Beyond the New Economy
by Blake Harris
Originally published in Visions magazine several years ago.
Warren Buffett, who GE’s Jack Welch called the greatest investor of our time, avoided investments in anything he couldn’t value, including most New Economy stocks. There was a time, not too long ago, when Buffett would have seemed an anachronism or a technophobe to many investors. Clearly, here was someone too firmly rooted in the economy of the past to recognize the exciting, new economic prospects before us.
In hindsight, Buffett’s reluctance to invest in anything that he didn’t fully understand appears to be nothing short of wisdom. Yet with the same 20/20 hindsight, one wonders how so many other investors could have been so wrong.
There are the usual easy answers: Their timing was simply off and they jumped the gun in anticipating a public flocking to Internet-based commerce. Or more cynically: It is always easy to sell to those whose greed makes them desperate to believe. And the vision of a world economy dominated by dot-coms had a legion of eager believers.
Yet beyond such easy, pat answers stretches a troubling expanse of dishonesty, misinformation and misunderstanding that signals a deep and fundamental rot in our economic health.
Two or three years ago, such a suggestion would have seemed ludicrous to most Americans. But back then, who would have believed that a Fortune 500 front-runner like Enron would soon file for Chapter 11 after seriously misleading investors about profits?
Certainly, at the heart of the dot-com boom and bust lies a profound lack of honesty and integrity, a lack that the dot-com frenzy of the time camouflages more than it explains away. Many people made a lot of money by selling investors on what amounted to pie-in-the-sky business schemes. It may not have been outright fraud in the legal sense, but how many of the New Economy stock promoters cared whether or not their investors had a reasonable expectation of return based on corporate profits?
Perhaps many Internet entrepreneurs and their stock promoters really did believe that the Net was rapidly creating new business models where all the rules were different. But if they did believe, the way so many investors seemed to believe, then that belief was rooted in a profound misunderstanding about the true nature of the changing economy.
Economic Delusions
It is easy to fall prey to semantics. Redefinition of words, along with the big lie, is one of the standard tools of the propagandist. And in the case of the New Economy, whether deliberately fostered or not, much of our muddled thinking stems from the vague or imprecise language that has been used to describe what we became accustomed to calling the Information Revolution.
In fact, the very term “information revolution” is misleading and vague. What exactly is an information revolution? If the Industrial Revolution was about the emergence of mass industrial production, then is the Information Revolution about the emergence of mass information production?
And in many quarters, that vagueness was pushed even further when the Information Revolution was equated to an Internet revolution. The Internet was rapidly going to change everything, we were told. The virtual corporation, a network-based organizational form, would rapidly rise up to devour the industrial organization of yesteryear.
Like all great delusions, there is a kernel of truth in much of this. The Internet is a significant development that will eventually have tremendous social impact one way or another. And indeed, the development of the computer and information technology has already dramatically changed production and distribution methods in almost every field. The computer has even helped to map the human genome, unlocking the first secrets of DNA and ushering in a revolution in the biosciences that may dominate and alter 21st century society as much as anything else.
It is a safe bet that computerization and the Internet will eventually change our culture, for better or worse, in ways that are as yet difficult to predict. So part of what is going on here might be better described as a computer revolution rather than an Information Revolution — the computer serving to increasingly augment human research, design, production and communication. Described that way, this revolution clearly began in earnest in the 1950s, and it continues to gain momentum.
For half a century, in other words, successive developments in the computer field have been changing our economy, specifically by changing how we research, design, produce and distribute commodities of all descriptions.
Economically, there was, at the same time, another fundamental shift. As management guru Peter Drucker pointed out, knowledge had become the true capital and the premier wealth-producing resource. But in the way he meant this, knowledge is not simply information. “Knowledge,” said Drucker, “is information that changes something or somebody, either by becoming grounds for action, or making the individual (or an institution) capable of different and more effective action.”
So from this perspective, the Information Revolution was far better called a knowledge revolution. And indeed, that too has been central to what has been going on here.
Knowledge work has replaced industrial production as the mainstay of the workforce in developed countries. And this itself means changes. As Alvin Toffler described it, the substitution of information and knowledge for brute labor has brought us to the edge of the deepest power shift in human history.
Moreover, knowledge itself is exploding in every direction. As scientist and ocean explorer Dr. Robert Ballard once told Visions, “Most of what I learned [in the classroom], I had to throw away.”
Knowledge is simply changing so rapidly that what once passed for knowledge in school textbooks and elsewhere is now actually wrong. So indeed, we have been undergoing a knowledge revolution that is decades old and which continues to unfold at great velocity. Yet it is hard to draw a link between this and the dot-com frenzy that swept up so many investors.
The dot-com boom and bust, more that anything else, was about the prospects of Internet marketing, which apparently had new rules that no one could clearly define. In that sense, the information revolution was to be primarily a marketing revolution. But even in the marketing field, questions were being raised about what exactly constituted an information revolution.
Marketing guru Jack Trout argued that the Information Age is really an explosion of non-information. It’s an explosion of data. “What’s the difference between data and information?” he asked. “Information must lead to understanding. Therefore, what constitutes information to one person may be mere data to another. If it doesn’t make sense to you, it’s not information.”
In this context, the Internet did represent an information revolution — an explosion of non-information. But how billions of dollars were to be rapidly made from this should have been highly questionable right from the start.
Beyond Economics 101
Following the dot-com meltdown, people began to question whether the New Economy was more fiction than reality. But here again, part of the problem lies in vague definitions stretched to mean different things to different people.
