4 ‘Garage tinkerers’: new economy or industry life cycle?

4.1 Introduction

As you have now seen, the concept of the ‘new economy’ has inspired a number of studies that compare the effect that new technologies have had on economy-wide productivity in previous eras with the effect that IT has – or has not yet – had in the current era. I shall now ask another question, still along the lines of ‘what's new in the new economy?’, but this time from a more microeconomic perspective, which focuses on the individual firm and industry rather than on the whole economy. (Look back at the distinction made in Section 1 between microeconomics and macroeconomics.) I shall ask whether the information revolution, that is, the emergence of IT as a new GPT, has changed the way that firms and industries evolve.

Why should we ask this question? Well, just as there is a debate about whether the ‘new economy’ has changed the dynamics of productivity, there is also a debate about whether the ‘new economy’ has changed the way that firms and industries operate and evolve. For example, some claim that the ‘new economy’ has made technological change and entrepreneurial activity more important to company survival than it was before, and hence has heightened the role of small, flexible and innovative firms. Others claim that technological change, new ideas and entrepreneurial activity were just as important in the early phase of industries that emerged before the ‘new economy’ era. Rather than investigating this debate through the views of optimists and pessimists, as we did above, we can dive right in by comparing an old-economy industry, the US automobile industry, which has been around for 100 years, and a new-economy industry, the US personal computer industry. The goal is to see whether patterns that are claimed to be characteristic of new high-tech industries were just as common in the early development of a traditional industry. These patterns include the role of small entrepreneurial firms (‘garage tinkerers’), the rapidity with which firms rise and fall, and the importance of technological change for company survival.