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justin hall
21 December 1997
Introduction to Economics
Bernard Saffran

the way new economy

String together the human population with telephone wire and give them marvellous information tools;
what do you get?

Unlimited economic growth to encompass all the new babies and a consumer electronics lifestyle for everyone?

Some folks outside of economic circles, popular writers and futurists, are boasting about just such a condition of today, they call it:

(for want of anything more descriptive?)

These new economy espousers tend to be a bold bunch. Within the glowing glossy pages of Wired magazine, and Business Week, the new, or network, or information economy is the accompanying resource distribution system to the broad changes wrought by technology. It promises to liberate people from focus, drudgery and poverty and provide a means of unstoppable growth. The all encompassing talk proposes to address third world development, unlimited employment, environmental sustainability. It at once coincides with current trends, spins recent history, and proclaims the future. Readers are both charged to avoid the threatening recalcitrance of traditional economic thought, and to believe that this system is all pervasive and inevitable.


In reality the new economy is of course a mixed bag, both a flashy metaphor coinciding with certain zealous interests, and a real result of globalization and the broadening distribution of information technology; evidencing postmodernism in economics.


Since the days of mercantilism(*), when European movers and shakers looked inward to enhance trade and industry, the major economic powers of the world have increasingly seen profit in extending their trade borders, and lowering trade barriers.

In the time since the world wars, and largely without overt force of arms, countries have been moving towards free trade.

mercantilism - a relatively arbitrary western world factoid selected from my permeable memory to add historical heft. I say relatively arbitrary because it seems important to me, but I really don't know enough history of international trade to say for certain that mercantilism was an appropriate initiatory point of modern trade topography.

Europe is as close to united as it has ever been since Hitler (and a bit more willingly so) into a common market (the EEC - European Economic Community), with free migration of labour and capital, and elimination of barriers to commerce within (Mabry/Ulbrich, Economics, page 457).

Also, free trade areas, such as the recent NAFTA (North American Free Trade Area), allow more autonomy for member nations to set international trade standards, but allow for elimination of trade barriers within the bloc.

Briefly stated, NAFTA, the EEC, and widespread capitalism in formerly Communist states and developing nations are the leading signs of globalization - one of two harbingers of the new economy.
Now, how does globalization lead to utopian growth?

According to Stephen B. Shepard, Editor-In-Chief of Business Week, for America, "this means international trade and investment play a much greater role in our economic life than before. Twenty years ago, exports and imports made up 17% of our economy. Today, they account for 25%."

If we take that statistic over to Paul Krugman, Professor of Economics at MIT, he puts it in a broader context. Bear in mind that Shepard's bold proclamation contained the bulk of his article's argument on the effects of globalization - perhaps an unfortunate result of his writing for a popular level magazine on the subject. Krugman, here writing for the Harvard Business Review, brings a little closer focus to Shepard's blinking lights:

"...such global competition mainly occurs in the goods-producing sector - very few services are traded on international markets - and even within manufacturing there are many industries that remain largely isolated from foreign competitors (seen any Chinese refrigerators lately?). Since we are mainly a service economy, this means that no more than 25 and probably less than 15 percent of employment and value-added are actually subjected to the kind of global market discipline that the new paradigm emphasizes."
- Paul Krugman, "How fast can the U.S. economy grow?"

So, now more than ever, stuff is happening. All over the world!

What Krugman takes issue with here is the radical apparentness espoused by the new economists. The numbers don't bear it out, most of the people in most of the world have very little to do with it, even in new-economy-vanguard America, a slight sector of business has been affected. For all the fire in the hot air engines of the good ship "new paradigm," they can't get enough knots up to reach deep water.

There's a sense engendered by the "gurus" of the new economy (as Shepard refers to them) that some kind of radical shift has taken place. It's in their language -

"We have entered a period of sustained growth that could eventually double the world's economy every dozen years and bring increasing prosperity for - quite literally - billions of people on the planet. We are riding the early waves of a 25-year run of a greatly expanding economy that will do much to solve seemingly intractable problems like poverty and to ease tensions throughout the world. And we'll do it without blowing the lid off the environment."

Whoa - all that since the death of Samuel Beckett?

That quote, from Peter Leyden and Peter Schwartz, head of the Global Business Network, illustrates the ruthlessly optimistic extreme. When they turn their long rhetorical guns on globalization, look out - they see "...everybody in the planet in the same economy" (they later continue to opine, "...the rise of Asia, for example, simply can't be stopped" - back in July 1997, just before the severe fall stock market and currency crash in that region of the world).

