Is the "New Economy" a Fad?

Not long ago the "new economy" was portrayed by many as having repealed the laws of economic gravity: stock prices, productivity, and employment were to go ever up, never to go down. NASDAQ's crash and the worldwide slowdown which followed caused many to think that the much vaunted "IT revolution" was merely another speculative bubble.

So, the question we now face is this: how important will the technological revolutions in data processing and communications be in the long run? Can we really speak of a "new economy"? No one has a crystal ball and erroneous predictions are possible. Nevertheless, we believe that the long_run economic impact of the "new economy" is likely to be huge.

Some technological innovations change our lives but have no lasting effect on the economy as a whole. The revolution in illumination is a good example. In 1800, an American household spent 4% of its income on candles, lamps, oil, and matches. It now spends less than 1% on lighting and consumes more than a hundred times as much artificial illumination. The real price of light fell by a thousandfold over the past two centuries, yet we do not speak of the "illumination revolution," or of a "new economy" based on streetlights and fluorescent office and store lights.

For a technological change to revolutionize an entire economy, as steam power and electricity did, its effect must not be local, but must radiate across much of the economy, so that the demand for new products grows more rapidly than the decline in their prices. Only then can we speak of a "new economy" because only then does the share of the new sector's products in total expenditure grow, with high productivity growth in the new sector translated into productivity growth for the entire economy.