New Economy

The New Economy is a term to describe the result of the transition from an industrial/manufacturing-based economy. 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.

Origins

A 1983 cover article in Time magazine, "The New Economy", described the transition from heavy industry to a new technology based economy. By 1997 Newsweek was referring to the 'New Economy' in many of it's articles.

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 by the mid 90's, growth became much faster: 2.65 percent from 1995-1999. America also experienced increased employment and decreasing inflation. The economist Robert J. Gordon referred to this as a Goldilocks economy-the result of five positive "shocks"- "the two traditional shocks (food-energy and imports) and the three new shocks (computers, medical care, and measurement)"

Other economists 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. Gordon 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.

Dot-coms

In the financial markets, the term has been associated with the Dot-com bubble. 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 judgment, 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 information and communication technology. Furthermore, strong productivity growth after the 2001 recession make it likely that some of the gains of the late 1990s may endure.

(source:wikipedia)