Maybe in some way, some day, Asia will rise (again), and we'll be in "...a truly global economy, one integrated market." Their article, from which these quotes are pulled, is titled, appropriately enough, "The Long Boom: A History of the Future, 1980 - 2020." If we acknowledge their indulgence in panglossian scenario planning, what they spell out for us is a vision of opportunity. They don't get paid to be realistic, perhaps they serve a useful function, identifying the utopian hopes of ordinary wealthy technocrats.

"A positive scenario can inspire us through what will inevitably be traumatic times ahead." Not if us can't afford a screen big enough to tune in their big picture.

Is it any wonder that the editor of Business Week uses the term "gurus" and "believers" to describe proponents of the New Economy? Listen to this lingo from the concluding paragraph of Kevin Kelley's New Rules for the New Economy article from Wired:

Our minds will at first be bound by old rules of economic growth and productivity. Listening to the network can unloose them. In the Network Economy, don't solve problems, seek opportunities.

But for the new economy to achieve a state of tangible effect, that is, for it to be understood on lower clouds than those of that west coast crowd, it needs to achieve the sort of stability that inevitably betrays the boyish charm of these gleeful gurus.

In a quote that more reasonably illustrates the nature of the globalization behind the new economy enthusiasm, Brad De Long engages the nature of the trade and investment. This is important, because as Paul Krugman demonstrated, it is not the case that America is team-exporting the service industry, nor is it the case that there is a full-throttle free trade bonanza in manufacturing.

"Today we have "high-bandwidth" trade and investment. The breadth of cross-national links has vastly increased. Back [100 years ago] you could not exercise corporate control across national borders. Now you can ... Back then you could not integrate design and specification in one country with production in another. Now you can."
- Brad De Long, Slouching Towards Utopia?, chapter XXVIII. Looking Forward: Technology and Productivity

This kind of high bandwidth trade and investment that De Long talks about here is limited to very select market segments. His language here seems to observe some decentralization of trade power, perhaps instead we will see this as simply a reconfiguration. As De Long notes, further on, "And this shift to "higher bandwidth" in international economic links is still hard to see in its impact on the aggregate numbers--yet."

So if the global market is not completely enthusiastically responsible for the coming fulfillment of America's inner potential for growth, it must be the leaps in productivity and connectedness due to

information technology

The new economy has found an ideological home in Wired magazine. Between its dayglow pages are espoused the central tenants: the glorious omnipotence of technology and absolute necessity of free markets.

Something about a good net connection, it makes phrases like "information wants to be free" seem to apply to global trade and inequality of income distribution:

"...Information technology affects every other industry. It boosts productivity, reduces costs, cuts inventories, facilitates electronic commerce. It is, in short, a transcendent technology--like railroads in the 19th century and automobiles in the 20th."
Stephen B. Shepard, the New Economy

As a surface projection, it makes a lot of sense. Especially if we consider the surface of the modern office desk - nearly every paper pusher I know now spends more time on their computer than people I know who are obsessed with internet chatting. And so many people push paper! If the computer stands to revolutionize the service industry, many good smart Americans might find themselves coerced into more efficient production.

Having some experience in offices of America, I wonder how much of technological enabling is solitaire and screen saver adjustment; how much the additional flow of organizational data increases efficiency, or just balances near perfect information-states with information management tasks.

In "Old Rules for the New Economy," Brad De Long replies to Business Week boosterism with a little historical perspective:

"The first railroads connected key points between which lots of bulky, heavy, expensive materials needed to move. ... The first uses of modern telecommunications and computers -- Plain Old Telephone Service, music and news via radio, the first TV networks, Blockbuster Video, scientific and financial calculations, and large database searches -- were the highest-value uses. Later uses are lower-value uses -- if they were higher-value uses, computers would have been applied to them already. It is a good bet that the impact of computerization on measured economic GDP will turn out in the end to be small -- because most of the economic surplus has already been achieved."
from Rewired: http://www.rewired.com/97/1209.html
If De Long is correct, then the New Economists are playing catchup with the tremendous effects that information technology has already had on business and standard of living. The next version of Microsoft's Windows is not likely to affect the standard of living in this country,

especially if you're measuring Gross Domestic Product. Measuring GDP hasn't been mentioned up to this point in this paper. In more traditional discussions of the fate of the pocketbook of the planet, the GDP of the various players would have been a leading indicator. In this case, much of the new economy arguments center around its inability to be measured by conventional means.


