Understanding the New Economy: The economic and social dimensions

RESEARCH AND ADVOCACY TEAM
Working Paper No.1
Understanding the New Economy:
The economic and social dimensions
Gianni Zappalà
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Copyright © 2000 The Smith Family
October 2000

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Research & Advocacy Team
Working Paper
No.1, 2000
Understanding the New Economy:
The economic and social dimensions
By
Gianni Zappalà
Research Coordinator
Research & Advocacy Team
The Smith Family

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Research and Advocacy Team
Working Paper No.1, 2000
Preface
In March 1999 The Smith Family moved to enhance its research capacity by forming the
Research and Advocacy Team. In line with its vision for a more caring and cohesive Australian
community, the Research & Advocacy Team of The Smith Family researches different forms of
disadvantage to propose evidence based preventive responses to them and to work for the
development of social policy that benefits the entire community. A general theme that
integrates all of The Smith Family’s research activities is social capability. It refers to the
capacities of communities and individuals in them to draw from their own strengths and social
capital and to move beyond the limitations of disadvantage. The establishment of the Team
also reflects The Smith Family’s commitment to evidence based programs by ensuring ideas
are tested in pilot studies and evaluated for effectiveness. The Smith Family will also use
outcomes from its research to contribute to the policy making process to build a better future
for all of the disadvantaged through an enhanced advocacy role.
The Smith Family intends to play an active research and publication role, as well as form
strategic alliances with universities and other social sector organisations to bring about societal
change. A range of publications will make research undertaken by the Team available to a
broad range of people who have either an interest in or a commitment to The Smith Family’s
work. Background Papers identify areas to be researched as well as provide important pre-
evaluation information of Smith Family programs and activities. Working Papers present
preliminary research findings that contribute to the development of evidence based social
policy and initiate professional dialogue on critical research questions. Briefing Papers provide
analysis of Smith Family programs and wider social policy issues in a more concise timely
manner. A regular E – Bulletin will publicise the Team’s publications as well as provide a
summary on TSF research, policy and advocacy matters. These publications, as well as
occasional reports, submissions and monographs wil either be produced by members of the
Research & Advocacy Team, be the product of collaborative efforts with other researchers or
arise from commissioned research. All publications are subject to a refereeing process.
On behalf of the Research and Advocacy Team I trust that you find the following Working
Paper a worthwhile contribution to evidence based social research and to the development of
social policy that unlocks opportunities and builds capacity for all Australians.
Dr Rob Simons
National Program Manager
Research & Advocacy
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Research and Advocacy Team
Working Paper No.1, 2000
Contents
Preface
ii
About the author
1
Abstract
1
Introduction
2
What is the new economy?
2
Three dimensions to the ‘new economy’
3
Is the new economy the third industrial revolution?
3
The economic outcomes of the new economy
5
The social consequences of the new economy
8
Conclusion
10
Acknowledgements
12
References
12
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Research and Advocacy Team
Working Paper No.1, 2000
About the author
Dr Gianni Zappalà is the Research Coordinator in the Research & Advocacy Team of The Smith
Family. He has degrees in Economics, Industrial Relations and Political Science from the
Universities of Sydney, London and Cambridge. Prior to joining the Research & Advocacy Team
at the end of 1999, he held various teaching and research positions at the Universities of
Sydney, Cambridge, Wollongong and the Research School of Social Sciences at the Australian
National University. In 1996 he was appointed the Australian Parliamentary Fellow at
Parliament House, Canberra. He has published widely in the areas of labour markets and
industrial relations, immigration and citizenship, and Australian politics. His recent books
include Four Weddings, a Funeral and a Family Reunion: Ethnicity and Representation in
Australian Federal Politics (Canberra: AGPS, 1997) and Political Representation in Australia:
Theory and Practice (Melbourne University Press, forthcoming) with Marian Sawer.
Contact details:
Phone: (02) 9550-7153.
Email: gianniz@smithfamily.org.au
Abstract
The term ‘new economy’ has become increasingly used in Australia by the media, policy
makers and scholars. The ‘new economy’ remains, however, an elusive concept. This paper
provides two definitions (popular and specialised) of how the term has been used to date. It
then outlines the views of new economy proponents and sceptics in three key dimensions of
the new economy debate: i) Is there something qualitatively different about recent trends in the
economy?; ii) What are the main economic consequences said to result from this new
economy? iii) What are the main social consequences said to result from the new economy?
