general characteristics proposed by enthusiasts of the New Economy.

RADICALLY ALTERED BUSINESS ENVIRONMENT.

New Economy proponents energetically proclaimed that computer automation, the Internet, high-speed telecommunications, and IT were creating an economic revolution on a scale similar to those wrought in previous eras by the introduction of electricity or the automobile. In other words, the New Economy was placed on a scale with the Industrial Revolution, creating an Information Revolution in terms of acting as a historical marker or turning point. These structural changes were wrought by the implementation of technological innovations into the structure of economic production, particularly in the 1980s and 1990s, bringing greater means of precise control over production and exchange. For example, the movement of exchange and payment systems into electronic format and the attendant speed and efficiency of processing and recording transactions overhauled traditional practices and assumptions of economic exchange.

Other factors complementing the dramatically fortified technological infrastructure included the forces of economic globalization and the more or less worldwide trend toward deregulation of markets, allowing businesses and capital greater mobility to seek out the most cost-effective and profitable methods of conducting business and forcing local business and labor markets to compete with each other for investment. The end results included sharply lowered prices, particularly for high-technology goods for both the business and consumer markets.

THE BUSINESS CYCLE.

One of the boldest, albeit widespread, claims about the New Economy was that it had propelled capitalism past the era of the business cycle, in which periods of economic growth were punctuated by periodic recessions, during which time the excesses of the expansion period were weeded out and conditions were prepared for renewed growth. Most economic theory, and history, holds that this cycle takes place within the space of a decade. According to many commentators, the New Economy was immune from this cycle, which frequently produced political and social upheaval and occasionally severe economic depressions such as that suffered by much of the industrialized world in the 1930s. The unprecedented 10-year uninterrupted U.S. economic expansion between 1991 and 2001 gave considerable fuel to such New Economy arguments, and the acceleration of investment and profit levels following the explosion of the Internet in the mid-1990s greatly boosted their confidence.

ECONOMIC SAFEGUARDS VIA TECHNOLOGICAL DEVELOPMENT.

The sheer pace of IT development and evolution was another defining characteristic of the New Economy, producing hyperspeed innovation that fed on itself, bleeding into adjacent industries for a snowball effect on technological efficiency. This high-speed development carried an additional benefit, according to many New Economy enthusiasts. Because information technology developed so quickly, the latest, most cutting-edge technology, while immediately necessary in order to keep up with competitors, would be obsolete within a few years, requiring a new round of investment in order to remain competitive. In this way, according to such analysts, the IT sector of the economy could weather any slowdown elsewhere in the economy, and keep new money pouring in, because of the inherent nature of the business.

COMPANY VALUATION AND BUSINESS PRACTICES.

Another feature of the New Economy, and one that may largely have fueled its attendant outstanding growth, was the notion that old methods of valuating company stocks—such as seeking out sound fundamentals, profits, and long-term growth strategies—no longer applied. By the late 1990s, cartloads of dotcom start-ups defied all market logic by generating fantastic share prices without ever having made a profit, and with little evidence that they would one day be in the black. Nonetheless, companies such as Yahoo!, which sober-minded analysts in 1997 swore was grossly overvalued, saw their stocks continue to run up through the rest of the decade; investors who had listened to those analysts and pulled out of Yahoo! stocks would have missed extraordinary returns on their investments. As a result, such traditional analysts and companies, and their valuation logic, were increasingly derided as outdated and "Old Economy."

ECONOMIC GROWTH.

At the heart of the New Economy claims, however, was the enhanced rate of productivity growth that its enthusiasts insisted was a feature of the IT-driven economy. Fueled by information technology throughout their productive and managerial systems, companies were able to lead the United States to economic expansion while keeping inflation in check, generate tremendous profits for continued investment, and boost the gross domestic product and create a budget surplus for the first time in decades. This feature of the New Economy was hotly debated within the economics profession, however, with divergent researchers disagreeing on how much of the growth in productivity could be directly attributed to IT development and how much was simply an intrinsic component of the upswing in the business cycle.

