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The Geography of the New Economy
R. D. Norton

A. THE NEW ECONOMY: THREE CONCEPTIONS

A magazine solicitation from the Harvard Business School begins, "Please join other pioneers in the new economy and take advantage of this Charter rate." I'm delighted to be recognized as a pioneer in the new economy, especially by the Harvard Business School. But which "new economy" am I a pioneer in? People (and business magazines) are referring to "the" new economy all the time now, but they seem to have different models in mind.

There's a macroeconomic version, able to keep on growing rapidly without inflation. There's a microeconomic version, apparently driven by a new kind of firm.There's the digital version, likely to be identified with an Information Age. Then there are variants that focus on management, labor relations, sustainable development, and other topics as well. (Here's an aggressive version of the thesis from the economics editor at Business Week. And here's economist Hal Varian's authoritative site on the whole topic.)

What most new-economy approaches have in common is the idea that computers and in particular networked PCs have changed things in a fundamental way. That is the common denominator we will encounter as we look at the macro, micro, and digital versions of the new economy hypothesis in turn.

I conclude that there really is something new about the economy, as tends to happen every 50 years or so. Also, the new economy is in some relevant sense a "reborn" economy. That is, it has successfully weathered what could be termed a maturity crisis (or, as the British call it, a "climacteric") and defied the predictions a decade ago of inevitable U.S. economic decline. What has helped all this along is the nation's unique regional geography, a product of its continental scale.

But you don't have to arrive at these same conclusions to get something out of the grand tour we're about to take.


1. MACRO VIEWS (A): FASTER GROWTH, LOWER INFLATION

The crux of the macroeconomic version of the new economy is the idea that information technology (I.T.) creates higher productivity growth, which in turn permits faster growth in output without a rise in the rate of inflation. The awkward fact that measured productivity growth has not gone up by much is downplayed, and is sometimes viewed as an artifact of measurement problems.

Federal Reserve Board Chair Alan Greenspan himself seems to believe that things have dramatically changed. (Clicking on the hyperlink will take you to his testimony of February 24, 1998. We quote here from paragraph 6.) In his words,

" …our nation has been experiencing a higher growth rate of productivity—output per hour worked—in recent years. The dramatic improvements in computing power and communication and information technology appear to have been a major force behind this beneficial trend."

Indeed, in a recent report, The Emerging Digital Economy, the Department of Commerce presents a graph that shows I.T. reducing the rate of inflation by one full percentage point over what it would be in the absence of I.T.

There is no question that the macroeconomic picture has been a thing of beauty in the late 1990's. A useful indicator to show the improvement is the misery index, the sum of the inflation and unemployment rates. It used to be said there was an inescapable tradeoff between the two, a tradeoff portrayed in the Phillips Curve. In the late 1990s, however, with unemployment down to 4.5% and inflation below 3%, the index for the U.S. looked better than in three decades. (FIGURE 1.)

Generalizing, Bernard Weinstein (1997) offered the following list of new-economy attributes:

--An economy that grows without apparent threat of recession.

--An economy that continues to expand without a pickup in inflation.

--An economy constantly restructuring itself for greater efficiency and productivity.

--An economy replenishing and revitalizing itself through new technology and capital investment.

--An economy that functions without excessive debt, either public or private.

--An economy that maintains a balanced budget.

--An economy that is increasingly globalized and export driven.

Professor Weinstein concludes,

"Not to suggest that inflation is dead, the business cycle extinct, and the stock market destined to rise forever. But, with good macroeconomic management, we believe the economy can grow virtually without interruption for the foreseeable future."

Mark Zandi of Regional Financial Associates, a forecasting firm, described the new economy at a Boston conference in May 1998. "The new economy adjusts more quickly to exogenous shocks, and it does not generate an environment that leads to recession." In his view, (1) globalization, (2) faster technological change, (3) securitization, and (4) deregulation have together introduced new variables that have yet to be included in conventional forecasting models of the economy. (Miara 1998)

TRUIMPHALISM?

Zandi offers a fuller treatment of the macroeconomics of the new economy is his "Musings on the New Economy" (in Regional Financial Associates's Regional Financial Review, March 1998, pp. 4-10). There he describes it as "part real and part surreal."

Similarly, many economists would conclude that the improvement in the misery index is as much as can be said for any macroeconomic version of a new economy. For example, an exchange in the May/June1998 issue of Foreign Affairs turns on whether America's long expansion in the1990s signals a true restoration of the nation's bygone glory.

In "A Second American Century," Mortimer Zuckerman (a real-estate developer and publisher) contends that the U.S. triumph reflects "deft managers, technological innovation, and a culture that values rugged individualism—all fueled by finance capital that can nimbly meet the needs of a globalized, rapidly changing economy" (p. 1). Accordingly, he concludes, the present U.S. lead relative to Europe and Asia will if anything increase in the next century.

Paul Krugman's rebuttal, "America the Boastful," views all this as a triumphalist caricature. As background, Krugman has long since declared the New Economy dead. Here he points out in a lucid analysis that while productivity growth may be faster than the official measurements show, that has always been true. He notes that technically, the growth of real output is limited by the sum of (1) the increase in employed workers plus (2) the rate of growth of productivity, or output per worker. Instead he sees the U.S. ascendance as the result of a sustained cyclical expansion here, which looks all the better next to difficulties in Europe, Japan, and emerging Asia. Everything could change once the U.S. has another recession, and economies elsewhere revive. He concludes, "Future historians will not record that the 21st century belonged to the United States" (p. 45).

Similarly, Alan Blinder speaks of "lucky shocks," as the reason for the reduction in the rate of inflation while the unemployment rate also falls. Among them are lower prices for oil and for imports generally, a slowdown in the rise of health costs, and—last but for our purposes not least—the relentless fall in computer prices. (Louis Uchitelle, "Economists Reject Notion of Stock Market 'Bubble,'" The New York Times, January 6, 1999, p. C2.) (In general, you can read the Times on-line, provided only that you register with them for their free service.)