These dimensions illustrate the economic, social and ideological role that the ‘new economy’
term encapsulates. Of particular importance for social policy is that most models of the new
economy suggest that it has led to an increase in inequality and social exclusion for those not
positioned to take advantage of the supposed benefits of the new economy. Discussion of the
new economy in Australia has focussed on the narrower use of the term: whether individuals or
companies are using the internet and communications technology. This paper argues that
greater attention should be given to a broader definition of the new economy and its social
consequences for the ‘working poor’ as well as the disadvantaged more generally.
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Working Paper No.1, 2000
Introduction
Although the notion of a ‘new economy’ and much of the debate surrounding it is very much a
US phenomenon, the term has become increasingly used in the popular press in Australia. The
term has also become fashionable among politicians and policy makers. A former shadow
Minister for Industry, for instance, blamed the depreciation of the Australian dollar on the fact
that Australia is perceived as an ‘old economy’ by overseas observers:
There’s no doubt that a downside factor for the dollar is the perception of Australia as an
old economy – the perception that we are not in tune with the new – economy issues
and therefore we’re not one of the growth stocks of the future…what Australia needs is a
picture of ourselves in the new economy – the knowledge economy (Lewis 2000a:5).
The former Prime Minister Mr. Keating stated that ‘we have to be on the board of the new
economy with our toes hanging over the front!’ (Long 2000). The Federal government is even
discussing the possibility of creating a Department of the New Economy (Taylor & Lewis
2000:4). Trade unions are also using the term in discussions of recruitment strategies and
policies (Kennedy 2000). Definitions of exactly what is meant by the term ‘new economy’ in
these statements are, however, difficult to find. The term ‘new economy’ remains an elusive
concept (OECD 2000).
This paper outlines three key dimensions to the new economy debate. Clarifying these
dimensions is important in order to demystify some of the hyperbole that is often associated
with discussions of the new economy. It is also important for understanding some of the social
implications (e.g. the impact on the disadvantaged) that may be associated with the new
economy as well as formulating appropriate policy responses.
What is the new economy?
At the level of popular usage the term ‘new economy’ is often used to refer to ‘companies
which are involved in the internet and communications technology’ (Barrowclough 2000). It is
also a term used to contrast with so-called ‘old-economy’ companies or industries, such as
mining, traditional manufacturing and transport. When commentators refer to Australia as an
‘old economy’ they usually refer to the fact that primary resources rather than technology
industries are still the main driver of economic growth. Key indicators of the ‘new economy’ in
this sense of the term include: the extent of internet access and usage in society, the
production and use of information technologies, and the extent of e-commerce between
business and consumers and business and business (B2B). Depending on which indicator one
examines, Australia is seen as either in line with being a new economy or lagging behind. For
instance, in terms of individuals’ internet usage Australia ranks in the top five countries (Bryan
& Potter 2000:58). Australia’s export sector is also seen as having new economy attributes in
terms of firms’ usage and access to the internet, having a web site and using email (Harcourt
2000:10). Indicators often seized upon as evidence that Australia is lagging behind in the new
economy stakes include its poor performance in terms of the production and export of
telecommunications equipment (Potter 2000:53; Narin et al 2000).
At a more specialised level the term is used to refer not only to companies making or using
information technology but to the broader implications of such technology and ‘know-how’ for
the economic and social structures of society (see for example Castells 1996). The term ‘new
economy’ in this context is often used interchangeably with the ‘knowledge economy’, the
‘information economy’, the ‘information age’, and the ‘network society’. The increasing
internationalisation of the economy also forms part of this discourse as it is argued that the
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technology behind the ‘dotcoms’ of the ‘new economy’ has facilitated globalisation. This use of
the term particularly emphasises the need for workers to acquire a range of skills and be able
to continuously adapt these skills in the face of changing technology (OECD 1996). The focus
is also on the importance of education (from school through to vocational education and
training) in providing workers with the skills they will need in the new economy. Advocates of
the new economy in this sense of the term in Australia include Mark Latham (2000a;b) and
Lindsay Tanner (1999). Others have also argued that Australia is well placed to benefit from
the new economy even though indicators such as the production and export of IT products is
relatively low because we have the ability to adapt quickly to the new technology. This will
only be the case as long as governments make the necessary commitments to raising
educational standards and investment in scientific research (Oxley 2000).
