ABOUT THE NEW ECONOMY
A work paper presented to professor: RADY KHAZEM
By MBA student: ANJAD QUSAIBATY
WHAT IS THE MEANING OF THE TERM “NEW ECONOMY”?
Before we talk about the “new economy” It may be helpful to give a short definition of the
“old economy”. According to the Longman dictionary, the Old Economy is an economic
system that is based on older types of industry such as steel, energy, and machinery, in
other words: the economy that is based on traditional methods of doing business rather
than on the new high-tech Internet business activity. Some economists would like to give a
timeframe for the old economy era between the 1950s and 1970s.
Now Starting from the late years of the 20th century (between the 1970s and 1990s), all the
developed economies (followed later by the underdeveloped economies) started to go
through fundamental transformations. Some of the most obvious outward signs of these
changes or transformations are in fact among the root causes of it:
Revolutionary technological advances including: powerful personal computers, high-speed
telecommunications, and the Internet.
The market environment facilitated by these and other developments in the last decade has
been variously labeled the “information economy”, “network economy”, “digital economy”,
and “knowledge economy”. Together, the whole package is often simply referred to as the
WHATIS NEW IN NEW ECONOMY? /IS THE NEW ECONOMY REALLY NEW?
In my opinion there is no one definite answer for this question, therefore I will try to
answer it in five ways and from different points of view:
Beyond the technological advances, what is actually new about the so-called New
Economy? In one respect: nothing. Humans still work at jobs for a living, and they still buy,
sell, and trade products and services, just like they always have. As the former Federal
Reserve Chairman Alan Greenspan has noted, the heart of the economy is, as it always has
been, grounded in human nature, not in any new technological reality. In Greenspan’s
analysis, “The way we evaluate assets, and the way changes in those assets affect our
economy, do not appear to be coming out of a set of rules that is different from the one that
governed the actions of our forebears.... As in the past, our advanced economy is primarily
driven by how human psychology molds the value system that drives a competitive market
economy. And that process is inextricably linked to human nature, which appears essentially
immutable and, thus, anchors the future to the past.”
Nonetheless, Greenspan and other economists agree that some of the key rules of the game
are changing, from the way we organize production, to our patterns of trade, to the way
organizations deliver value to consumers.
Some economists dealt with this question from a historical perspective and concluded
that the new economy is not necessarily something really new. Sirkka Hämäläinen, a
Member of the Executive Board of the European Central Bank, and Jaakko Honko a Lecturer
at Helsinki School of Economics, adopted this side of the argument, and to prove their point
of view, they made a comparison between the wide effect of the technological revolution
on the economy in the recent years and the wide effect of discovering electricity on the
economy in the past years. (In conclusion, we would like to underline once again that the
new economy is not necessarily something really new. History shows that there have been
many similar quantum leaps which have led to long periods of adjustment with increased
productivity and higher potential growth. There are, however, some elements in the current
process which are somewhat different from past "revolutions". Many important enabling
factors have coincided with the development of digital technology and the "information
revolution". The synergies of these enabling factors are creating a process which is very likely
to become more far-reaching than previous "revolutions". Nevertheless, the ongoing
"revolution" is not changing basic economic laws.)
On the other hand, some other economist adopted the opposite point of view and tried to
give a precise answer to this question. One of those is The German economist Horst Siebert
(March 20, 1938 – June 2, 2009) in his paper titled “The New Economy-What Is Really
New?” presented to Kiel Institute of World Economics in august 2000. According to Horst
what is really new is “first of all the technological innovation. In economic terms what is new
is a new product. The new IT product brought about by the new technology means two
different things: a new device to handle data and to communicate and new good
“information”. This should lead to an increase of productivity, to a larger production
potential and to a higher growth rate. The new economy has implications for capital markets
and especially for labor. Major issues are regulation and taxation.”
The key words in his answer were:
- New technology: consists of the combined technological advancement of the
microprocessor, software and network facilities.
- New products: IT products (information and technological devices).
- And the impact of two former factors on productivity, growth, labor, capital market,
regulation, and taxation.
Another attempt to answer this question came from another two economists Robert D.
Atkinson and Randolph H. Court in their report presented to the Progressive Policy
Institute titled “The new economy index: understanding America’s economic
transformation”. Under the question “what’s new about the new economy?” they
answered by giving thirteen indicators classified under four main categories that collectively
illustrate the emergence of the structural roots of this New Economy. (Note: this report was
especially made about America but I think it could give us a general idea about what is new
in the new economy)
A- INDUSTRIAL AND OCCUPATIONAL CHANGE:
1- More People Work in Offices and Provide Services: Since 1969, virtually all jobs
lost in goods production and distribution sectors have been replaced by office jobs.
2- High-Wage, High-Skill Jobs Have Grown: For example, there were fewer than
5,000 computer programmers in America in 1960, and there are over 1.3 million
3- Trade Is an Increasing Share of the New Economy: One indicator of the extent of
the trend toward globalization is the growing value of exports and imports as a
share of the economy.
