Academic journal article National Institute Economic Review

What Became of the New Economy?

Academic journal article National Institute Economic Review

What Became of the New Economy?

Article excerpt

The Review is pleased to give hospitality to CLARE Group articles, but is not necessariiy in agreement with the views expressed. Members of the CLARE Group are M.J. Artis, T. Besley, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, C.P. Mayer, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, P. Seabright, Z.A. Silberston, S. Wadhwani and M. Weale. Drafts of this article have been discussed among members of the Group, but responsibility for the views expressed rests with the authors alone.

Over the past five years, there have been widespread claims -- not only that there is a 'new economy' but that a new economy requires new economics. This article reviews the claims of this kind which have been made in three principal areas -- in the measurement of economic statistics and in macroeconomic management, in company and stock market valuations, and in the nature of competitive advantage and the origins of business success. In each of these areas, it finds little basis for believing that revolutionary, rather than evolutionary, change is required. Indeed the application of well established economic principles and concepts might have saved investors, commentators, and those whose job it is to manage the economy, from costly mistakes

What is the new economy?

The phrase 'new economy' first appeared in Business Week in 1996. Over the following five years, it came into daily use in commentary on the economy, business and finance. The new economy is sometimes used to describe growing and emergent sectors, particularly telecommunications, media and technology (TMT). These are contrasted with 'old-economy' sectors, which include most areas of manufacturing and established retailing. The phrase has also been used to suggest that a new economy requires new economics.

This paper is concerned with this latter sense of the new economy. It will appraise the argument that major changes are required in the concepts which economists have been accustomed to apply in their attempts to understand the functioning of business and the economy. Of course, these activities are subject to continuous technological and organisational innovation. These innovations need to be incorporated into the frameworks of analysis applied to business and the economy; but enthusiasts for the new economy claim that we are currently experiencing discontinuity, rather than evolution, in these processes. As a result, much established knowledge is irrelevant, and those whose training is based on such knowledge are ill-equipped to deal with the issues which the new economy poses -- they 'don't get it'.

It is hardly surprising that the strongest such claims come from those who are professionally involved in new-economy sectors. Wired is generally regarded as the house magazine of the new economy. Its editor, Kevin Kelly, is author of New Rules for the New Economy (Kelly, 1998, p.161). Kelly's rules include:

* Increasing returns. As the number of connections between people and things add up, the consequences of those connections multiply out even faster; so that the initial successes are not self-limiting, but self-feeding.

* Plentitude, [1] not scarcity. As manufacturing techniques perfect the art of making copies plentiful, value is created by abundance, rather than scarcity, inverting traditional business propositions.

* Follow the free. As resource scarcity gives way to abundance, generosity begets wealth. Following the free rehearses the inevitable fall of prices, and takes advantage of the only true scarcity: human attention.

* Opportunities before efficiencies. As fortunes are made by training machines to be ever more efficient, there is yet far greater wealth to be had by unleashing the inefficient discovery and creation of new opportunities.

Kelly's assertions are representative of the breathless and apocalyptic tone of much new-economy writing. …

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