Three dimensions to the ‘new economy’
Three key dimensions to the ‘new economy’ debate that relate to both the popular and
specialised use of the term noted above can be identified:
• Is there something qualitatively different or ‘new’ about recent trends in the economy?
• What are the main economic consequences or outcomes said to result from this new
economy?
• What are the main social consequences or outcomes said to result from the new economy?
Is the new economy the third industrial revolution?
The first dimension of the new economy debate concerns whether we are witnessing the
emergence of a new technological paradigm that will be similar in its impact on the economy
and society as the steam engine and electricity were in earlier centuries. Do technological
changes in the economy (e.g. information and communication systems, mobile telephony, and
biotechnology) herald the arrival of the third industrial revolution?
The proponents of the ‘yes’ case are gathering supporters among well-respected scholars as
well as the popular press. In his latest book, MIT economist Lester Thurow claims that a third
industrial revolution (at least in the US) is occurring (Thurow 1999:5). The economic
landscape is changing so rapidly that traditional ways of ‘building wealth’ need rethinking.
Others argue that today’s technology represents potential growth and productivity
improvements of a magnitude at least three times greater than that of the industrial revolution,
and at least similar to changes evinced by the deployment of railroads and telegraphy (Kadlec
1999).
Where most people have seen the practical translation of this view has been in the media
reporting of the spectacular growth of internet-based firms’ stock prices. While Australia has
had its own listing of new economy firms with the subsequent spectacular rise (and fall?) in
stock price (e.g. MYOB, Melbourne IT) most are familiar with the success story of new
economy icon, Amazon.com in the US. Amazon’s shares peaked at $US106.69 in December
1999 (Hof 2000). Since going public in May 1997 its shares have increased as much as
3,800%! (Lewis 2000b). Yet what many do not realise is that Amazon is still to deliver a profit
to its shareholders. Indeed, Amazon has a debt load of $US2.1 billion (Hof 2000).
Amazon’s story is illustrative of at least one new phenomenon of the new economy: some
companies have been able to list without any earnings track record, many being priced on the
expectation that they might be the next Microsoft (Eastway 2000). Some investors have been
prepared to value companies on their future earnings potential even though they are making
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losses in the present. This has been occurring in the investment world because of the
assumption that these companies represent the crest of the new economic and technological
paradigm referred to above, the next steam engine, the next electric motor. They are seen as
the harbingers of the Third Industrial revolution. Internet-based companies have been able to
ride the lack of profitability primarily through being subsidised by ‘new’ capital markets
(investors and lenders). In 1999, for instance, internet-based companies raised $US18 billion
from venture capitalists and another $US18 billion from initial public offerings of stock
(Samuelson 2000a). The relative shortage of venture capital in Australia, especially in
industries such as biotechnology is often noted as another reason why Australia is lagging
behind in the new economy stakes (Meredith 2000:3).
In contrast to the ‘Third Industrial revolution’ proponents are the ‘new economy’ sceptics who
doubt that we are witnessing the birth of a new economic era (Shiller 1999). They argue that
stock market assessments of new economy firms are overvalued because investors have
unreasonable expectations about the longer-term earnings and profit growth of these firms and
hence the inflated share prices will not be sustained. Information and communications
technology may be significant changes but they are not of the same magnitude of previous
technological innovations such as steam power and electrification. There is no ‘new’ economic
paradigm around the corner. Indeed, to some ‘it seems fanciful to suppose that the internet
could have the same impact [as electricity and steam]’ (Brookes & Wahhaj 2000:9).
A key reason behind the scepticism concerns the concept of ‘enabling technology’ (Kay 2000).
Enabling technologies are those that enter into every part of the business process and enable it
to be done differently and better (e.g. telegraph and telephone, electricity, air transport) as
opposed to technologies whose primary contribution is to produce new goods (radio and
television). The Industrial Revolution, for instance, was founded on the first new enabling
technology – the application of steam power (1780-1820) and the most recent has been
computers (1930-1980). The key question is whether the technologies of the so-called Third
Industrial revolution (in particular mobile communications and the internet) are enabling ones?