A similar dismissal of the macro version of the thesis appeared in a Silicon Valley magazine, Red Herring, whose editor concludes,

 …the argument for a new economy does not make sense. Digital technologies have not dramatically increased productivity; international competition doesn't have much effect on prices; and the economy cannot grow by more than the sum of the increase in productivity and the increase in new workers. (Jason Pontin, "There Is No New Economy," Red Herring Magazine, September 1997.)

MACRO VIEWS (B): COMPETITIVENESS

More generally, Krugman chides new economy advocates for a lack of historical perspective. His point is that there is nothing new about technological change. Now, Krugman knows what he is talking about on these questions. (For a look at his influential writings, popular and more technical, see his site, which The Economist Magazine recently cited as the top economist's web site in the world. Of particular interest to us at this point is "Requiem for the New Economy," from way back on 10 November 1997.)

But economic history yields an alternative view as well. In hindsight, we could say that there were two great economic questions of the 20th Century. One was about the effectiveness of communism as an economic system. That was answered decisively with the collapse of the Soviet Union after 1989.

The second great economic question of the 20th century has been the adaptability of what might be termed mature capitalism—above all as practiced in the largest mature economy, the U.S.

The big question was whether the U.S. had to endure the decline that afflicted the world's first industrial nation, Britain, at the end of the 19th century. As Moses Abramovitz asked in a Presidential Address to the American Economic Association in 1980: "Can we mount a more energetic and successful response to the challenge of newly rising competitors after 1970 than Britain did after 1870?"

INDICATORS OF A U.S. COMEBACK IN THE WORLD ECONOMY

In that light, it is precisely Britain's historical precedent that makes the U.S. comeback in the world economy such an unexpected event.

The Swiss competitiveness ranks. Consider, for example, the annual press releases from Davos, Switzerland, where an organization called the World Economic Forum publishes ratings of the world's economies in terms of their "competitiveness." Any single index of competitiveness is bound to be in part arbitrary, and this one has met its share of criticism. But in the past couple of years Jeffrey Sachs and Michael Porter of Harvard have helped refine the measure. What it shows in each recent year is a ranking for the U.S. (3rd, after Singapore and Hong Kong) higher than for any other major economy. And by the subjective appraisals of business executives polled by the Forum, the U.S. actually ranked first in both 1997 and 1998. (See Table 6 of the Executive Summary.)

Industrial output. One reason for the business leaders' view may be that the U.S. manufacturing sector has surged in the 1990s. This is not always understood, partly because downsizing and layoffs still occur and indeed accelerated in 1998. In addition there is a lingering "post-industrial fallacy," which in one version measures the sector's role by employment—or in another uses current instead of inflation-adjusted dollars to track manufacturing output as a share of GDP.

An example of the fallacy is a recent New York Times column: "The Economy Grows. The Smokestacks Shrink." There we read, "Manufacturing has been losing momentum for decades, with its share of the gross domestic product dwindling to just over half of what it was in 1953…." (Louis Uchitelle, 29 November, 1998, 3:4.)

In real terms manufacturing's 1996 share of GDP reached its highest value in a generation, 19.1%, vs. previous peak values of 18.3% in 1989 and 18.7% in 1979. (See Table 1231 of the Statistical Abstract of the United States 1998, and the corresponding tables in earlier editions.)

At about 3% a year since 1975, manufacturing's productivity growth is much faster than in the rest of the economy. (As Table 689 of the Abstract shows, output per hour rose 65% from 1980 to 1997, vs. 21% in the non-farm private sector as a whole). Therefore manufacturing output can grow rapidly over time without adding more workers—or even with fewer workers, as in agriculture at the beginning of the century. Faster productivity gains also mean costs and prices rise less rapidly in manufacturing than in other parts of the economy. For that reason, when measured in current dollars manufacturing as a share of output lags. But the shrinkage is an illusion of prices.

U.S. productivity levels in manufacturing are the highest in the world. While the Netherlands and Sweden come close, and other countries have higher levels in specific sectors (e.g., cars in Japan), the aggregate U.S. lead remains. In 1996, output per hour worked in manufacturing was half again as high as in Canada or the U.K, and a third again as high as in Japan. (That is, the index values relative to 100 in the U.S. were 68 for Canada, 67 for the U.K., and 74 for Japan. See Tables 1374 and 1375 of the Abstract.)

The U.S. share of world exports in manufactures rebounded from a 10.7% share in the late 1980s to 11.5% in 1995. Faced with the rapid expansion of exports from China and the Asian Newly Industrializing Countries (NICs: Hong Kong, South Korea, Singapore, and Taiwan) other advanced economies lost ground. The former West Germany's share fell from 14.6 to 12.2%, and Japan's from 12.4 to 11.4%. (Table 1244.)

What all this adds up to is that the U.S. has had a faster expansion in industrial output since 1980 than any other advanced economy. FIGURE 2 tells the story, tracking the percentage growth in output for manufacturing, mining, and electric and gas utilities. The U.S. increase of 56% exceeded Japan's 51%, virtually all of which occurred in the 1980s. Mexico and Canada are not far behind, with Europe's major economies trailing.

In short, it is not obvious that the U.S. has been de-industrialized, or that its manufacturing sector is shrinking relative to the rest of the economy, or that it has lost its industrial competitiveness.

LIVING STANDARDS

As a result of its economic revitalization, the U.S. continues to have the world's highest average living standards. Economists compare living standards across countries by output per person, assuming that the more output is produced per year, the more will be available for consumption by the population. The usual measure of output is gross domestic product, GDP, defined as the market value of currently produced final goods and services during one year. For any given year, then, a country's average living standards are gauged by per capita GDP.

For the U.S. in 1997, this figure, $28,740, equals a GDP of $7.7 trillion divided by a population of 268 million. I'm reading these numbers off a printout from the excellent (and recently overhauled) World Bank site, specifically from Table 1 of the statistical appendix to the Bank's World Development Report 1998/99. (While you are there, you might tour the terrific slide show, Knowledge for Development.)

