A Framework for Understanding Our New Economy
Stephen Cohen
Brad DeLong
John Zysman
Introduction
Politicians come to Silicon Valley these days much as their
predecessors came to Manchester, England to ooh and ahh over
the industrial revolution a century and a half ago, or to Detroit
before the Great Depression to ooh and ahh over the mass-production
assembly-line. 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 the extent to
which policies to nurture and support the high-tech information-based
computer-and-communications sectors of the American economy are
in all of our interest--and not just the redistribution from
weak claimants to powerful special interests that is the meat
and fish of American politics? (1 minute.)
By and large they do not. And this is too bad. For we all
believe that this is a genuine moment of transformation--one
in which getting the foundations, the rules and resources to
support a new kind of economic growth, right will pay enormous
dividends. And getting the foundations wrong, failing to properly
set the rules and provide the resources, will recoil badly. For
in such transformative moments change comes so rapidly that politicians
and their advisors trying to shape the future face an almost
impossible task. How are they to understand the choices they
have and the opportunities available before it is too late to
make the right decisions? (2 minutes.)
Few in Manchester during the industrial revolution, for example,
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 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. (3 minutes.)
But perhaps politicians and their staffs--elite journalists
and those who rely on them for their opinions--policy-planners
and think-tank experts who rarely venture beyond the Beltway--would
have a chance of grasping the nature and significance of this
age if we can communicate to them a framework for understanding
our "new economy," a consistent thread on which the
can hang anecdotes and experiences, and to which they can refer
when they need to form opinions on issues of policy.
Framework: The New Economy
That is what we are here to do--to try to lay out a framework
for understanding our "new economy" in which we all
believe. Ideally the framework should be simple enough to be
easily incorporated as a five-minute motivating section in larger
briefings, clear enough that a wet-behind-the-ears congressional
staffer can gain enough from reading a thirty-five page document
to sound sophisticated and knowledgeable, and bullet-proof enough
that its hundred-page version can withstand serious critiques
without suffering serious damage. (4 minutes.)
So let's begin. First of all, it is important to note that
all kinds of people have been using the phrase "new economy"
in all kinds of ways to mean all kinds of things with which we
would not agree. For example, the "new economy" is
not going to give us permanently low unemployment without inflation.
It is not going to give us a world without bear markets. It is
not going to eliminate the business cycle.
So it is important to reclaim the phrase "new economy"
for what we do believe. The new economy is about a new source--with
the potential to become the dominant source--of economic growth.
Economic development has become less and less about accumulating
more and more physical capital, and more and more about the creation
and deployment of intellectual capital. It is science based.
But it also includes innovations in business models--many of
these innovations made possible by technology. It is about a
new style of business entrepreneurship and risk taking that is
exploding many of the organizational tactics of business--again
a style made possible by new technologies. (5 minutes.)
Now as this new source of economic growth expands throughout
the economy, it is going to need foundations: rules of the marketplace
that are consistent with its needs, and resources to fuel its
development. Thus the right government policies become important--or
at least the wrong government policies become significant obstacles--to
the economic transformation. 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. (6 minutes.)
Without the right rules--in this case federal preemption of
state health and safety regulation affecting interstate commerce--you
don't have America's highly efficient Chicago meatpacking industry.
Without limited liability you don't get corporations with enough
capital to take advantage of the economies of scale available
in late nineteenth-century America. As it was then, so it is
now. But what, exactly, is the nature of this techno-economic
transformation? And what foundations--what rules and resources--are
needed to support its full growth and development? (7 minutes.)
This Transformation
You all have your favorite 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 Moore's Law and Metcalfe's
Law--how this time it seems not to be the case that the highest-value
uses of new technology are adopted first, or rather this time
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. (8 minutes.)
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. Think of Sam Walton as the
first network billionaire: Walmart's cost advantage is supposed
to have come from purchasing power and economies of distribution,
but previous attempts with less sophisticated information technology
to take advantage of such economies--think of Federated Department
Stores--did not fare well. For me the most impressive statistics
is the 20 percent fall in the manufacturing and trade inventory-to-sales
ratio since this stage of the last business cycle: better information
technology--and pressure from competitors with better information
technology--seems to be making a difference everywhere. (8
minutes.)
