New Economy

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The New Economy was an evolution of developed countries from an industrial/manufacturing-based wealth producing economy into a service sector asset based economy from globalization and currency manipulation by governments and their central banks. Some analysts claimed that this change in the economic structure of the United States had created a state of permanent steady growth, low unemployment, and immunity to boom and bust macroeconomic cycles. They believed that the change rendered obsolete many business practices. Critics of these ideas felt vindicated when the stock market bubble burst. Many of the more exuberant predictions proved to be wrong. Some pundits continue to use the term New Economy to describe contemporary developments in business and the economy.

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[edit] Names

Already in 1995, Newsweek coined the phrase 'New Economy' to refer to this happy state. According to many commentators in the late 1990s, investment in Information technology (ICT) had eliminated economic fluctuations and ushered in a golden age of economic prosperity. The economist Robert J. Gordon referred to it as the Goldilocks Economy. To explain these changes, economists largely pointed to the ripening benefits of the computer age, being realized after a delay much like that associated to the delayed benefits of electricity shortly after the turn of the twentieth century. However, the same economist that coined the term 'Goldilocks Economy' contended in 2000 that the benefits of computers were marginal or even negative for the majority of firms, with their benefits being consolidated in the computer hardware and durable goods manufacturing sectors, which only represent a relatively small segment of the economy. His method relied on applying considerably sized gains in the business cycle to explain aggregate productivity growth.[1]

[edit] Theory

The general idea is that a business should focus on those areas of its operation which are critical to its success and where it has a competitive advantage. Other areas of its operation should be outsourced, typically using technology as the facilitator. In a developed economy, the critical success factors to a leading business are likely to be intellectual things such as brands, products specifications and technical capabilities. Many routine business functions (such as manufacturing and customer service desks) may be outsourced.

Ashot Grigoryan believes that the “new economy” is a current Kondratieff Cycle which will end after a 50-year period in 2040’s. Its innovative basis includes Internet, nanotechnologies, telematica and bionica[2].

[edit] Background

After a nearly sixty-year period of unprecedented growth, the United States experienced a much discussed economic slowdown beginning in 1972. However, around 1995, U.S. economic growth accelerated, driven by faster productivity growth. From 1972 to 1995, the growth rate of output per hour, a measure of labor productivity, had only averaged around one-percent per year. But with the shift to this 'New Economy,' growth became much faster: 2.65 percent from 1995-1999.[3]

[edit] Dot.coms

In the financial markets, the term has been associated with the Dot-com boom. This included the emergence of the NASDAQ as a rival to the New York Stock Exchange, a high rate of IPOs, the rise of Dot-com stocks over established firms, and the prevalent use of such tools as stock options. In the wider economy the term has been associated with practices such as outsourcing, business process outsourcing and business process re-engineering.

At the same time, there was a lot of investment in the companies of the technology sector. Stock shares rose dramatically. A lot of start-ups were created and the stock value was very high where floated. Newspapers and business leaders were starting to talk of new business models. Some even claimed that the old laws of economics did not apply anymore and that new laws had taken their place. They also claimed that the improvements in computer hardware and software would dramatically change the future, and that information is the most important value in the New Economy.

Some, such as Joseph Stiglitz and Blake Belding, have suggested that a lot of investment in Information technology, especially in software and unused fibre optics, was useless. However, this may be too harsh a judgement, given that U.S. investment in Information technology has remained relatively strong since 2002. While there may have been some overinvestment, productivity research shows that much of the investment has been useful in raising output.

The recession of 2001 disproved many of the more extreme predictions made during the boom years, and gave credence to Gordon's minimization of computers' contributions. However, subsequent research strongly suggests that productivity growth has been stimulated by heavy investment in ICT. Furthermore, strong productivity growth after the 2001 recession make it likely that some of the gains of the late 1990s may endure.

[edit] Literature

  • "The Roaring Nineties - A new history of the world's most prosperous decade," Joseph E. Stiglitz, 2003.
  • Michel Volle, e–conomie, Economica, 2000, ISBN 2717840737

[edit] References

  1. ^ Gordon, Robert J. (2000), "Does the 'New Economy' Measure up to the Great Inventions of the Past?," The Journal of Economic Perspectives, v. 14, pp. 49-74.
  2. ^ Ashot Grigoryan, On the way of the “New economy”: conceptions of Russia’s innovational evolution / “The State and The Society”, International conference, Moscow, 2005, p. 82-85
  3. ^ Gordon, Robert J. (2000), "Interpreting the 'One Big Wave' in U.S. Long-term Productivity Growth," Productivity, Technology and Economic Growth, v. 1.

[edit] See also

[edit] UNDP-APDIP Books

Wikibooks
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This e-primer provides a comprehensive review of the digital and information and communications technology revolutions and how they are changing the economy and society. The primer also addresses the challenges arising from the widening digital divide.