What Is the New Economy? A Framework for Understanding
Executive Summary
Politicians, journalists, social critics, and other observers
come to Silicon Valley these days in search of high technology
much as their predecessors came to Manchester in search of the
original industrial revolution or to Detroit to see the marvels
of mass production. Yet when they leave, do they understand the
nature and significance of the technological and economic transformation
through which we are living? Do they understand how much is at
stake in correctly managing the transition to the "new economy"?
Do they understand how easily the wrong policies and attitudes
could hobble the transformation and disrupt an historic opportunity?
By and large they do not. They leave with anecdotes and impressions,
but with no framework with which to make overall sense of the
anecdotes they have heard and the impressions they have received.
But they don't really understand what is going on. And so they
don't really understand what resources and what structures of
private and public governance are needed to nurture this transformation.
Change is already coming so rapidly that non-technologically-literate
politicians and their advisors trying to shape the future have
an almost impossible task, for how are they to understand the
choices they have and the opportunities available before it is
too late to make the right decisions?
Hence the need for an analytical framework: the need
that this document tries to fill.
Our proposed framework can be summarized in five points:
- The new economy is not a state of affairs in which
there will never again be economic bad news, or macroeconomic
disorder.
- The new economy is a shift in the kinds of activities that
create the bulk of value and utility for users and consumers.
- The new economy is more than just another episode of rapid
productivity growth in a relatively narrow "leading sector"
of the kind we have seen about once a decade since the industrial
revolution.
- In part because of the wide spread of the effects of the
new economy, it is having a greater impact on economic growth
than official statistics report--and we all have a greater stake
in the success of the transition than we might realize.
- Because the new economy is a shift in the kinds of activities
that create value, successfully supporting and nurturing will
require changes in public policies and attitudes: our old ways
of doing things will not get high-tech the resources and the
systems of governance that it needs to flourish.
- If we in America fumble the transition and fail to support
the high-tech core of the new economy, the new economy will still
arrive--but from other growth poles outside the United States,
and in such a form that we will benefit less from it than we
might.
Each of these five is worth further elaboration:
The new economy is not a state of affairs in which
there will never again be economic bad news, or macroeconomic
disorder. It's not permanently low unemployment, or ever-rising
stock prices, or permanently low inflation. There will be recessions,
bear markets, and price rises in the future.
The new economy is a shift in the kinds of activities that
create the bulk of value and utility for users and consumers.
It used to be the case that the bulk of value was created by
accumulating the stock of physical capital that embodied and
utilized technological knowledge, and in organizing the flow
of other factors of production to make good use of technology-embodying
capital. It is becoming the case that the bulk of value will
be created by processing and communicating information,
so that those goods and services that will be produced and distributed
will be those that have the highest value for users and consumers.
The industrial revolution saw technological advances in power
and materials greatly reduce the cost of high-volume production,
and also saw the technological advances in transportation and
distribution necessary to link high-volume producers with product
users. The result was an enormous increase in economic value
added, with the key links being accumulating the capital needed
for high-volume production and distribution and organizing the
business to keep the pipeline full.
The transition to a new economy is seeing technological advances
in computing and communications that truly and for the first
time allow high-volume producers to create and distribute the
goods and services that exactly match users' desires and need.
The result will be another enormous increase in economic value
added. The key links will be processing information about user
needs and preferences most efficiently and using that information
to satisfy users' demands.
The new economy is more than just another episode of rapid
productivity growth in a relatively narrow "leading sector"
of the kind we have seen about once a decade since the industrial
revolution. The emergence of an "information" economy,
the successive clusters of innovation--semiconductors and computers,
microprocessors, the net--the reconfiguration of existing economic
activities from package delivery to customer support--it is clear
that what we have here is not a garden-variety leading sector
that greatly amplifies productivity in making some small slice
of commodities, but instead a wave of innovation that is going
to greatly amplify productivity practically everywhere. The new
economy is truly of economy-wide scope: every business organization
and consumer marketplace can make use of the information-processing
and communications tools that are this current wave of technological
advance, even ones seemingly far removed from computers-and-communications.