Comparing per capita GDP across countries requires one more step. Except for the Euro group, which rallied around a single currency on January 1, each country has its own currency whose value depends on supply and demand in world markets. Therefore an adjustment must be made for something called "purchasing-power parity" (PPP). The adjustment corrects for any discrepancy between a currency's domestic purchasing power and its exchange rate, to give a more accurate index of living standards.

The benchmark value in their Table 1 is the U.S. figure in 1997 of $28,740. That placed it a close second to tiny Singapore's $29,000. The U.S. figure was, for example, 23% higher than No. 6 Japan's $23,400 and 31% higher than No. 10 Canada's $21,860.

To be sure, any such average value says nothing about income distribution, which is becoming more unequal in the U.S. and in other industrial economies. In addition, there are various other measurement and quality-of-life issues that make per capita GDP a crude yardstick at best.

The UNDP human development index. For skeptics, the United Nations Development Program provides an interesting alternative measure of well-being. Their Human Development Index (HDI) factors in not only per capita GDP but also life expectancy at birth and average educational levels. As the UNDP explains, "a composite index, the HDI thus contains three variables: life expectancy, education attainment (adult literacy and combined primary, secondary and tertiary enrolment) and real GDP per capita (in PPP$)." By this score the U.S. ranks No. 4, behind Canada, France, and Norway. (France had lower education and output values, but a higher life expectancy, 78.7 vs. 76.4 for the U.S., in 1995.) Japan ranked No. 9, the U.K. No. 14.

Revising real growth upward. How does all this square with the view that U.S. living standards have not improved much over the past quarter-century? Much has been made of the fact that after about 1973, productivity growth and the rise in living standards slowed.

But it turns out that the official numbers have given too pessimistic a picture. The distortion stems from the way the year-to-year changes in output and income are adjusted for inflation. According to the Boskin Commission (chaired by Michael J. Boskin and including the luminaries Ellen Dullberger, R.J. Gordon, Zvi Griliches, and Dale Jorgenson), inflation rates have been overestimated by about 1.1% a year for some time. The technical reasons inflation has been measured at too high a rate come under four headings: product substitution, retail outlet substitution, quality, and new-goods biases.

Thus about 1% too much has been subtracted from each year's measured per capita GDP for perhaps the past two decades. Living standards, thought to be stagnant, have actually risen by something closer to 2% a year. That would still not be as high as before 1973, but it is respectable for an economy that already had the world's highest absolute productivity levels.

For perspective, let's view the change in terms of the " rule of 72 ." It says that the time it takes an amount growing at compound growth rate r% to double can be found by diving 72 by r. Living standards would thus double in 36 years at 2% a year, vs. 72 years at 1%.

Labor-force outcomes. A look at labor-market conditions may be found in a recent on-line report from the Progressive Policy Institute, a Democratic Party think-tank. The report, What's New about the New Economy?, organizes a variety of useful indicators. In combination the findings (some of which are quoted directly below) suggest a less secure economy—but one teeming with opportunity:

       1. Low-wage jobs are growing, but higher-wage jobs are growing even faster.

       2. Manufacturing has not disappeared, it has been reinvented.

       3. In the last 9 years, three million new managerial jobs have been added.

       4. Fewer workers are unemployed and under-employed.

       5. The increases in worker displacement remain modest.

       6. The wage premium for skilled jobs is growing.

       7. Increases in contingent (part-time, contract, temp) work are also modest.

       8. Workers experience less job stability.
 

In a similar analysis, Michael J. Mandel, economics editor of Business Week, observes that since March, 1991, "real wages have risen at an annual rate of 1 percent," a big improvement over the 0.2% average for the expansion of the 1980s. Mandel also provides a chart on page 9 of his report showing that over two-thirds of the new jobs created in the economy between 1995 and 1998 are "good jobs," in managerial, professional , and skilled-production occupations. As he puts it, "The benefits are especially apparent for young people graduating from college, who are coming into a world of soaring salaries rather than [the] dim prospects many had expected."  

MACRO VIEWS (C): JOB GROWTH

Not that it is new, but we should make explicit another feature of the U.S. economy that is familiar enough by now that we tend to take it for granted.

Since 1980, the U.S. has experienced net employment growth of about 30 million new jobs. What puts this achievement in perspective is the fact that over the past generation, the major industrial economies of Europe have had virtually zero job growth. (FIGURE 3.) As a first approximation, the national economy spawns large numbers of new jobs of all types because of the rapid growth of both large and formerly small states in the South and West—not only Florida and Texas, that is, but also Arizona, North Carolina, and Washington. (MAP 1).

CORE LEGACY: THE MANUFACTURING BELT AND THE PERIPHERY

For historical perspective, let's relate the Census Bureau's definitions of regions to the timing and geography of American economic development. (For data reasons, I use the Census definition of regions, with their 9 component divisions, rather than the Bureau of Economic Analysis definitions, which contain10 divisions.)

Economic geographers see the historical development of the nation's regional structure in terms of an industrial core and a less-developed periphery. We can bundle the 9 Census Bureau divisions accordingly. We start from the Census's four main "regions": the Northeast, Midwest, South, and West. As a map on the inside front cover of the Statistical Abstract of the United States 1998 shows, there are then 9 divisions:

  • Northeast: New England and Middle Atlantic divisions
  • Midwest: East North Central and West North Central divisions
  • South: South Atlantic, East South Central, and West South Central divisions
  • West: Mountain and Pacific divisions
The three bolded divisions industrialized before the others: New England, the Middle Atlantic, and the East North Central (or Lakes) divisions. These were the matrix for America's 19th century industrial revolution before and especially after the Civil War. Accordingly, historians and geographers define the Manufacturing Belt as the super-region from Boston to Baltimore to St. Louis to Milwaukee.

The other six divisions constitute the South and West, a label masking enormous diversity. Though an approximation, this core-periphery approach has proved useful. A wide range of variables (e.g., city growth, attitudes toward unions, ethnicity) display contrasting values as between the old industrial core and the developing periphery.

