The New Economy That Isn't All That New
J. Bradford DeLong
October 6, 1998
Did anyone ever expect the Promised Land to lie some 40 miles south of San Francisco, in a place called Silicon Valley? Yet that is where the most powerful and influential members of our society today--politicians, intellectuals, journalists, business leaders, and all-purpose visionaries--have found it. Just as their predecessors journeyed to industrial revolution Manchester or mass production Detroit, today's techno-pilgrims return from their journeys to Silicon Valley with visions of a technological and economic future of endless promise. They may have seen the future, but we should require more than mere exuberance before we grant their vision that new technologies are indeed creating a fundamentally new society, a new culture, and a new economy.
Just how new is tomorrow's economy? It is hard to say because the vision is somewhat fuzzy: each of today's pilgrims brings back a slightly different report. Some lack historical perspective, and so fail to see that the patterns of enterprise they believe to be new are actually quite old. Others fail to understand the most important fact about modern economic growth: that ever since the original Industrial Revolution there have always been dazzling new industries, inventions, and commodities.
The first dimension of "newness" that the techno-pilgrims hail is the sheer speed of technological progress in the semiconductor and semiconductor-derived industries. Since the transistor, information technology has seen no let-up in innovation and expansion. The promise of the transistor blossomed into integrated circuits, microprocessors, computers-on-single-chips, and now into a high-speed network with the potential to link every computer in the world. Intel founder Gordon Moore's law that the density of silicon on a chip would double--and the cost of silicon circuits halve--every 18 months has held for decades and is likely to hold for at least one more.
Thus one vision sees a future new economy of never-ending cost reductions as factors like "learning curves," "economies of scale," "network externalities," and "tipping points" drive your costs below those of competitors. In the old economy you made money by selling goods for more than they cost; in the new economy you make money by selling goods for less than they cost--and letting the learning curve lower your costs next year. In the old economy, you boosted your company's stock price by selling valuable goods to customers. In the new economy, you boost your company's stock price by giving away products--and hoping that network externalities will boost the price you charge next year as people now committed to yourproduct wish to upgrade. In the old economy the first entrant in a new market often made big mistakes that followers could learn from, and avoid. In the new economy the first entrant can pass a tipping point and gain a nearly unassailable position.
Some pieces of the world fit this vision of the new economy very well. Think of the Bill Gates beating Apple past the tipping point with Windows. Think of the rapid price declines of silicon chips. Think of the the rise to industrial prominence of companies like Intel that did not exist even one generation ago. Yet this particular dimension of "newness" is perhaps the oldest. What the techno-pilgrims are marvelling at are the standard economic dynamics of a "leading sector"--a relatively narrow set of industries that happen to be at the center of a particular era's technological advance.
Such leading sectors have existed for two hundred years. Manchester, England, and Detroit, Michigan were the Silicon Valleys of their day, and saw the same creation of large fortunes, the same plummeting product prices, the same sudden growth of enterprises. Economists Tim Bresnehan and Daniel Raff have tracked the price of the average car down from $52,640 of today's dollars in 1906 to $39,860 by 1910, even as technical improvements pushed car "quality" up by more than 30 percent. By the time the heroic entrepreneurial age of the automobile came toan end during World War I, consumers were getting more than four times as much car for their (inflation-adjusted) money as a mere decade before.
Since the start of the Industrial Revolution, we have had a succession of productivity revolutions in leading sectors, sweeping through everything from textiles to medical care. That's why we call it the Industrial &laqno;MDUL»Revolution&laqno;MDNM»: it ushered in the process of staggered sector-by-sector economic transformation, of which Silicon Valley is our most recent instance.
But the heroic age of rapid technological progress will come to an end in microelectronics just as it has in every other leading sector. And the true productivity revolution--the true impact--occurs before the heroic age ends. It is unwise to extrapolate today's payoff from semiconductors, computers, and telecommunications far into the future, for later uses of these technologies will have lower value. After all, if later uses were very fruitful and had big payoffs, they would be earlier uses.
After the heroic age ends, the form of competition changes. During the heroic age technology is in the driver's seat. Afterwards what matters most is figuring out exactly what customers want and then giving it to them. Today, no one knows what options computer and Internet-access purchasers really want--and there are fortunes to be made by those who discern the elements users will regard as essential.
Moreover, the fact that each burst of leading sector activity leaves us with an entire sector of the economy that has been technologically revolutionized does not mean that the sector has been through an economic revolution. Microelectronics has given us extraordinary intellectual vision, and amplified our capability to process information beyond all previous imagining. But that does not mean it will dominate our economy. The economy, after all, focuses its attention on what is expensive, not on what is cheap. In every leading sector, the story has been the same: once the exciting new product is squeezed into a relatively inexpensive commodity, economic energy flows elsewhere. As our capabilities in one sector grow, the salience of these expanded capabilities in the economy--which is the realm of things that are scarce--does not.
Yet we cannot say that the information technology revolution is giving us a "new economy" that is new only in an old way. For there may be something genuinely new in what the new economy may promise for economics--and economic policymaking. Information goods appear to defy two foundational principles of conventional economic thinking: scarcity and control. Information goods, from software programs to Hollywood movies, are easily duplicated, and once duplicated they are very, very hard to keep track of. Yet in the past goods have always been scarce--hard to duplicate--and relatively easy to control. Economists' belief in the power and utility of the market system as a social mechanism for regulating production and distribution may, in the end, rest on the assumptions that goods are scarce and that control over their use is possible.
If this looming challenge to the underpinnings of these economic principles materializes, we may find ourselves not just with a new economy but in need of a genuinely new economics and new economic policies to grapple with the market failures and other perverse effects of an information economy. That would make for a new economy that is "new" in a very different way from the visions of the techno-pilgrims returning from Silicon Valley.
J. Bradford DeLong is a professor of economics at the University of California at Berkeley; he served as a deputy assistant secretary of the U.S.Treasury Department during 1993-1995. A longer version of this essay appears in The Wilson Quarterly (Autumn 1998).
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