New economy is a term often used in the media to describe the changes that have taken place in the world of business since the widespread adoption of Internet technology. It has been applied to a wide range of situations and issues, most notably the rise and fall of high-tech and Internet startup companies. During the 1990s, as the United States experienced a long economic expansion and the stock market soared, many people started to think that basic economic principles no longer applied in the age of the Internet.

The basic idea behind the new economy was that computer and Internet technology had fundamentally changed the typical way of doing business. Analysts and investors alike focused on technology adoption and stock price valuation rather than revenues and long-term business plans when evaluating companies. As a result, high-tech startup firms staged public stock offerings before they had turned a profit and still attracted huge numbers of eager investors. Employees gave up the stability of traditional firms to work long hours at dot-coms in hopes of achieving a windfall in stock options. The workplace at high-flying tech companies evolved to include rooms full of toys and games to encourage employee creativity.

According to an article in Business Week, people made several assumptions about the new economy that ultimately proved to be false. First, they assumed that information technology was so important to business productivity that companies would always buy new systems and software, even in bad times. This belief caused big computer firms to give inflated earnings estimates which, when they were not met, contributed to the fall of the tech-heavy Nasdaq in 2000. Another popular assumption was that economic growth had become so stable that investors would no longer require a risk premium for stocks over bonds. Some analysts predicted that stock market averages would continue to increase indefinitely. In actuality, however, the high-tech driven expansion increased the risk and volatility of the stock market.

Another assumption concerning the new economy was that companies would no longer lay off workers during downtimes because high-tech labor is so scarce. As a result, many people were lulled into believing that they had greater job security than they actually did. Employees gave up the stability of employment at traditional companies for the big signing bonuses and stock options offered at dot-coms. "It used to be that when you went to a startup, you were an individual with a very high risk tolerance and probably had an ideal you were trying to achieve, " technology company president Christine Heckart told Paul Prince in Tele.com. "But a lot of people with very low risk tolerance left very good, secure jobs at the height of the frenzy to get rich quick in the world of startup-dom. And all of a sudden, before their dreams were achieved, the bubble burst."

When the Internet boom went bust and the U.S. economy slowed significantly in the early 2000s, many companies began laying off workers. As a result, employees began looking for jobs with more conservative companies once again. "Many [job seekers] are bent on finding a company with a future they can believe in, a dependable path to profitability, and a stable working environment where they won't be required to work around the clock for little more than stock options that may never pan out, " Prince wrote. "Internet companies and technology startups in general must find a way to prove their stability and financial viability while giving employees some of what they gained in the new-economy environment. That includes room for creativity, as well as a sense of passion and ownership."

Some experts now claim that there is no such thing as a new economy. Others say that the new economy is actually the old economy, but with technological breakthroughs integrated into existing businesses. But some experts continue to insist that the Internet has fundamentally changed the rules of doing business, despite the stock market downturn. In an article for Computerworld, Don Tapscott argues that the Internet provides a new infrastructure that lowers transaction costs and encourages collaboration among firms. He says that it creates a new platform for strategic thinking that consists of suppliers, distributors, and customers, all using the Internet as their base of communications. "Some claim that there isn't a New Economy. E-business and the Internet are a bust, and it's time to go back to tried-and-true principles that have guided commerce and investing for decades, if not centuries, " he wrote . "But heeding such advice would be a stunning mistake. There is a New Economy, with the Internet at its heart. Spurn this notion, and your company's failure is assured."

FURTHER READING:

Brock, Terry. "Old Principles, New Ideas Work in New Economy." Atlanta Business Chronicle. November 3, 2000.

"Educators Rethink Buzzwords Such as 'New Economy.' " Knight-Ridder/Tribune Business News. April 20, 2001.

"The New Economy's New Reality." Business Week. March 12, 2001.

Porter, Michael E. "Strategy and the Internet." Harvard Business Review. March 2001.

Prince, Paul. "Conventional Wisdom: Scarred by Dot-Bombs, Employees Are Fleeing New-Economy Flair for Traditional Nine-to-Fives." Tele.com. April 16, 2001.

Schwartz, Matthew. "Retire 'New Economy' Tag." B to B. March 19, 2001.

Suutari, Ray. "Organizing for the New Economy." CMA Management. April 2001.

Tapscott, Don. "Don't Doubt the Future of the New Economy." Computerworld. February 19, 2001.

SEE ALSO: Dot-Coms

New Economy was a term coined in late 1990s by pundits to describe what some thought was an evolution of the United States and other 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. At the time, 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. Furthermore, they believed that the change rendered obsolete many business practices. When the stock market bubble burst, analysts soon realized they had been wrong. While 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.

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.

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.

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.

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.

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.

Technology sector

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.

Investment

Some, such as Joseph Stiglitz, 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.

Literature

• Georg Erber & Harald Hagemann: "The New Economy in a Growth Crisis", in: The New Economy in a Transatlantic Perspective: Spaces of Innovation, ed. Kurt Hübner, Routledge Studies in Governance and Change in the Global Era , Routledge, 2005.
• Richard Sennett: The Culture of the New Capitalism, Yale University Press, 2006.
• Joseph E. Stiglitz: "The Roaring Nineties - A new history of the world's most prosperous decade", 2003.
• Michel Volle, e–conomie, Economica, 2000, ISBN 2717840737

References

New Economy was a term coined in late 1990s by pundits to describe what some thought was an evolution of the United States and other 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. At the time, 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. Furthermore, they believed that the change rendered obsolete many business practices. When the stock market bubble burst, analysts soon realized they had been wrong. While 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.

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.

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.

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.

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.

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.

Technology sector

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.

Investment

Some, such as Joseph Stiglitz, 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.

Literature

• Georg Erber & Harald Hagemann: "The New Economy in a Growth Crisis", in: The New Economy in a Transatlantic Perspective: Spaces of Innovation, ed. Kurt Hübner, Routledge Studies in Governance and Change in the Global Era , Routledge, 2005.
• Richard Sennett: The Culture of the New Capitalism, Yale University Press, 2006.
• Joseph E. Stiglitz: "The Roaring Nineties - A new history of the world's most prosperous decade", 2003.
• Michel Volle, e–conomie, Economica, 2000, ISBN 2717840737

References