For example, TABLE 1 shows that when we rank the 9 divisions by the timing of their industrialization, a standard measure of state "business climates" for the year 1980 aligns closely. Similarly, of the states with "right-to-work" laws that forbid union shops (requiring workers to join unions at unionized job sites), all 20 are in the five "younger" divisions, and not one is in the four divisions that industrialized earlier.

Reflecting high costs and such political and institutional variables, manufacturing employment in the core has declined steadily since the late 1960s. (FIGURE 4.) The core had 10.8 million in 1970, but only 7.7 in 1997. Offsetting much of that decline, the South and West gained 2 million jobs over the interval, most of it by 1980. For the U.S. as a whole, the count peaked at 21.0 million in 1979 and has dropped by one million in the 1990s, from 19.7 to 18.8 million. All in all, the U.S. has fared far better on this score than Europe (which has lost over 5 million manufacturing jobs). The reason is the job growth in new manufacturing activities in the South and West (R.D. Norton, 1997).

Hidden from these sweeping comparisons is a remarkable industrial resurgence in the Upper Midwest. During the 1990s, after a generation of painful adjustment, the Lakes states have displayed an impressive comeback. It is based on the division's traditional cluster of "heavy-metal" and vehicles—and on another staple activity, agriculture. The effects are less evident in manufacturing than in total employment. In terms of total (non-farm) payroll employment, the triumph of the resurgent Midwest is that it has added jobs at about the national rate during the 1990s.

The Midwest recovery can be gauged in TABLE 2. It shows that the states with job growth at rates above the 15% U.S. average are all in the South and West—with two notable exceptions. Wisconsin and Michigan grew slightly faster than the national rate and together added over 1 million new jobs.

The divisions hit hardest in the 1990s have been New England and the Mid-Atlantic. As FIGURE 5 shows, the Northeast lagged far behind the rest of the U.S. in job growth in the 1990s. In the early part of the decade, the traditionally slow-growing Northeast was hit especially hard by (1) defense cuts, (2), corporate downsizing (which rocked the region's headquarters complex in New York City, New Jersey, and Connecticut), and (3) the rapid shift of American computing to the West.

Cuts in defense spending after 1989 had a huge impact on such states as Massachusetts, Connecticut, and New York—and on the West Coast, California. FIGURE 6 tells one version of the story. Among the six states with the largest absolute cuts in defense spending between 1984 and 1993, the states with the largest percentage cuts in defense spending had virtually no growth in total payroll employment between 1990 and early 1997. Texas, by contrast, had the smallest percentage cuts among the six and the fastest 1990s growth in non-farm payroll jobs.

Nevertheless, by the beginning of 1997 the state and regional job picture had reached a new stage, in which, for example, Massachusetts would add employment at about the national rate. By that point the Northeast had ridden out its various shocks, and the region's strengths in finance, health care, and software gave it a new lease on growth.
 

MACRO VIEWS (D): NEW DEMOGRAPHICS, NEW POLITICS?

Some 90% of the growth in the U.S. population since 1970 has registered in the states of the South and West. Each state has two U.S. senators, of course. But by the doctrine of "one man, one vote," the Constitution requires reapportionment of the House of Representatives every 10 years to reflect the changing distribution of the population.

Both regional and city-suburban shifts thus require a redistricting after every census. The result is to redistribute power from older cities and from the Manufacturing Belt—which as late as 1980 accounted for half of the House of Representatives. Since the Electoral College (which technically determines the outcomes of presidential elections) reflects congressional redistricting, presidential politics are at stake as well.

We offer now a brief overview of regional population shifts, after which we return to the question of how they change the nation's political environment.

REGIONAL POPULATION SHIFTS: A PRIMER

A valuable checkpoint for state population trends is a Census Bureau news release posted on the last day of 1998 as an update on the 1990s. It features two maps of population changes by state, one for 1990-1998, the other for 1997-1998. These are classic examples of what good maps can do. They show patterns that the numbers for individual states do not. And they allow quick visual comparisons of how the most recent year (1997-1998) aligns with or differs from the 1990-1998 pattern. You can compare the two maps now by going to the site and clicking each in turn.

The 1990-1998 map shows most of the states in the South and West growing faster than the U.S. average of 8.7%. Most of the states in the Northeast and Midwest are growing more slowly. The slow-growth region sweeps from Maine to Oklahoma and up to North Dakota, which (like Connecticut and Rhode Island) actually declined. Anomalies are slow-growth Louisiana and brisk New Hampshire.

Now compare the pattern for 1997-1998. Relative to the U.S. average (as it happens, 1.0%), the basic regional pattern is unchanged. But now, for example, Alaska, Washington, and Oregon are closer to the average, and California has surged ahead. On the downside, Pennsylvania and West Virginia lost population in the most recent year.

Why, then, do the states of the South and West typically add population faster than those elsewhere? Without getting into deeper chicken-and-egg theories of job-seeking vs. amenities-induced migration, we can take a quick look at the definitional components of population growth.

For the nation as a whole, by definition

(E.1) Population Growth=the Natural Increase (Births – Deaths) + Net Immigration

Click on item 2 of the news release, State Population Estimates and Demographic Components of Population Change: April 1, 1990 to July 1, 1998. The first row shows that the U.S. population rose 21.5 million to 270.3 million between 1990 and 1998. The increase of 21.5 million=(32.9 million births – 18.6 million deaths) + 6.7 million net foreign immigrants. (The discrepancy of .5 million reflects the unlisted net gain as a result of returning U.S. military and government employees from abroad during the year.)

The U.S. thus adds nearly a million people a year through legal (and illegal) immigration. This, plus the higher birth-rates among recent immigrants (especially Hispanics), is what gives the U.S. higher rates of population growth than Japan or Europe.

For states and regions, we have to add domestic migration. To see why a state or region is growing at a higher or lower rate, find the natural increase (births – deaths) and then add the two migration entries. The first, as for the U.S., is NIM (net international migration). The second is NDM (net domestic migration). In practice, domestic migration has for a long time tilted the population increasingly away from the Northeast and Midwest, to the South and West.