And again with hindsight, it seems obvious that we should be paying much more attention to the fundamental question: If the economy is changing dramatically, so much so that it deserves the description “New Economy,” then exactly how is it changing?
Earlier this year, The Economist published a lengthy survey that addressed just this. Their premise was summed up: “In the years to come, experts predict, many companies will use information technology to become a ‘real-time enterprise’ — an organization that is able to react instantaneously to changes in its business. And as firms wire themselves up and connect to their business partners, they make the entire economy more and more real time, slowly but surely creating not so much a ‘new’ but a ‘now’ economy.”
That kind of thinking certainly is in the right direction, although not for the most obvious reasons. And in fact, this very statement should also ring alarm bells of caution. If “experts” predict this, then the chances are that it will turn out to be wrong. History has repeatedly demonstrated that experts or scientists are almost always wrong when they try to predict the future.
To the magazine’s credit, the survey does note, “The Silicon Valley hype machine has already appropriated the concept of real time.”
So that is the next big thing to be wary of.
A big part of the underlying problem in trying to discern whether or not there is in fact a new economy emerging — and if so what the drivers and dimensions of that might be — lies in our misconceptions about the nature of economies themselves.
As Jane Jacobs, the woman who changed how we think of cities as economic engines of growth, once told Visions, “It seems that we are becoming increasingly aware of the fact that a lot of old economic theories were very deficient.”
Her well-developed reasons for arguing this point were covered in her last book, The Nature of Economies. And while there is much behind her statement, far more than can be summarized here, there is a simple argument that can be made.
The complex ecology of any economy is as much about science and culture as it is about finance and business. And that is why economists are unable to predict economic events as well as they would like to. Statistics that monitor capital and production capacity tell only part of the story. They do not take into account discovery, invention and innovation, the very things that most create economic shifts and upheavals. And they do not reflect cultural trends, such as fashion.
In fact, a culture is driven by its art as much as it is driven by its business, management and manufacturing accomplishments. “A lot of uneconomic activities, like various forms of art, are tremendously important,” said Jacobs. “I don’t think we understand what part art plays in our lives. And I think art is at least as important as economies. The processes of economic life are important and we need to understand them, but they aren’t going to solve all our problems. But I think the emphasis on economics and on economic theory should be on how it actually does work.”
Following such logic, the idea of a “now” or “real-time” economy has some merit because there is growing evidence that we are increasingly becoming a real-time culture. And if the culture is increasingly real time, then so will be the economy. But the description is also fraught with liability, as the concept can too easily be mauled around to become the lynchpin of the next great hype bonanza.
Moreover, it does little to solve the pressing need, which Jacobs argued for: the development of practical economic theories that explain how economies work.
Complexities
Human economies are complex and complicated systems, just as human beings themselves are. If a new economy is indeed emerging, in part because a new culture is emerging, then it is a safe bet that no one right now can explain how this New Economy will work.
We can’t fully explain the New Economy, if it exists, because we still can’t even fully explain how the old economy works. No economic theory to date has adequately covered all the nuances of the old economy’s complexity.
But if we think of the economy as an extension of culture as much as it is a financial/business/production system, the question of whether or not a new economy is emerging becomes somewhat moot, a point of semantics as much as anything. Because cultures change slowly — far more slowly than people who have sought change often have patience for — profound economic changes are never an overnight occurrence save for tremendous disasters.
Yet there is no doubt that our culture is changing. People’s attitudes and values change, something we have all witnessed in our lifetime. And many things — science, technology, events such as war and natural disasters and even our methods of communication — all contribute to those changes.
Because of this, as much as anything, there is no doubt that our economy is also changing. But this change is not a sudden upheaval, a bandwagon to jump upon lest one misses the big opportunity. This process of change has been under way for half a century, and it is a process that we can reasonably expect to continue into the foreseeable future.
Historians may someday look back and isolate one particular spot that marks the turning point where a new economy truly began. But that is an exercise for historians. It is not something we realistically can expect to do while in the midst of the fray of change.
What is certain is that we today have an economy that is increasingly global in nature, and one that continues to present new challenges as well as new opportunities for making life better for everyone.
But we are likely to see more economic catastrophes such as the dot-com meltdown if we do not dispel the misinformation, the false hype and the misconceptions that continue to cloud general economic thinking, not to mention the investment decisions on the part of millions.
Government has an increasing role to play in this arena, in part, to keep the economic playing field free from corruption and dishonesty.
But beyond this, government needs to recognize that there are no pat answers when it comes to economic development. A case can be made that economic develop without cultural development is ultimately a half-baked exercise — cultural used here in the broadest sense of the word. Dark fiber in the ground does not a culture make.
That is why one of the wisest policy directions to have emerged in recent years is the push for better education. This is likely our best long-term economic development investment.
The general argument is that a better-educated workforce is needed for the jobs of the 21st century. And while undoubtedly true, that is only part of the story.
Good education is also the foundation of a healthy, informed and able culture, a culture where freedom reigns, where art flourishes and where democracy has the best prospects of working. Whether or not that democracy is increasingly digital in nature changes nothing. It is people who form the heart of a democracy, just as it is people who form the heart of an economy or a culture.
In a sea of change, much of the wisdom we have accumulated through centuries of experience is as valid today as it was in yesteryear. And the real challenge is sorting out the wisdom from the false knowledge, the hype and the misconceptions so that we make fewer big mistakes: economic, political and social.
Beyond that, we would greatly benefit if we had a better understanding of economies in general, whether they are labeled old, new or anything else.
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