Historical comparisons floated many proponents' claims. The 1950s and 1960s were characterized by staggering annual productivity growth rates of about 3 percent, fueled by a combination of factors: pent-up demand stemming from the war and depression years, the integration of military-based technological developments into the commercial sector, and boosted trade and production from the Marshall Plan's U.S.-based reconstruction of the war-torn industrial economies. By comparison, the 1970s and, to a lesser extent, the 1980s were a disappointment, with annual productivity growth averaging between 1 and 2 percent. The unique post-war circumstances had by that time played themselves out, while new challenges, such as skyrocketing energy prices, took their toll, leading many economists to suspect that the 2-percent annual growth rate was just about as much as a highly developed country could hope for. When annual growth rates leaped to the 3-percent mark again in the late 1990s, however, economists tried to explain the phenomena; one such explanation was rooted in the concept of the New Economy.

History seemed to vindicate New Economy proponents in another economic category as well. While the 1950s and 1960s are often called the Golden Years of capitalism because of the fantastic rate of growth, the period was also characterized by steady inflation. The annual growth rate long considered by economists to be the limit for containing runaway inflation was about 2 and one-half percent. Yet between 1995 and 2000, the U.S. economy grew at an annual average of about 3 percent with little inflation to show for it, while simultaneously keeping unemployment levels remarkably low. As a result, as the 20th century drew to a close, New Economy theorization and commentary gradually won over skeptics and assumed prominence, if not hegemony, in economic and popular literature.

SKEPTICS ABOUND

While the booming economy proceeded and commentators routinely chalked it up to the breakthroughs in technological development, there did exist the many, though much quieter, killjoys who insisted that the boom, as large and prolonged as it was, represented nothing evidently new as much as it represented a traditional stock-market bubble, a run-up of investment fueled by unsound predictions of lucrative returns and can't-miss myths that would, eventually, crash on itself. For instance, e-commerce itself, despite its tremendous publicity, was a very small factor in the surge in productivity and economic growth in the late 1990s. Both business-to-consumer and business-to-business e-commerce sales in 2000 accounted for only about one percent of total U.S. sales in those categories.

The first empirical challenges to the New Economy thesis came with the tech-market bust of spring 2000. Through the rest of the year, tech stocks sank. In late 2000 and 2001, moreover, the economy was certainly slowing, and analysts debated whether the United States was heading for recession. The Nasdaq high-tech stock market index, the benchmark of the New Economy, plunged through much of 2000 and early 2001, most glaringly in the realm of dot-com start-ups, and profits of Internet giants, such as Cisco, fell off dramatically. The rose-colored predictions by equity analysts in late 2000 of sustained long-term profits growth of 19 percent, according to The Economist, just months later sounded like wishful fantasies. By 2001, with the U.S. economy slowing and unemployment on the rise, the idea of a New Economy immune from the capitalist business cycle was transformed into a laughable notion that few were willing to admit to having entertained. When the technology markets began to retrench in 2000, major IT firms, such as Cisco, Sun, and Nortel, long remained certain that they could soundly weather the storm without any substantial decline in earnings. In the end, however, such companies ended up lowering earnings projections, stinging many New Economy faithful into accepting that one of their cherished assumptions was unsound.

While dot-coms and other Internet companies rejoiced in what they saw as the New Economy's abandonment of economic laws, many acted as though the Internet Age brought the suspension of labor laws as well. While a tight labor market and a seemingly endless supply of venture capital turned many hotshot dot-coms into attractive places to work, once the financial bottom fell out of the market and these firms scrambled for cover or closed their doors, many neglected to adequately honor their employee agreements, resulting in drastically thickened caseloads for employment-law firms across the country, particularly in New Economy hotbeds like California. Failure to adequately warn employees of, or compensate them for, mass layoffs was the most common blanket claim against such firms, encompassing negligence on agreements, loosely worded contracts, and even misuse of 401(k) withholdings. As companies surged ahead to take advantage of the hot dot-com economy, according to Business Week, many left clear human-resources policies and contract language on the back burner. When stock options, health benefits, and even back pay were increasingly pulled out from under employees as the Internet economy cooled, employees turned to litigation.

Another claim of the New Economy enthusiasts also suffered from embarrassing realities in the early 2000s. According to The Economist, IT-based inventory control systems and the widespread adoption of just-in-time inventory techniques were supposed to ensure that production across companies' diverse operations, even across international borders, would be so systematically and expertly controlled that large inventories would never be permitted to swell up due to excess production relative to sales figures and projections, thus avoiding the massive inventory stockpiling that helped generate earlier recessions. The evidence across many IT-saturated industries by 2001, however, suggested otherwise, with companies that implemented the latest cutting-edge software forced to scale back workforces due to excessive production.