The effects of net domestic migration flows can be seen visually in FIGURE 7. For each of the 9 divisions you can scan the role of foreign and domestic migration. (Every division had a positive natural increase, births - deaths.) Four of the divisions lost migrants to the rest of the U.S., as indicated by their "below-the-line" bars in the chart.

We can compare two divisions on the East Coast that had offsetting numbers of domestic migrants. The Middle Atlantic division attracted 1.5 million net foreign migrants but lost 2.3 million people to other U.S. regions. Its natural increase, 1.5 million (=4.5 million births – 3 million deaths), was therefore reduced by over .8 million net migrants out of the region. All in all, its net increase in population was less than 700,000, for a population growth rate of only 1.8%.

As an example of a fast-growing division, the South Atlantic (which includes Florida and North Carolina) added 5.4 million people, for a rate of 12.3%. The increase consisted of a natural gain of 2.3 million, plus net foreign immigration of 1 million, plus 2.2 million in-migrants (job-seeking and sun-seeking both) from other parts of the U.S.

In the far West, a similar comparison might be drawn between the Pacific Division, dominated by the flight from California in the early 1990s, and the Mountain states. Visually (just as with the Mid-Atlantic and South Atlantic divisions), the number of domestic out-migrants from the Pacific was roughly matched by the number of domestic in-migrants to the Mountain states.

California aside, these tendencies are broadly similar to the prior two decades, the 1970s and 1980s. A fuller treatment of population growth by state and region is in the Statistical Abstract of the United States 1998. Using the Adobe Acrobat reader provided there, you should move to Table 29, p. 31, "U.S. Resident Population, by Region and Division: 1970 to 1997."

There you find that from 1970 to 1997 the U.S. population grew by 64.3 million, an increase of 32%. (Owing to legal and especially illegal immigration, the rate is noticeably higher than in Europe or Japan). Less than 10% of the 64.3 million additional people registered in the Manufacturing Belt: New England, the Mid-Atlantic, and the East North Central divisions. Over 90% of the increase in the U.S. population between 1970 and 1997 occurred in the South and West.

That brings us back to the politics of demographic realignments.

POWER SHIFTS

As early as 1969, the Republican theorist Kevin Phillips titled his book on electoral demographics, The Emerging Republican Majority.Before the reapportionment required after every decennial census, the 1980 delegation from the North in the House of Representatives was 225 (or 50% of the 450). It fell to 208 in the 1980s, and again to 193 after the 1990 census. By no coincidence, virtually every major committee in the House is chaired today by a Republican from the South or West.

Population shifts count ideologically because most states in the South and interior West are more conservative than most states in the North, the Manufacturing Belt. The South and interior West were historically less urban and industrial and today remain attached to rural and conservative values. In general, new residents not only add to a growing state’s electoral count but also tend to acquire the political coloration of the new environment.

The thesis that the South and West hold decisive power in choosing presidents was formulated again in 1975. In a prescient glimpse of the Reagan Revolution yet to come, Kirkpatrick Sale wrote that the U.S. was experiencing its fifth fundamental political Power Shift:

  • …first [was] the consolidation of federal control at the turn of the eighteenth century,
  • …second…the introduction of Jacksonian democracy in the early nineteenth century,
  • the third…the expansion of Northern industrialism after the Civil War, and
  • the fourth [was] the establishment of Rooseveltian welfarism in the 1930s.
  • The rise of the Southern Rim marks a fifth.
As a geographic concept, the "Southern Rim" may have missed the mark, but modified to the "South and West," Sale’s thesis hits the target. Six successive elected presidents spanning the last 9 elections have hailed from outside the North.

Not that the regional pattern implies a one-party presidency. As Jimmy Carter and Bill Clinton proved, centrist or new or Third-Way Democrats can still get elected president. But the geographical dispersal of people and power forces Democratic candidates for president to the center of the political spectrum.
 

THREE ECONOMIES?

A struggle among three spatially overlapping but ideologically distinct economies has been provocatively sketched out by David Friedman, who directed the New Economy Project in California in the mid-1990s. In Friedman's words, the innovative, bureaucratic, and provincial economies display the tensions that exist between the new and old economies:

The wired [innovative] economy. The densely packed concentration of entrepreneurs and companies in America's urbanized states that generate virtually all the nation's globally competitive, high-wage industries, such as multimedia,design, software, entertainment, computers, biomedical, engineering, finance, and business services.

The Kluge [bureaucratized] economy. Slang for Rube Goldberg-like computer code that barely, if ever, achieves its purpose, the Kluge describes the economy of major media, public-sector bureaucracies and universities that dominates urban politics.

The provincial economy. The rapidly growing Southern and Intermountain Western regions of the country that now dominate national politics. (Quoted from Friedman, "The Fate of a Nation," Los Angeles Times, August 20, 1995, p. M1.)   Regionally, both the wired and Kluge economies are centered in the urban, high-wage states of the Manufacturing Belt. These industrialized states have nearly half the nation's employment, about one-sixth of which is in the opinion-defining core bureaucratic sector: government, education, and social-service activities.

The provincial economy, in Friedman's view, occupies the South and Mountain West. It accounts for about 35% of the workforce. Despite its rapid-growth image, on the whole it specializes still in slower growing industries and the footloose incomes of, for examples, retirees.

As to party realignments, the party of the bureaucratized economy is the Democrats and that of the provincial economy is the Republicans. The innovative economy (as in the Tofflers' Third Wave model) has no clear alignment but tends to prefer Republicans as noninterventionist.

Within this imaginative (if oversimplified) framework, geographical dispersal plays a key political as well as economic role. On the one hand, the urban underclass remains concentrated in the Manufacturing Belt and in such dispersed cities as Los Angeles and Atlanta. On the other hand, the job-generators in the innovative economy can escape the political hostility and regulation of the core's bureaucratized players by heading for greener grass elsewhere.

