3 The benefits and costs of the new economy
As well as looking at the behaviour of firms and the industries and markets to which they belong, economists also engage in a different style of inquiry, thinking about what economic change means for the lives of the people involved. Once again there is a variety of interpretations and different ideas but this time they concern the desirability of economic change. What benefits does the ‘new economy’ bring and what costs, or negative effects, does it impose on people? In analysing these benefits and costs, different economists will be guided by different priorities and values. Some economists may place greater weight on material rewards as against health and happiness. Some may prioritise the well-being of workers over that of consumers. Others may assume that the interests of entrepreneurs are paramount and overlook the needs of people with caring responsibilities.
In the late 1990s some economists, especially in the USA, emphasised relationships between ‘headline’ economic indicators such as inflation, wages, productivity and growth. For these economists, such as Alan Greenspan (1998), the Chairman of the Federal Reserve (the US central bank), what was new about the new economy was the almost unprecedented coexistence of economic growth and low inflation. The combination of ‘tight’ labour markets (where employers have difficulty in finding enough workers to fill all the job vacancies) and hence low unemployment with low pressure for wage rises was also unusual. The coexistence of these factors challenged the conventional economic theory that tight labour markets lead to wage rises and more generally that rapid growth – a boom – will lead to inflation and then to ‘bust’. This view is encapsulated in the extract from Business Week Online:
The New Economy
It works in America. Will it go global?
It seems almost too good to be true. With the information technology sector leading the way, the US has enjoyed almost 4% growth since 1994. Unemployment has fallen from 6% to about 4%, and inflation just keeps getting lower and lower. Leaving out food and energy, consumer inflation in 1999 was only 1.9%, the smallest increase in 34 years.
This spectacular boom was not built on smoke and mirrors. Rather, it reflects a willingness to undertake massive risky investments in innovative information technology, combined with a decade of retooling US financial markets, governments, and corporations to cut costs and increase flexibility and efficiency. The result is the so-called New Economy: faster growth and lower inflation.
(Business Week Online, 31 January 2000)
In fact it was too good to be true. US economic growth slowed during 2001, the terrorist attacks on the World Trade Center on 11 September undermined consumer confidence and by the end of the year the US economy was in recession. This raises the question, ‘was the spectacular boom built on smoke and mirrors after all?’ In other words, was it a unique historical episode or is it reasonable to believe that the economy will be seen nevertheless to have undergone a lasting change?
There are understandings of the ‘new economy’ that emphasise longer-lasting changes in the nature and organisation of firms and employment patterns. The development of information and computing technologies is emphasised because they can potentially revolutionise business organisation and therefore have implications well beyond the high-technology sector itself. Changes in the composition of the workforce, such as the increasing participation of women and the development of new, more flexible patterns of employment, affect how people can manage their work/life balance. The role of the state in creating a deregulated environment, which promotes flexibility in financial markets and working practices, has also been emphasised. All of these changes are claimed to be deep-seated and widespread and therefore unlikely to be reversed, despite short-term ups and downs in the economy.
The benefits that are claimed for the new economy arise from the development of high-technology and knowledge which offer new products and processes and new forms of high-level employment as well as opportunities for entrepreneurs. These are some of the real changes that are thought to underlie the unprecedented levels of inflation-free growth in the late 1990s in the US economy as referred to in the extract (above) from Business Week Online.
By contrast, the negative aspects of the new economy are highlighted by writers such as Ulrich Beck (2000) and Richard Sennett (1998), who link rapid economic change with increasing inequality, risk and insecurity, family breakdowns, falling fertility and the fragmentation of communities.
Some economists link the positive and negative effects of the new economy. For example, Danny Quah (1996) argues that the positive and negative dimensions of the new economy are opposite sides of the same coin and form part of an emerging digital divide. That is, some of the essential characteristics of the knowledge-based economy which contribute to economic growth also increase economic inequality and put increasing pressure on balancing the claims of work and life.