New Economy - "New Math"

Some proponents of the new economy decry current economic indicators as inaccurate measures of growth, or progress. The burgeoning information sector of the economy, for example, does not show up in reports of GDP - "...We don't know how to measure output in a high-tech service economy." (Shepard, New Economy). Accordingly, much of their evidence for the existence of a new economy is anecdotal, demanding a change in economic perception.

Krugman replies,

"Just about every economic historian who has looked at the issue believes that standard measures of productivity have consistently understated the true improvement in living standards for at least the past 140 years. It's anybody's guess whether unmeasured productivity growth in the last few years is greater or less than in the past. (My personal guess is that the hidden improvements are less important than they were in the 1950s and 1960s: For example, direct-dial long-distance calling and television made more real difference to our lives than the Internet and DVD.)"
- Krugman, Speed Trap, Slate

But this is evidentiary in itself - telephone and tv may have changed a forty or fifty year old life most, like Krugman, more than the internet (or not even emergent technologies like digital video disk). But for people in my socio-economic-generational situation, the internet is having greater real difference in our lives - if only because a lot of us get hired to make web pages for technology companies!

So much of internet content concerns the internet, media or computers. Does that contribute to levels of national productivity? I find mere fractions of my time online contribute to higher levels of productivity or growth. But that is pure anecdotal evidence.

"...a lot of the evidence for the New Economy is anecdotal."
- Shepard, New Economy
Much of the writing cavalierly exhorts executives to embrace chaos, rapid change. In some ways this sounds like preaching the highly desirable, but impossible, to breed credibility, or simply foster fond feelings. Depending on how you define "change," the notion that people who produce a dependable product will consistently throw out their relative advantage is poppycock. Whether or not, as Kevin Kelley says, it's advantageous to do so in this new environment, it's not borne out in the recent or historical record of human nature. Even Microsoft got caught with it's internet pants down. Soothsaying Wired hasn't stopped grinding its chrome capitalist axe yet.

Wired magazine was the site of my initial exposure to these ideas. I saw Kevin Kelley's New Rules for the New Economy article in the September 1997 issue of Wired, and read with interest as he described the exciting sea change happening in economics. I read as well with some shared enthusiasm, since his description of the structure and importance of networks, as well as the increasing importance of the more peripheral elements in society excited me. But in the end, it was a bold simplistic assessment of a complex situation. In that article, and other articles in the magazine, little concern is given to the toiling poor, the wheezing environment, and other externalities of the current system. In a hurry to get to the brave new world, the writers of Wired and the people they profile propose most often technology as a solution to the negative side effects of industry. I was excited to see them using terms like diminishing marginal cost, increasing returns. These were concepts I could understand, from my rudimentary economic training, unfortunately, the way they were put forth in this piece, the very rules that I had learned underpinning these concepts were turned on their head or declared irrelevant by the Wired writers or guest stars.

This is a problem with new economy evangelists. By declaring an end to traditional economics, they shy away from scrutiny: concocting utopian scenarios or manifestos. Manifestos are fine to read, but they don't provide a model by which to thoroughly analyze and declare the structure of any given system.

The fact that these economic phenomena are described as "the new" should be immediately suspect, for its inherent ephemerality. It immediately affirms the lifestyle of the toy-toting authors in the catbird seat. They breathlessly await the new future and cast technological scraps to those otherwise left out of the current and future economic picture. Will the new economy address the critical problems we have today? Or simply accelerate current trends and problems?

But a sustained analysis of new economy theories in light of history and politics, mere reality, awaits the brilliant, embittered and graduate students online. Meanwhile, proponents of new growth theories continue to lean welcomed towards the ear of big business with their casual chaos theories and strategies for sailing into the vast profitable unknown:

"In fact, as anyone who makes much of his income from book royalties and speeches can tell you, the incentives are all the other way: People would much rather hear about how everything has changed than about why most of the usual rules still apply. (And feel-good optimism sells much better than dismal realism.)"
Krugman, Speed Trap, Slate

There's where Krugman may be wrong - Kelley is not shy to invoke Kali, the destroying/creator in his proclaiming:
"In a poetic sense, the prime task of the Network Economy is to destroy - company by company, industry by industry - the industrial economy. While it undoes industry at its peak, it weaves a larger web of new, more agile, more tightly linked organizations between its spaces." (New Rules) So there's some spirited fear attracting listeners to his feet; it's a strangely appropriate edge to his ordinary effervescence.

Basically what the new economists sell is a vastly connected, high velocity unknown. The new economy suffers ultimately from intangibility - Kelley speaks of "living beings linked together through air and glass" when he speaks of the net. he puts it himself, in a recent interview, "I am suffering from an especially bad case of optimism." (As cited in Rewired: http://www.rewired.com/97/1205.html.

