He is the Stanley B. Resor Professor of Economics at Yale University and the
author of Irrational Exuberance (2000).
There has always been a "new economy," every decade since the beginning of the
industrial revolution. There have been so many important inventions over the
last century that brought us from the horse-and-buggy days to the pampered
situation we find ourselves in now, and brought life-expectancy up from 45
years to 80 years. If the next decade is as good as those of the last century,
we should count ourselves very lucky. And I think that there is a good chance
that the new information economy can help sustain this same level of economic
growth that we saw for the last century.
National correspondent for The Atlantic Monthly and a former columnist
for The Industry Standard, he has written extensively about technology,
economics, and politics for more than two decades.
Just about everything concerning the Internet phenomenon benefits from
separating the short-term from the long-term view. For instance: we know that
in the short term the Internet has not really changed the balance of power in
politics or eliminated the importance of national borders. What it will mean in
the long run is another matter -- it would be like trying to foresee the full
impact of automobile culture in 1905.
So too with "New Economy" rhetoric. With the advantage of hindsight we can say
what the short-term importance of that phrase was during the bubble years. It
was a way for everyone to rationalize what was, by any normal standards,
irrational behavior. Two hundred dollars a share, for a company that's never
made a profit? Sure! Don't you know how the New Economy works? And to give
credit where it's due, not everyone who thought or talked this way was a
huckster or an idiot. There are times in history when assumptions and
operating rules change, and the people who fail to shift their thinking are the
ones laughed at in retrospect. ("Those Orientals will never be able to build
cars for American roads." "The customer will never need more than 48k of
I suspect that, fifty years from now, we'll see that information technology
created a "New Economy" very much in the way that electricity, the telephone,
gasoline and oil, and antibiotics-and-immunization did. That is, it will remove
many barriers and limits previously assumed to be insuperable, and will be so
important that its role will almost become invisible. To take one example: the
same mainstream financial-and-media world that now hoots about the "absurd"
Internet stock bubble still under-appreciates, in my view, the impact of
the "eBay model" of doing business. The idea that millions of people can deal
directly and independently with millions of others has sweeping implications,
which we're only beginning to explore. To the extent people in the media world
notice the "eBay way," they think of it as a way that oddballs can trade
baseball cards with each other. I think it's more important than that. In the
long run, I'm a New Economy optimist. In the short run, with all appropriate
allowance for the people who were cynically fleecing the masses, I understand
why people used the term while the bubble was being puffed up.
Chief economist at BusinessWeek, he is the author of The Internet
Depression: The Boom, the Bust, and Beyond (2001).
Many people misunderstood the true nature of the New Economy. They assumed that
the Information Revolution and the Internet had eliminated recessions, and that
the economy and the stock markets were now on a permanent upward trajectory.
In some cases this was explicit, when journalists would write about the end of
the business cycle. In other cases it was implicit, when market analysts and
corporate executives would predict 20 percent growth in revenues as far as the
eye could see.
But they completely missed the point. The New Economy is more risky than the
Old Economy, not less. There is a lot more reliance on innovation and
high-risk investments to drive growth, which is great when the innovations pan
out. But when big gambles, such as the dotcoms, fail to pay off, then the whole
Actually, this is probably the biggest mistake that investors made. Because
they didn't understand the high-volatility nature of the New Economy, they took
far bigger risks than they should. They didn't realize that by investing in new
initial public offerings, they were effectively taking the same risks that
venture capitalists do -- which means facing the possibility that a lot of your
investments will go bust.
But were the (real) venture capitalists -- by pushing many of these dotcoms
to go public far too early in the game -- exploiting the public's willingness
to take these gambles?
If someone offers to sell me a lottery ticket, is that exploitation? No. People
wanted a piece of these deals, they begged for a piece of these deals. I would
much much rather err on the side of encouraging people to take risks, rather
than discouraging them.
Editor of The Baffler magazine and a contributing editor of
Harper's, he is the author of One Market Under God: Extreme
Capitalism, Market Populism, and the End of Economic Democracy (2000).
Theories that we had entered a "New Economy" mainly hinged on a lot of
millennial ideas, all of which implied that the historical problems of
free-market capitalism had been solved by technology -- and that therefore
government regulation, taxes, labor unions, etc. were no longer needed. As it
happened, these theories were mostly invented and trumpeted by people who
already believed that government regulation, taxes, labor unions, etc.
were bad things. Among other things, they told us that the business cycle had
been suspended, that tech companies now enjoyed perfect information, that the
economy could no longer be measured, that brands were more important than
anything else, that entrepreneurs were near-divine figures who should not be
restricted in any way, that old ways of valuing property and businesses and
stocks were no longer meaningful, that options would make up for lost wages,
and so on.
This was clearly more ideological than it was factual; more of a
quasi-religious phenomenon than a description of what was going on in the
world. Yes, there was technological advance in the 90s, as there has always
been. But the really big change, in my opinion, was the widespread acceptance
of an idea I call "market populism," the increasing conviction of a huge swath
of Americans (journalists, politicians, and above all business leaders) that
laissez-faire, free-market capitalism was the quintessence of human freedom;
that markets expressed the popular will in a manner that government could never
do; and that business would inevitably and rightfully triumph over its enemies
-- the welfare and regulatory state, organized labor, and social critics. This
cultural change is how I define the "New Economy." ...
Let me also say a word about what you call "the dancers on the dotcom grave,"
or the "schadenfreude" that they are constantly lamenting in The Wall Street
Journal. No one is happy when hard times return. The people who are hurt
worst in such scenarios are always the small investors who got in at the very
end, and also the workers at the very bottom of the corporate flowchart, who
lose their jobs. Many close friends of mine were badly hurt by the collapse --
they bought in at the very top, just like the gurus told them to do -- so it's
hardly a subject for levity around my house.
The real issue is, Who gets the blame? All this talk about "schadenfreude" is
just an attempt to direct public attention away from the real culprits -- the
people who puffed the bubble -- and onto their critics, on those who dared
question "New Economy" thinking. If we had all just believed, they tell
us now, everything would have been fine.
Co-founder and editor-in-chief of the online magazine FEED (feedmag.com), he is
the author of two critically acclaimed books on technology and society:
Interface Culture (1997) and Emergence (2001).
The whole idea of the new economy is a bit like the Gaia hypothesis: there's a
strong version and a weak version, and one is more compelling than the other.
There was a kind of "Squawk Box" version of new-economy theory, which basically
revolved around the possibility -- or rather, the extreme likelihood -- that
the Dow was headed straight to 20,000 and the Nasdaq to numbers that exceeded
the capacities of our simple primate minds. That was the
"what-goes-up-doesn't-come-down-anymore-thanks-to-Moore's-Law" notion of the
new economy, and it was as bogus and transitory as the share price of
The other new-economy notion is more intriguing, and more valid I think, but
it's about a change that will probably take fifty years to unfold, not five. As
a planet, it's worth remembering that we're still only halfway through the
transition to the industrial age, and the ultimate consequences of that shift
are still very much up in the air. The information revolution -- which is the
more interesting, and more valid, version of the new economy hype -- might take
a little less time to play out, but it's still a process that we're at the
very, very beginning of. The boom and bust of the last five years will be a
footnote when the ultimate histories are written, just like the industrial boom
and bust cycles of England in the 1830s.
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