New Economy - Defining The New Economy, Skeptics Abound, Which Way For 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.