4- Foreign Direct Investment Is on The Rise Around The World.
C- DYNAMISM AND COMPETITION:
5- The Economy Is Spawning New, Fast-Growing Entrepreneurial Companies: or so
called gazelles (companies with sales growth of at least 20 percent per year for
four straight years). The economy is increasingly made up of these gazelles. Since
1993, the number of gazelles has grown 40 percent, to over 355,000. These
companies are responsible for creating 70 percent of the net new jobs added to
the economy between 1993 and 1996.
6- Fierce Business Competition: for example: In 1965, IBM faced 2,500 competitors
for all its markets. By 1992, it faced 50,000.
7- “Cooptation” In The New Economy: Collaboration Among Competitors: A lot of
experts have suggested that the collaborative dynamic of networks, partnerships,
and joint ventures is a main organizing principle in the New Economy.
8- The New Economy is Constantly Churning: while firms can grow fast, they can go
out of business or downsize just as quickly. In fact, 30 percent of all jobs a year are
in flux (either being born or dying, expanding or contracting).
9- Consumer Choices Are Exploding: For example: An estimated 50,000 new products
are announced every year in America, up from only a few thousand annually in
10- The New Economic Order: Speed Is Becoming The Standard: For example: One
study found that in 1990 new U.S. products took an average of 35.5 months to
complete, but by 1995 companies were introducing new products in an average of
approximately 23 months.
D- THE INFORMATION TECHNOLOGY REVOLUTION
11- Microchips Are Everywhere: For example: From 1982 to 1996, the world
semiconductor market has grown from a $20 billion market into well over a $100
billion market in constant 1992 dollars. In the same period in the United States,
semiconductor sales as a percentage of GDP rose from less than 0.2 percent to as
high as 0.65 percent, all while dropping in price.
12- Computing Costs Are Plummeting: the cost of computing is dropping by nearly
25% per year.
13- Data Transmission Costs Are Plummeting: The cost to transmit one bit of data
over a kilometer of fiber optic cable declined by three orders of magnitude
between the mid- 1970s and the beginning of the 1990s, allowing more data to be
transmitted over longer distances at lower prices.
Some of the economists prefer to answer this question by making a comparison between
the old and the new economy to help reveals the new sides and characteristics of the new
Steady and linear, quite
unsteady and very hard to
Market changes Slow and linear Fast and unpredictable
Economy Supplier-driven Customer-driven
Lifecycle of Products and
Key Economy Drivers Large industrial firms
Scope of Competition Local Global hyper competition
empowerment & self-
Work force characteristics
Mainly male, high proportion
of semi-skilled or unskilled
No gender bias; high
proportion of graduates
Skills Mono-skilled, standardized Multi-skilled, flexible
Education Requirements A skill or a degree Continuous learning
Confrontation Cooperation, teamwork
Affected by market
opportunity / risk factors
Employees Seen as Expense Investment
Pace of business Slow
Appreciably faster with ever-
rising customer expectations
Strategy pyramid: vision,
mission, goals, action plans
Key Drivers to Growth Capital
Main Sources of Competitive
Access to raw materials, cheap
labor, and capital for
conversion; cost reduction
through economies of scale
moving with speed; human
Scarce Resource Financial capital Human capital
Strategic Alliances with Other
Rare, "go alone" mindset
Teaming up to add
New: refocused on people,
knowledge, and coherence
DOES THE NEW ECONOMY NEED NEW ECONOMICS?
I would like to answer this question from two different perspectives:
1- THE MACROECONOMICS PERSPECTIVE:
Macroeconomics sees the economy as an aggregate. It study the performance and
operation of the economy as a whole: the nation’s gross domestic product (GDP),
consumption, saving and investment, employment and unemployment, price levels, interest
rates, imports and exports, exchange rate, capital flows, etc. From this perspective I think
that the basic economics laws are still the same and we don’t need new economics laws. In
other words, The focusing here is not on inventing new economic laws, it is on studying the
Impact of the new economy on the aggregate statistics of the economic performance that
reflects the fundamental changes taking place in the world economy. (For example: U.S.
exports and imports have increased from 11 percent of GDP in 1970 to 25 percent in 1997
as a result of increasing share of trade under the new economy)
2- THE MICROECONOMICS PERSPECTIVE:
Microeconomics focuses on the interaction of individual participant in the economy
(consumers, producers, etc). From this perspective I think that changes must take a place in
basic laws of microeconomics to take in consideration the new factors brought by the new
economy (new technology, new products, etc) that has a deep effect on the behavior of
for example: in the classical production functions, production was studied as a function of
capital and labor, while under the new economy, new factors that affect production must be
added to the function such as technology, knowledge, managerial abilities, etc, to make the
mathematics modules more close to reality.
Q= f(K,L) Q=f(K,L,T, N, M…)