As these comments suggest, population shifts are also reshaping the political process on another axis, not only away from the long-industrial states of the North, but from cities to suburbs. The combination of regional and suburban realignments is the subject of a 1998 policy memorandum by two consultants to the Democratic Party.

CITIES, SUBURBS, AND NEW REALITIES.

In "Five Realities that Will Shape 21st Century Politics," William A. Galston and Elaine C. Kamarck view the future of the Democratic Party through the prism of demographic and geographic change. For brevity, the five realities are synopsized here.

(1) "The New Economy Favors a Rising Learning Class over a Declining Working Class." The new economy holds new realities for party politics, away from class-based legacies of the New Deal. The new key determinant of economic position is family structure. Unions have shrunk so much that they are no longer pivotal. "In the Information Age political power will rest on the ability to compete in the marketplace of ideas" (p. 10).

(2) "The New Deal Generation Gives Way to the Skeptical Generations." Whereas the New Deal generation saw government as a solution to the problems of the industrial age, and Baby-Boomers have mixed emotions based on Watergate and Vietnam, the formative Generation-Xers hold the key to the future. They are even more skeptical than Boomers, because they have come of age in a time of economy insecurity, in which government seems as much a problem as a solution. In their view, "large-scale politics is a blunt and ineffective instrument for addressing key social problems…." (p. 13.) But they can be recruited to programs for education and the environment.

(3) "Power Continues to Shift from the Cities to the Suburbs." The key comparison here is that 25 years ago, "there were roughly equal numbers of urban, suburban, and rural districts in the U.S. House of Representatives. Today, suburban districts outnumber urban districts by more than 2 to 1, and rural districts by almost 3 to 1" (p. 14). If the Democrats want to find a demographic power-base comparable to the cities in the New Deal, it will have to be the suburbs, where relevant issues will be education, crime, sustainable development, and the environment (p. 16).

(4) "More Children from More Diverse Backgrounds Will be Concentrated in a Shrinking Percentage of Households." The paradox that comes out of changes in family structure is this: "The needs of children will be increasingly central…but the percentage of families with minor children will continue to shrink" (p. 17). In other words, there will be an empathy problem on the part of the majority of the electorate.

(5) "A New Diversity Brings the Challenge of National Identity Politics." Whereas the old politics were about black/white divisions, immigration is changing the picture. From an immigrant low-point in the 1960s, today 11 percent of the population is Hispanic and another 3 percent Asian by birth. (This combined share of the foreign-born exceeds the African-American share, 12 percent.) Such tendencies are likely to accelerate. The challenge will be so appeal to the American Dream as a unifying message to offset the politics of ethnic identities.


2. MICRO VIEWS: NEW ECONOMY, NEW FIRM?
 

To sum up our exploration so far: the macroeconomic debate over a new economy is about changes in growth-inflation tradeoffs in the macroeconomy. A number of skeptical top economists (Krugman, Blinder, or Brad DeLong, for example) hold fast to what might be termed The Casablanca Rule: "The fundamental things apply, as time goes by." On the other hand, Fed Chairman Alan Greenspan, no fad-chaser himself, is a convert to the idea of a new economy.

Our topic now is the "new firm" and its regional coordinates. As background, let's take a light look at the 1998 Forbes Magazine list of the 400 richest people in the U.S. (TABLE 3.) This list is largely a creature of stock-market valuations at any given month or year, since truly monumental fortunes (the ones denominated in billions) in the U.S. nearly always reflect ownership of large corporations. (To see which stocks have most enriched the Forbes 400 recently, check The Forbes Forty.) The 1998 list appeared in the October 12 issue, when the stock market was in a temporary slump. Still, and allowing for these and other vicissitudes in the wealth estimates, the top ranks of the list tell quite a story about the American economy in the late 1990s.

For one thing, the top 14 people on the list all live outside the Manufacturing Belt. In general, there are no old-fashioned smokestack industrialists among the top 15 (and not many among the top 50). True, the 15th member of the list, Sumner Redstone, is from Newton, Massachusetts, but he is a media magnate (his Viacom owns Paramount, UPN, MTV, and Blockbuster Video), not an industrialist or denizen of Route 128. Except perhaps for John Werner Kluge (founder of Metromedia and developer of the nation's largest cell-phone network in the 1980s), the top 14 appear to live in the regions where their fortunes originated. (Barbara Cox Anthony's came from Cox Communications, an Atlanta media company; she lives in Honolulu.)

These fortunes emanate from I.T., Wal-Mart, and media. (Warren Buffet, the investor, is a possible exception; it would depend on his portfolio.) Five of the top15 are high-tech entrepreneurs, from Seattle, Austin, and Silicon Valley. Five are members of the Arkansas Walton family; their vast wealth derives from founding-father Sam Walton's controversial innovations in the organization of retailing. Four (Kluge, Redstone, and the Cox sisters) owe their fortunes to media empires of one kind or another. And one (ranked second with $29 billion) is Warren Buffett from Omaha.

While far from definitive, this list would seem to be consistent with the thesis of a new economy. What are its implications?

  • First, the growth sectors of the U.S. economy—at least as perceived and valued by Wall Street—have shifted to new activities.
  • Second, there is a preliminary suggestion here of heightened entrepreneurial performance in younger regions.
  • Third, it appears that firms (Dell, say, or Wal-Mart) can spring up from nowhere and catapult to great size within the span of a generation or two.
What no such list can tell us is whether something has changed about the firm, i.e., about the organization of production. Beyond management consultants' jargon about reengineering, core competencies, etc., is there a "new firm" spearheading the new economy?

To attack this question, let's first develop an introductory vocabulary on business organization in the U.S. in the 1990s. Then we can turn to a related but different topic of how firms influence the adaptations of their home regions to changing environments. We'll conclude our inquiry with a look at the notion of the network enterprise, as defined by Manuel Castells (1996).