But his good-natured couching doesn't dissuade my creeped-out feelings. Even after much of this lengthy inquiry, I remained hesitant, and somewhat confused. Reading over my paper, I found myself decrying the brave new economic vision of some unabashed optimists. I have before been deemed one of those very beasts myself! Isn't there a case to be made for abstract, excited, broad vision of the future? (I think that's a large part of what i'm writing my thesis on next semester.)

I told my girlfriend, Amy, I said, "i'm writing a paper about the new economy." She hadn't heard about it. "These guys say that the whole economic system in the world has changed in the last twenty years." "Yeah, I think so," she said. That stunned me. While she hadn't heard of the new economy, she did feel change. Where? "The world is run on credit now," she observed, "there's no absolute worth - only what you owe other people, what other people owe you."

Here she had highlighted a consumer level shift in the nature of commerce, and one that can likely be blamed on technology, if not globalization. Credit cards would not as popular without telephone lines (and Verifone), and they have perhaps brought the world within reach of some otherwise more stranded consumers.

Taken aback, I framed the larger debate for her, that some guys i'm studying are saying that because of technology and globalization of trade, the economy of the US and ultimately the world will soon grow to solve many traditional economic problems largely without regard for existing economic rules.

I told her I felt bad blasting people with new theories of economic possibility; since when have I criticized people espousing the plurality of truths?

My problem with that, she replied, is that they are talking about where we eat and where we sleep - matters of survival. Postmodernism of ideas is a matter of intuitive mind, abstract intellect. Perhaps they're not disparate entities, but it's harder to swallow postmodernism with regards to the economy. Her postmodernism is the validity of anything, so what about this? She could appreciate it on an academic level, but not in any practical way. It sounds like megalomania. Postmodernism always brings her back to the body: the undeconstructable.

That got me thinking, perhaps, as she said, the new economy works as an idea, sure. But as a policy recommendation to the chairman of the federal reserve?

If Krugman supports the opening of markets, why does he stand against the new economy? primarily for its lacking basis in leading economic indicators? Maybe it strikes him dangerous - like economic charlatanism.

In their prediction "the long boom," Schwartz and Leyden mark a new year's revolution:

"The millennium also marks a symbolic changing of the guard at the Federal Reserve Bank: Alan Greenspan retires, the Fed lifts its foot off the brake, and the US economy really begins to take off."

The new economy: little sacrifice or compassion required. Little grounding either; as Paul Krugman put it in "White Collars Turn Blue," "consumers don't want information, they want tangible goods."

or, in this case, tangible theory.


My elementary understanding of economics stems largely from a convergence of Rodney Mabry & Holley Ulbrich, Economics: Second Edition, Houghton Mifflin Company, Boston, 1994, and Bernard Saffran, my professor for Introduction to Economics.

From this point on, my research took place online. This was the first school paper i have done where essentially all my documentation was to be found online. Did that augment my productivity? Let professor saffran know.

I began my exploration of the new economy, or in this case, the networked economy, with Kevin Kelley's "New Rules for the New Economy" article from Wired. it served as a great ideological introduction, but i found it hard to extract materials therefrom for debate within this paper - nearly outrageous optimism in a reasonable tone, with few empirical data evident.

But that was tame considering the expansive "The Long Boom: A History of the Future, 1980 - 2020," by Peter Schwartz and Peter Leyden, from Wired July 1997. I tried not to quote it too much, but it was irresistible. Clearly not an exercise in economics - more brazen brainstorming.

After some snorting some Wired, i got sober with articles from the Official Paul Krugman Web Site, at http://web.mit.edu/krugman/www/:

"Speed Trap: The Fuzzy Logic of the New Economy," Slate, December 18, 1997

"How fast can the U.S. economy grow?", Harvard Business Review, Summer 1997

"White collars turn blue"JThe New York Times Magazine, 9/29/96

I sought a more sober, substantiated yea voice in "The New Economy: What it really means," by Stephen B. Shepard, Editor-In-Chief, Business Week, November 17, 1997.

I found Brad DeLong's Slouching Towards Utopia? online at http://econ161.berkeley.edu/TCEH/Slouch_title.html.

during my work on this paper, two leading internet theory magazines took up the question of the new economy:

feed had a debate, and Rewired ran a rebuttal.

Information on mercantilism was provided by R.R. Palmer & Joel Colton, A History of the Modern World, Seventh Edition, McGraw-Hill, Inc., New York, 1992, pages 119-120. i read that back in high school.

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