There are many pieces of evidence of the speed and breadth
of this transformation. Take your pick. Some are most
impressed with the rapid take-up of the web. Others with the
new forms of employment, new approaches to compensation, and
new ways of launching enterprises many of which were developed
right here. Others are impressed with the doubling of computer
power every eighteen months, and how the value of the network
grows faster as each additional node joins it. This time it seems
not to be the case that the highest-value uses of new technology
are adopted first, or rather it seems that the continous explosion
in the amount of processing power and the size of the network
is constantly bringing new and even higher-value applications
of technology within our reach. Still others focus on analogies--to
the modern computer network as the equivalent of telephones,
telegraphs, radios, televisions, and books all rolled into one,
and even more.
Consider that the first network-economy billionaire was Sam
Walton of Wal-Mart: only today's information technologies allowed
the efficiencies of distribution that let Wal-Mart undercut its
competitors by tens of percent. The breadth of the coming transformation
is breathtaking, and is one of the key features that makes it
just more than just another episode of sector-specific rapid
economic growth and technological change.
In part because of the wide spread of the effects of the
new economy, it is having a greater impact on economic growth
than official statistics report--and we all have a greater stake
in the success of the transition than we might realize. We
all now recognize that the acceleration of productivity growth
in the late 1990s was 100% driven by declines in computer prices.
(But note: it is not the case that growth in output per worker
outside computer manufacturing was no higher in the late than
in the early 1990s; growth in output per worker outside computer
manufacturing was higher in the late 1990s--because the
falling price of computers allowed for extraordinarily rapid
growth in the capital stock.) But how many people recognize that
only one single factor--the Bureau of Labor Statistics' inability
to track the shift in American purchasing patterns toward discount
stores like Wal-Mat--inflation has been overstated--and thus
real growth in incomes understated--by at least 0.2% per year?
And how many recognize the role of information technology--computers
and communications--in driving the shift to less costly
modes of inventory control, shipping, and distribution like those
found in discount stores? And how many other factors of the same
size that lead to underestimates of economic growth exist? The
Boskin Commission guessed that standard official statistics understate
true economic growth by one percent per year or more, and their
estimates are as good as any.
Halt the spread of computing power and the expansion of the
network, and many of these sources of decreased cost and increased
economic efficiency are halted as well.
Because the new economy is a shift in the kinds of activities
that create value, successfully supporting and nurturing will
require changes in public policies and attitudes: our old ways
of doing things will not get high-tech the resources and the
systems of governance that it needs to flourish. In the eighteenth
and nineteenth centuries the pace of technological advance and
the level of technological complexity was sufficiently low that
the Constitution-ordained patent system was a reasonable policy
for promoting technological development: it balanced the goal
of rewarding innovation with the goal of preventing intellectual
property holders from permanently stifling the diffusion of useful
knowledge. But over the past fifty years the increasing pace
of technological advance and the increasing level of technological
complexity has made the system of relying on private investment
in research and development alone less adequate. We can see this
in the large number of fundamental advances in American technology
directly funded or jump-started by the government in the past
fifty years. We can see this in the important role played in
fundamental research by semi-national laboratories like Bell
Labs or Xerox PARC where the link between corporate-funded research
and corporate profitability was... tenuous.
As we shift to the new economy this dependence of further
technological advance on fundamental research and development
which is unrewarding from the perspective of a private corporation's
bottom line. As the old regulated monopolies have fallen and
government support of research has shrunk and shifted toward
biomedicine, where is the fundamental research needed to drive
the further advance of high-tech (outside of biomedicine) going
to come from?
Fundamental knowledge is only the first of the resources needed
for high-tech to flourish and the new economy to realize its
potential in America. The 1980s taught us how bad macroeconomic
policies could produce a very high cost of capital and a very
unfavorable exchange rate--both things that greatly retard investment
on the scale that the new economy needs. A look at the consequences
of Brazil's controls on hardware imports or of the DRAM cartel
of the late 1980s on more valuable "downstream" industries
and on ultimate users underscores the importance of free trade
and competition in the products that high-tech industries use
as inputs.
Human resources are at least as important. In Britain in 1850
Manchester--the heart of the industrial revolution--was seen
by everyone as showing both the potential and the dangers of
the industrial revolution. The potential was the enormous increase
in productivity and output. The dangers were found in the slums,
for the British government was not then investing in the infrastructure
needed to keep its rapidly-expanding urban population healthy,
let alone to provide education for its urban children.
Few in Manchester during the industrial revolution noticed
this--noticed that the British government was not building schools
for children of workers migrating in from the countryside to
the jobs in the new factories. Yet it was clear to keen-eyed
observers even then that industrial technology was rapidly becoming
both closely linked with science and increasingly sophisticated.