Let me highlight that for a moment. It is a commonplace that
workers who use computers are more productive, that sites that
computerize and network see boosts in productivity, that firms
are eager to computerize and network--and yet that aggregate
economy-wide productivity shows next to no sign of productivity
gains from computerization and networking. And it is rapidly
becoming a commonplace that the resolution to this "productivity
paradox" lies in our inability to measure changes in the
quality of shopping or in the degree of fit between the good
bought and the consumer who bought it. Because of the automatic
teller machine, people don't have to take sick time to make it
to the bank. But that change the Bureau of Labor Statistics's
statistical system does not catch. Thus it seems likely that
the productivity benefits from computerization and networking
are already being distributed extremely widely--that even people
who wouldn't know an object method if it bit them are already
the substantial beneficiaries of computers-and-networks through
lower costs, better quality of service,and more choice. (9
minutes.)
Let me also highlight that 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.
But it will not stay all-American forever. Consider the success
of Finnish wireless innovation. And consider how the European
wireless standard offers potential competiive advantages to firms
focused on that standard. We have to expect new and unexpected
nodes of innovation to emerge from diverse locations--and we
have to fear that foreign government decisions about rules and
resources will play to foreign competitors' strengths and not
to the strengths of America's entrepreneurial, free-wheeling,
risk-loving pattern. (10 minutes.)
So how can we as a nation sustain this transformation, and
assure that broad national advantage flows from it? How can companies
for which it is genuinely true that what is good for them is
good for America educate our political masters to what is at
stake?
Through a policy debate. But what should it be about?
Resources and Rules
Fifteen years ago the policy debate had to have a large "macro"
component: high deficits that drained the pool of savings and
led to high domestic interest rates and a high cost of capital;
a high exchange rate generated by high domestic real interest
rates that priced U.S. producers out of world markets and foreign
producers into U.S. markets. Now--thanks to shrewd changes in
congressional operating procedures pushed by George Bush and
his team that changed the dynamics of congress, thanks to Bill
Clinton's and Alan Greenspan's trade of deficit reduction for
more expansionary monetary policy, and thanks to a good deal
of luck--we don't have to worry about the macro picture. We don't
have an extraordinarily high cost of capital and an extraordinarily
overvalued real exchange rate. (11 minutes.)
So, instead, the debate should be about resources and
rules. Resources to sustain innovation and use of these
revolutionary technologies. Rules to make sure that competition
happens and that competition is constructive.
Resources come in four overlapping categories--human, physical,
financial, and intellectual.
Human resources fall into three categories. Elite workers--how
to make sure that the U.S. educational system produces the elite
scientists and engineers that high-technology industries need
(rather than producing hordes of lawyers and MBAs only), and
how to make sure that U.S. businesses get the chance to draw
on the elite scientists and engineers that our--very good--universities
train. Skilled workers--how to reshape our educational systems
so that a good chunk of young adults are able to use computers
and their technologies as familiar tools. Mass--how to make sure
that the skills and orientations necessary to make effective
use of computer-driven systems are part of the basic stratum
of literacy that everyone acquires. It would be extremely cruel
if we developed technologies capable of greatly amplifying human
powers of recall, association, calculation, and thought--and
then created a large divide which many people could not cross
by failing to give them basic experience with how computer systems
work. (12 minutes.)
Physical resources--who is going to build and maintain the
network? AT&T has one view of the incentives it needs to
provide high-speed service to the last mile. (And they did just
install an extra repeater 2/10 of a mile up my private road to--as
best as I can see--boost cable signal strength to acceptable
levels for a cable modem for one house: mine.) So far this isn't
a problem. May it not become one.
Financial resources--cost of capital is not a problem now.
Availability of financing for entreprenurial ventures is not
a problem now. Financial institutions to properly support Silicon
Valley systems of options-based compensation may become a problem.
Intellectual resources--knowledge--investment in research
and development--where will the next generation of advances in
fundamental knowledge come from? These are very serious questions
that are by and large not debated enough in Washington. (13
minutes.)
In addition to resources there are rules: taxes, management
of the network backbone, access to the "last mile,"
privacy, legal reform--modernizing adjudication--making sure
that separate sets of rules made by nations jealous of their
sovereignty do not hinder a globally interoperable network--making
sure that rules abroad do not disadvantage American competitors.
Last, but surely not least, 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
what must be an inclusionary economy. (14 minutes.)
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