In the end, the Internet blitz followed the pattern of other major technological innovations, such as railroads and electricity, before investors, awed by the new technology and its potential, poured money into the industry and sent stock prices soaring, only to watch the market plunge as economic reality began to catch up. Between spring 2000 and 2001, according to Laura D'Andrea Tyson, dean of the Haas School of Business at the University of California at Berkeley and writing in Business Week, more than half of the previous five years' astonishing gains in the high-tech sector were obliterated by the stock-market plunge, resulting in an unprecedented cycle of wealth creation and destruction.

WHICH WAY FOR THE NEW ECONOMY?

While the end of the business cycle, the discarding of old valuation methods, dot-com mania, or profoundly altered economic laws may be consigned to relics of 1990s over-excitement, many analysts still insist that, minus these extravagances, there's still much to be said for the New Economy, and that it isn't going away. Generally, these analyses focus on the transformative power of information technology and the Internet, which have yielded, and will continue to yield, greatly enhanced productivity and efficiency to businesses across many sectors of the economy, particularly, of course, in high technology but in Old Economy sectors as well.

Meanwhile, brick-and-mortar firms were hardly retreating from the Internet in the wake of the dotcom bust. Rather, established firms were busy sifting through the wreckage of the Internet shakeout, swallowing up Internet-based firms in order to take advantage of their diversified leverage to make a quick inroad into the Internet market. While overall corporate IT investment retrenched substantially in the early 2000s as the U.S. economy (contrary to the expectations of many New Economy promoters) backtracked, the continuation of e-commerce was assured, albeit at a more measured pace of evolution.

The New Economy, at least its tremendous growth in IT investment, may be hard to revive even after the early 2000s slowdown irons itself out, in large part because the quadrupling IT investment of the late 1990s is extremely unlikely to repeat itself, although investment in such technology is expected to pick up again. In order to reignite the kind of growth about which economists, investors, and business leaders were so excited, it will be necessary for the New Economy to shift its main engines of growth away from the boom in IT investment, perhaps towards a greater surge in e-commerce. The latter possibility was certainly in the cards, as Internet penetration increases, bandwidth improves, inter-business networks are implemented and the novelty of online shopping graduates into common practice.

While the New Economy's sputtering in the early 2000s certainly gave skeptics the long-awaited opportunity to say "I told you so," several key features of economic organization lingered. As Computer World explained, the economy of most of the 20th century was built on a particular mode of business organization—the vertically organized corporation—and a physical infrastructure of storefronts, roads, railroads, and power grids. With the advent of late-20th century IT, and particularly the Internet, the traditional business model was being supplanted by more diffusely organized entities connected over sophisticated electronic networks irrespective of geographical boundaries, while the Internet infrastructure allowed for tremendous access to comparative information, networking, and shopping without regard for geography. In the process, the New Economy created tremendous—and ultimately superior—methods of competition, cost reduction, and wealth creation. Moreover, the New Economy model, according to Don Tapscott in Computer World, wasn't limited to high-tech or Internet firms. Instead of the business sector a company worked in, it was the kind of business thinking and organization a company engineered for itself that determined whether it was New Economy or Old Economy.

New Economy

views updated May 21 2018

New Economy

New economy is a term often used in the media to describe changes that have taken place in business since the widespread adoption of the Internet. The term has been applied to a wide range of situations and issues, most notably the rise and fall of high-tech and Internet startup companies. During the 1990s, as the United States experienced a long economic expansion and the stock market soared, many people started to think that basic economic principles no longer applied.

The basic idea behind the new economy was that computer and Internet technology had fundamentally changed the ways of doing business. Analysts and investors alike focused on technology adoption and stock price valuation rather than revenues and long-term business plans when evaluating companies. As a result, high-tech startup firms staged public stock offerings before they had turned a profit and still attracted huge numbers of eager investors. Employees gave up the stability of traditional firms to work long hours at dot-coms in hopes of achieving a windfall in stock options. The workplace at high-flying tech-companies evolved to include rooms full of toys and games to encourage employee creativity.