HEADCOUNT

There were about 22 million companies (in Section 17, "Business Enterprise," of the Statistical Abstract) in the U.S. in the mid-1990s. (FIGURE 8.) One way to look at their makeup is in terms of the three forms of business organization described in introductory economics textbooks. These are (1) the proprietorship (a single owner), (2) the partnership (two or more owners), and (3) the corporation. As a matter of sheer numbers, the proprietorship dominates, accounting for some 16 million companies in 1994. (FIGURE 9.) Next come some 4 million corporations, a number swelled by the large number of small professional practices (doctors or accountants) incorporated for tax reasons. Third, partnerships number another 1.5 million. (These data are based on tax filings, which is why they are a few years old before they reach the Abstract.)

One can also describe the population of firms in terms of market structure, i.e., as examples of monopoly, perfect competition, oligopoly, or monopolistic competition.

  • The competitive firm (selling a standardized product, in an industry with free entry and many sellers) can hardly be found outside agriculture, where small firm size and a standardized product are still observable.
  • The monopoly, the only seller of a particular product (e.g., the local cable company or, allegedly, Microsoft), is observable but numerically rare.
  • More common are oligopolies: firms in industries dominated by only a few sellers (because capital requirements make entry difficult) such as the U.S. auto industry or laundry detergents. Roughly speaking, these are the firms on the Fortune 500 list, or any such tabulation of the nation's largest firms.
  • Nevertheless, what economists classify as monopolistic competitors are overwhelming the most numerous types of business organization, encompassing not only virtually all proprietorships and partnerships, but most corporations as well. These are firms like restaurants or laundries that are in industries easily entered (because it doesn't take much capital to get started), and in which each firm is somehow differentiated if only slightly (and often by its location) from its competitors. That is, it faces a downward sloping demand curve: it can raise prices without losing all its customers.
Putting it differently, most of the 22 million companies in the economy are proprietorships, 99% of them engaged in monopolistic competition. Because firms in this category are subject to competition from new entrants, profits seldom get too far above the amount required to cover the opportunity cost of capital, i.e., to keep the firm afloat. Moreover, this is where the rapid growth in the number of firms has occurred in the 1990s, for reasons both positive (opportunity) and negative (necessity). Needless to say, the failure rate is also high.

But what about the other representative category, not small business but Big Business? One way to put big business in perspective is to look at the profit (net income) figures, which are dominated by a relatively small number (fewer than 5,000, say) of corporations in (1) manufacturing, and (2) finance, insurance, and real estate (FIRE). (FIGURE 10.) In 1994, these relatively few corporations had over two-thirds of the $550 billion in total business profits in the U.S.

The upshot, as a first approximation, is that we live in a dual economy of millions of small firms (a relative handful of which will become large) and a few thousand large corporations. More will be said as to how this duality plays out spatially, but for now we can settle for a comparison of large and small firms in the resurgent Rust Belt and in defense-dependent California.

HOW REGIONS ADAPT: THE MIDWEST AND CALIFORNIA IN THE 1990S

Conceptually, we can think in terms of three channels of change open to any region that has been hit by adversity (and that means every region, from the Midwest in the 1970s to Texas in the oil-bust 1980s to California in the early 1990s). To wit:

  • Established firms in stable or declining industries can do the same thing as before, only better, to claim a larger share of a fixed or shrinking pie.
  • Established firms can convert to new, faster-growing product lines.
  • New firms can do new things, and small firms can grow rapidly.
The Midwest comeback in the 1990's illustrates the first process—which is rare! The region's resurgence flows from agriculture and a reinvigorated U.S. auto complex, led by the traditional (post-makeover) Big Three. As with half the nation's regions, the Upper Midwest experienced minimal dislocations from defense cutbacks after 1989, simply because they had benefited less from defense spending during the Cold War. In part for this reason, the erstwhile Rust Belt has actually matched the U.S. average in job growth (15%) during the 1990s, adding 2 million jobs.

At first blush, the story of the Midwest comeback is "the more things change, the more they stay the same." But things are not entirely the same, as explained in "The Midwest Turnaround: Internal and External Influences," by William Testa, Thomas Klier, and Richard Mattoon, three researchers engaged in a project on the Midwest comeback done at the Federal Reserve Bank of Chicago . In particular, while the Midwest in 1996 had four more auto plants (31) than it had had in 1979, the increase masked the closing of 9 plants and the opening of 13 others.

The technologies and organization of the workflow in the new plants bear little resemblance to what had gone before. The region's watchword today is lean manufacturing. In other words, the comeback took place only after an agonizing restructuring over the past generation, as marked in part by the adoption of Japanese techniques and practices. The result is to extend the earlier recoveries of New England and the Mid-Atlantic divisions to the western end of the old core, the Manufacturing Belt.

CALIFORNIA: CONVERSION VIA REALLOCATION OF TECHNICAL TALENT

California poses a direct test case of how a regional economy adapts to the sharp downsizing of some of its largest companies—in this case, defense cutbacks after 1989. Did existing defense firms shift to new product and service lines, the second channel of conversion? Or did conversion require new firms and the expansion of firms in other sectors, the third possibility?

In "California’s Recovery and the Restructuring of the Defense Industries," Luis Suarez-Villa analyzes the state’s surprisingly strong mid-decade rebound from the doldrums of the early 1990s. How important was "defense-conversion" in fostering that recovery? He concludes that it wasn’t a factor. "Rather, California’s recovery was a product of the upswing in the national economy, which boosted demand for many of the state’s products, and of the rise of many small and medium-sized firms in a few…very dynamic sectors…." The growth-industries included civilian high-technology, wholesale trade, the film industry, and producer services.

The level at which "conversion" occurred in California was therefore less within defense firms than via the market-based recycling of technical talent from defense companies to more entrepreneuerial firms. This process is symbolized by California’s striking share (25 percent) of all the nation’s firms that doubled in size between 1989 and 1994. In general, such firms are known as gazelles . Also see the New Economy Index.

Suarez-Villa concludes that conversion occurred not within firms but through the rise of new enterprises and the expansion of existing non-defense sectors. What may look like conversion at the level of the firm is typically some constructed mix of downsizing, mergers, and acquisitions.