As Kay (2000:7) argues, ‘to make the statement that we are going through an era of
unprecedented technological progress has about it a certain loss of historical perspective.’
There is more agreement among both proponents and sceptics of the ‘new economy’, however,
that what is ‘new’ in the ‘modern economy’1 is that the assets of corporations are increasingly
knowledge based and intangible rather than tangible. Firms still make profits through
possessing a distinctive capability that others do not. What has changed is where the source of
this capability comes from. They no longer involve large scale and market dominance
(characteristic of the old economy), but rely on the knowledge base of employees, brands,
patents and so on. According to Thurow (1999:xv):
In the past when capitalists talked about their wealth they were talking about their
ownership of plant and equipment and natural resources. In the future when capitalists
talk about their wealth they will be talking about their control of knowledge.
Economic activity is increasingly intangible and immaterial and involves processing and
analysing information, making judgements, and providing services. The generation and
exploitation of knowledge is becoming critical to how companies, regions and economies
develop and sustain competitive advantage (Leadbeater 2000; Kay 2000). In a world of more
open and liberalised markets, it is less feasible for companies to sustain competitiveness on the
basis of traditional assets such as land, raw materials, machinery and cheap labour. Instead,
competitiveness must be based on intangible assets, capabilities and competencies that are

1 This is the preferred term of sceptics like Kay (2000).
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consumer driven. Hence, both proponents and sceptics agree that the ‘new’, ‘modern’ or
‘knowledge-driven’ economy should not be solely a description of high-tech industries or firms
but a description of a set of new sources of competitive advantage that apply across the board
(Leadbeater 2000; Thurow 1999; Kay 2000).
The economic outcomes of the new economy
The second dimension to the new economy debate relates to its economic outcomes and
consequences. New economy proponents, especially in the US, argue that we are witnessing
the end of inflation, the end of the business cycle and recessions, a return to full employment,
and a new way of valuing stocks on the share market. One influential euphoric proponent of
the new economy thesis, is Harvard Business School Professor, William Sahlman (1999).
A stylized version of recent US economic history according to Sahlman goes something like
this. Following the oil crisis shock of 1974-75 that brought the post-war boom to an end,
interest rates increased. This made it harder and more expensive for firms to raise funds. This
led to unemployment. In the early 1980s a new business model emerged that coincided with
economic deregulation and technological innovations such as the microprocessor and genetic
engineering. New entrants to the market rather than established companies seized upon these
technologies. Their success led to a new system of venture capital hoping to back the new
‘Apples’, ‘Microsofts’ and so on. The emergence of the internet in 1994 simply fuelled the
trend towards a more entrepreneurial economy, and lowered or eliminated entry barriers in
many industries. Costs and prices are therefore decreasing and prices wil be kept down by the
internet’s ability to let people comparison shop (Sahlman 1999). This view is also being
increasingly accepted among Australian business commentators. For instance, an article in the
Australian Financial Review remarked:
The internet is essentially anarchic. It destroys the ability of corporations to corner
markets and makes it harder to manipulate consumers. Far from being a stepladder to
power and wealth for the leaders of capitalism it is their nemesis (Kohler 2000).
It is argued that more competition wil generate more efficient prices and economic growth.
The reason for the success of the ‘new economy’ is the unleashing of entrepreneurial spirit that
was assisted by the decentralised nature of computers. This also facilitates a credit market that
favours the financing of such activities. Hence the new economy generates a fusion between
entrepreneurship and particular forms of finance and venture capital.
The new economy is strong because it is ‘built on several important factors to which traditional
economists don’t usually lend much credence: America’s admiration for entrepreneurs and its
tolerance of failure, not to mention its easy access to capital’ (Sahlman 1999:100). Even a
recent OECD report on the new economy states that the: ‘most important role for policy in this
context is to provide a framework that enables entrepreneurship to flourish’ (OECD 2000:14).
Hence the main economic outcomes and consequences of the new economy according to
proponents are:
• consistent non-inflationary economic growth;
• productivity increases;
• full employment;
• lower barriers to entry and reduced monopoly power; and
• the unleashing of entrepreneurial spirit.
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