According to an article in Business Week, people made several assumptions about the new economy that ultimately proved to be false. First, they assumed that information technology was so important to business productivity that companies would always buy new systems and software, even in bad times. This belief caused big computer firms to give inflated earnings estimates which, when they were not met, contributed to the fall of the tech-heavy Nasdaq in 2000, signaling the dot-com bust. A popular assumption widespread in the 1990s was that economic growth had become so stable that investors would no longer require a risk premium for stocks over bonds. Some analysts predicted that stock market averages would continue to increase indefinitely. In actuality the tech driven expansion increased the risk and volatility of stocks.

Another assumption concerning the new economy was that companies would no longer lay off workers during downtimes because high-tech labor is so scarce. As a result, many people were lulled into believing that they had greater job security than they actually did. Employees gave up the stability of employment at traditional companies for the big signing bonuses and stock options offered at dot-coms. "It used to be that when you went to a startup, you were an individual with a very-high-risk tolerance and probably had an ideal you were trying to achieve," technology company president Christine Heckart told Paul Prince in Tele.com. "But a lot of people with very low risk tolerance left very good, secure jobs at the height of the frenzy to get rich quick in the world of startup-dom. And all of a sudden, before their dreams were achieved, the bubble burst."

When the Internet boom went bust and the U.S. economy slowed significantly in the early 2000s, many companies began laying off workers. As a result, employees began looking for jobs with more conservative companies once again. "Many [job seekers] are bent on finding a company with a future they can believe in, a dependable path to profitability, and a stable working environment where they won't be required to work around the clock for little more than stock options that may never pan out," Prince wrote. "Internet companies and technology startups in general must find a way to prove their stability and financial viability while giving employees some of what they gained in the new-economy environment. That includes room for creativity, as well as a sense of passion and ownership."

Some experts, even in the roaring 90s, claimed that the new economy was largely illusion. It was just the same old economy integrating technological breakthroughs. Supporters of the designation have been hanging in there, however. In an article for Computerworld, for instance, Don Tapscott argued that the Internet provides a new infrastructure that lowers transaction costs and encourages collaboration among firms. He said that it creates a new platform for strategic ventures. "Some claim that there isn't a New Economy. E-business and the Internet are a bust, and it's time to go back to tried-and-true principles that have guided commerce and investing for decades, if not centuries," Tapscott wrote. "But heeding such advice would be a stunning mistake. There is a New Economy, with the Internet at its heart. Spurn this notion, and your company's failure is assured."

Tapscott wrote this before the terrorist attacks, of 9/11/2001, in a very real sense changed both the economic as well as the political atmospherics. The recession, already underway, took hold in earnest. Later, the economy began recovering in a unique way, labeled the "job-less recovery." The new economy appeared to have two faces, one radiating electronic light, the other one darkened by staggering trade and budget deficits, layoffs, sluggish job growth, ambiguous globalization, and the displacement of jobs overseas. In the new environment characteristics of the mid-2000s, a reassessment was underway. Surviving dot-coms had consolidated their positions and e-trade was growing at a brisk pace. At the same time economic insecurity was wide spread. Some analysts were looking toward the "next economy" or focusing on the core of the last one: innovation. Whether or not the term will survive another decade remains to be seen.

see also Dot-Coms

BIBLIOGRAPHY

Atkinson, Robert D. "Is the Next Economy Taking Shape? The United States needs to be preparing now for what it will do when the computer-driven new economy loses momentum." Issues in Science and Technology. Winter 2006.

Boatwright, Peter, Jonathan Cagan, and Craig M. Vogel. "Innovate or Else: The new imperative." Ivey Business Journal Online. January-February 2006.

Brock, Terry. "Old Principles, New Ideas Work in New Economy." Atlanta Business Chronicle. 3 November 2000.

Lofgren, Ovar, and Robert Willim, eds. Magic, Culture and the New Economy. Berg Publishers, 2005.

"The New Economy's New Reality." Business Week. 12 March 2001.

Paganetto, Luigi., ed. Finance Markets, the New Economy and Growth. Ashgate Publishing Co., 2005.

Prince, Paul. "Conventional Wisdom: Scarred by Dot-Bombs, Employees Are Fleeing New-Economy Flair for Traditional Nine-to-Fives." Tele.com . 16 April 2001.

Tapscott, Don. "Don't Doubt the Future of the New Economy." Computerworld. 19 February 2001.

Hillstrom, Northern Lights