The Emergence of a "New Economy"
Explaining and understanding the new economy
The new American economy in its global context
The policy debate
Explaining and Understanding the "New Economy"
Showing the new economy.
Telling a clear and coherent story.
What the "new economy" is not.
A lot of politicians come through Silicon Valley these days,
much as their predecessors came to Detroit before the Great Depression
to ooh and ahh over the assembly-line. 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
high-tech information-based computer-and-communications sectors
are truly in the public interest?
No, they do not.
This is too bad. We here 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. Getting the foundations wrong
will recoil badly. How are politicians, their current advisors,
and their would-be advisors to understand the choices they have
and the opportunities available before it is too late to make
the right decisions?
We think that the politicking and policy-making class would
have a chance of grasping what is going on if we can communicate
to them a framework for understanding our "new economy,"
a consistent thread on which they can hang anecdotes and experiences,
and which will orient them when they try to form opinions on
substantive issues.
Showing the New Economy
Measures abound.
Which are the best ones to use?
We will have no problem documenting the ongoing transformation.
The OECD, the Progressive Policy Institute (that is the "research"
arm of the New Democrats) the Council on Competitiveness--there
are a lot of people who are tracking the emergence of the new
economy. Originality in documentiation could actually get us
into trouble--into arguments with people who ought to be our
allies. And we are very interested in what are your favorite
anecdotes and examples, because you live in the center of the
tornado.
Showing the New Economy
Telling a Clear and Coherent Story
Needed because people need something they can grasp and
use.
Foundations: the new economy is a knowledge and an innovation
economy.
Clusters of innovation succeed each other.
- New technologies.
- New business models.
Likely to continue for an extended time.
- Moore's law.
- Metcalfe's law.
- Still in the early stages of the transformation...
The consequences are pervasive.
- Transformative technologies create new activities.
- Transformative technologies reconfigure existing activities.
Assessing its historical significance.
Where originality and serious thought are needed is
in telling a clear and coherent story--clear enough to serve
as a compelling orienting framework.
As we see it, the new economy is about a new source--with
the potential to become the dominant source--of economic growth.
Ideas have always underpinned industry, but in the past ideas
required massive investments in finicky and dedicated fixed capital:
knowing organic chemistry in late nineteenth century Germany
was useful only if you also had very large stainless-steel vats
to mix chemicals in. Today we are seeing somewhat of a decoupling
between physical and intellectual capital--or rather that the
physical capital is no longer dedicated to one particular industrial
use, but is instead invested in the extremely flexible network.
And this new source of economic growth spills over. We also
see major innovations in business models--many of these innovations
made possible by technology. The new economy is also a style
of business entrepreneurship and risk taking that is exploding
many of the organizational tactics of business--a style that
is hard to imagine without the new information technologies.
We see these technological developments and their economic
consequences as truly transformative. It's not just for people
living near San Jose, an it's not just for businesses that make
things out of silicon. Where did Walmart's sudden ability to
significantly underprice its old-style competitors come from?
What has driven the twenty-percent fall in the inventory-to-sales
ratio in U.S. manufacturing over the past business cycle? Will
web-assisted purchases amount to five percent of cars sold this
year? Will they amount to thirty percent of cars sold in five
years? Webvan thinks that it can streamline distribution and
make the grocery-product-display out of cheap bits in a server's
cache rather than Safeway's expensive piles-and-aisles. Is it
right? Tut Systems thinks that every American is going to find
all kinds of uses for network connections beyond the last mile,
inside the house. Is it right?
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. The right government policies become important--or
at least the wrong government policies become significant obstacles.
Two historical examples. First, Swift's and Armour's idea
of a little more than a century ago: mass-slaughter beef in Chicago,
ship it dressed to Boston, and undercut local small-scale Boston-area
slaughterhouses by a third at the butchershop. A very good business
plan, unless the Massachusetts legislature required--for "health"
and "safety"--that meat sold in Massachusetts be inspected
live and on the hoof by a Massachusetts meat inspector before
slaughter. Without the right rules--federal preemption of state
health and safety regulation affecting interstate commerce--it
doesn't work.
And the new source of economic growth cannot flourish without
the right resources. Manchester in England was the center of
the industrial revolution. But who noticed that the British government
wasn't building schools for the children of Manchester's factory
workers? By the end of the nineteenth century the lack of a well-schooled
workforce in Britain meant that the post-steam-engine technologies
of electricity, metallurgy, and chemistry moved to Germany--where
investments in schools had been made. And Britain entered its
half-the-twentieth-century death struggle with anti-democratic
German regimes with its large initial edge in technology and
productivity already squandered because politicians hadn't provided
the right resources to support rapid industrial growth.
Showing the New Economy
Telling a Clear and Coherent Story
What the "New Economy" Is Not
And as we sketch out our clear and coherent framework, we
also need to make sure that the phrase "new economy"--or
whatever shorthand we ultimately rely on--means what we want
it to mean in the modern political debate. All kinds of people
are using the phrase "new economy" to mean things that
we do not believe in--and that are probably false: that there
will never be another recession, or another bear market.
The Global Context
The American comeback.
The global innovation economy.
Our framework also needs to 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--abroad. 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.
And our framework needs to highlight that this revolutin will
not stay all-American forever, is not staying all-American now.
Is it Jeff Sachs or Michael Porter who rates Finland as the most
entrepreneurial country in the world? And how will Finnish wireless
innovation build on its recent success? What competitive advantages
does the European wireless standard offer?
Preserving the benefits of the network and a level playing
field for U.S. innovators in a world in which national rules
can have subtle effects and other governments have strong attachments
to national standards may prove difficult.
If we do a good job at laying out this framework--and if it
does get taken up--then it will help shape the policy debate
in constructive directions. But let me turn that topic back over
to John.
Shaping the Domestic Policy Debate
Resources.
Rules at home.
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.)
|