By the end of the nineteenth century the lack of a well-schooled
workforce meant that the post-steam-engine technologies of electricity,
metallurgy, and chemistry found themselves much more at home
in late nineteenth century Germany--where investments in schools
had been made. Thus Britain entered the twentieth century and
its half-century death struggle with anti-democratic German regimes
having squandered a large initial edge in technology and productivity,
because its political leaders hadn't even realized that nurturing
the next generation of industrial development required upgrading
the literacy and technical skills of the workforce.
America today is also facing both a schools crisis at the
pre-college level and a massive diversion of talent away from
technology (and toward law, business, and medicine) at the college
and post-college level. Even a successful school reform would
be a solution only for a generation hence. What is to be done
in the meantime to make sure America's high-tech industries have
the human resources they need? (Bear in mind that one consequence
of the new economy is that jobs can much more easily move to
wherever the appropriately-trained people are.)
But more is needed to nurture the transition to the new economy
than just resources--human resources, finance, and knowledge.
The new economy will require shifts in private and public systems
of governance as well.
What do we mean by systems of governance? A historical example
may make it clear. Recall that a little more than a century ago
the railroad and the refrigerated boxcar made the Chicago stockyards
possible: mass-slaughter the beef in Chicago, ship it dressed
to Boston, and undercut local small-scale Boston-area slaughterhouses
by a third at the butchershop. Or you could do so unless the
Massachusetts legislature required--for "health" and
"safety"--that all meat sold in Massachusetts be inspected
live and on the hoof by a Massachusetts meat inspector in Massachusetts
immediately before slaughter.
Without the right system of governance--in this case public
governance, federal preemption of state health and safety regulation
affecting interstate commerce--you don't have America's highly
efficient Chicago meatpacking industry. But what, exactly, are
the systems of public and private govenance that are in tune
with this techno-economic transformation?
This is perhaps the hardest set of issues raised by the transition
to a new economy. One set of systems of governance that must
be altered is that of intellectual property. In the past intellectual
property rights--patents and copyright--were important, but not
of today's salience.
Interoperability...
What is the lesson from Xerox PARC?
Taxes, responsibility for backbone maintenance, etc. etc...
Finally, how does the American government try to ensure that
separate sets of rules made by nations jealous of their sovereignty
do not hinder a globally interoperable network in ways that disadvantage
American-based businesses and workers?
Moreover every transformation has winners and losers. There
are people whose lives are disrupted--whose economic niches disappear.
Many times the winners do not realize that they are the winners
from change. But the losers always realize that they are the
losers. Government policies to create the right kind of resources
and rules will be stable and sustainable only if politicians
believe that they are genuinely acting in the public interest--rather
than doing favors for a particular sector that is making life
difficult for numbers of their constituents. So the debate must
make sure that the winners know that they are winners--that their
ATM cards would not work without fast routers--and must make
sure that the losers are cushioned by and know that they are
cushioned by what must be an inclusionary economy.
If we in America fumble the transition and fail to support
the high-tech core of the new economy, the new economy will still
arrive--but from other growth poles outside the United States,
and in such a form that we will benefit less from it than we
might. This techno-economic revolution has--so far--proven
to be overwhelmingly an American one. The entrepreneurial, risk-loving,
independence-rewarding culture of the Americas has proven vastly
more effective at sparking innovation and driving through to
success than the cultures--loyalty-rewarding, consensus-loving,
organization-building--that a decade and a half ago many of us
saw as mounting a serious and significant challenge to the United
States's role as the leading edge of world technological development.
Nevertheless, further advances in business organization, in
software, and in ways of using the network to deliver value can
be made in Bangalore as well as in Palo Alto, in Helsinki as
well as in Redmond, in Yokohama as well as in Austin. The transition
will still take place but it will be less to the advantage of
Americans, for there are reasons for a government or a people
to prefer to be at the leading edge of industrial and technological
development. After all, lawyers in New York earn six times as
much as their counterparts in Buenos Aires and barbers in Marin
County earn six times as much as their counterparts in Rumelia
not so much because the lawyers are more skilled at muddying
the waters or the barbers better at cutting hair as because of
the uniquely high technological level and productivity of the
rest of the American economy. Public policies that seek worthwhile
goals at the price of retarding or failing to support the transition
to the new economy may well turn out to carry a much more expensive
bill than their advocates realize.
|