Instead, conversion occurs as workers are released from downsized defense firms and re-employed in expanding (civilian) activities. In this process, entertainment employment in Los Angeles over the past decade has expanded rapidly enough to offset losses in the area's defense sector. More specifically, some high-skilled workers released from defense activities wound up finding high-paid jobs in the entertainment sector.

The conclusion? The links between companies and regions are diverse and not easy to summarize. From this comparison, it is tempting to conclude that "big is good, and small is good, too." On the other, there are deep and rich literatures that explore the connections between companies and regions, today and in the past, in the U.S. and in other nations. We return to this topic in Part C, Spatial Clusters.

What can be said at this point is that companies of all sizes and in all locations are going through changes that reflect breakthroughs in communication technology.

THE GOSPEL ACCORDING TO MANUEL

"A new economy has emerged in the last two decades on a worldwide scale."
(Manuel Castells, 1996, p. 66.)

Perhaps the most influential guru of the new economy among scholars (especially non-economists) is Manuel Castells, a Berkeley sociology professor born in Barcelona in 1942. Following a 1989 book, The Informational City, Castells has written a massive trilogy between 1996 and 1998 on The Information Age: Economy, Society, and Culture. Volume one is The Rise of the Network Society. It lays out a worldview and describes "the information technology paradigm." And it contains long chapters on "the network enterprise" and "the space of flows" (i.e., as distinct from "the space of places").

Castells' logic and rhetoric are traditional, though not quantitatively analytical. (In other words, the numbers are used to illustrate, but they don't prove anything.) Without claiming to do justice to the range and ambition of Castells' magnum opus, I will sketch out the main lines of his argument on the new firm here.

In a nutshell, the new firm is the Networked Firm. As such, it is neither small nor large, neither start-up nor corporate, neither digital nor industrial. Instead, it can be any combination of the foregoing, provided it uses computer networks to adapt and compete.

FRAMEWORK: THE INFORMATION TECHNOLOGY PARADIGM

Castells offers a framework for "the material foundation of the informational society" (p. 61). The key features he lists refer not to all the influences the new technologies exert upon society, but only to economic factors, "the material foundation." Five characteristics define the information technology paradigm:

  • In contrast to earlier technological revolutions, this one is about technologies that "act on information."
  • Since information is a part of all human activities, all aspects of life are affected.
  • Any system or organization using information technologies has a network logic, a logic which in turn has become more powerful because of computers.
  • The paradigm is accordingly based on the flexibility that networks provide. As he puts it, "Turning the rules upside down without destroying the organization has become a possibility, because the material basis of the organization can be reprogrammed and retooled" (p. 62).
  • The fifth property is the technological convergence of such formerly separate sectors as computers, telecommunications, and biology.

The information-technology paradigm, writes Castells, is informed by (but not the same as) "complexity theory." The descendant of the "chaos theory" of the 1980s, the complexity school is centered in the Santa Fe Institute, which derives from the nuclear laboratories at nearby Los Alamos, New Mexico (now in the news for an espionage story linked to China). A hallmark of complexity theory is its focus on how simple systems in nature and in the economy generate spontaneous order, i.e., operate as self-organizing systems.  Putting it differently, a broader school of thought links not only (1) complexity, but also (2) fractals (self-replicating geometric patterns in nature, as in the leaves of a tree),  (3) self-organizing systems, and (4) emergent computation.  In any case, as a perspective for understanding diversity, complexity theory has a part in Castells'  paradigm—whose defining qualities he lists as "Comprehensiveness, complexity, and networking" (p. 65).

By way of distancing himself from the morality of the new information technologies, Castells concludes this discussion of his organizing framework with a famous maxim from the technologist Melvin Kranzberg. "'Technology is neither good nor bad, nor is it neutral.'" (Kranzberg, 1985, p. 50, emphasis in Castells, p. 65.)

THE NETWORK ENTERPRISE

"Networks are the fundamental stuff of which new organizations are and will be made."
(Castells, p.168.)

Castells also posits a "new organizational logic." This he sees as common to all organizations, whereas their contexts may vary with circumstances and cultures. In his view the 1980s saw a "recapitalization of capitalism" (p. 85) that restored the preconditions for investment that capitalist economies require for growth. One hallmark was the much-heralded "transition from mass production to flexible production, or from 'Fordism' to 'post-Fordism'" (p. 154). Another is the "crisis of the large corporation, and the resilience of small and medium firms [SME's]…." (p. 155). A third is a new style of management, most evidently around the Japanese practices that reduce uncertainty by opening up communication between workers and management, and between suppliers and customers.

In addition, three other sets of arrangements that give firms new flexibility derive from networks. One concerns a variety of networked relationships among SME's. Another encompasses the various practices large corporations use to subcontract and license production to smaller firms. Finally, a sixth arrangement is the "intertwining of large corporations in…strategic alliances" (p. 162).

From all this emerges the horizontal corporation. The organizational innovations just listed can be understood is as a response to the crisis of the bureaucratic, hierarchical corporation—the corporate dinosaurs decried in the late 1980s and early 1990s. Nor is the horizontal corporation necessarily "lean and mean," since it became clear in the 1990s that "large corporations had to become primarily more effective rather than more thrifty" (p. 164).

Instead, the meaning of the horizontal corporation within what Castells terms the informational/global economy is as a "network enterprise." Following the French theorist Alain Touraine, Castells distinguishes here between static and evolving organizations. The first type has as its goal self-reproduction. In the second type, the organization's goals lead to endless structural changes. "I call the first type of organizations bureaucracies; the second type enterprises" (p. 171).


3. DIGITAL DIVIDE

Many observers have believed that a developed capitalist economy tends to slow down and even stagnate over time. In that context, a "new" economy becomes a welcome thing. In hindsight, however, it turns out that new economies have emerged in the U.S. and world economies about every half-century or so. Today's New Economy, in other words, is one of a progression of new economies over the past two centuries, beginning with the high Industrial Revolution in Britain in the late 1700s.

In that light, the issue becomes, what does this new economy replace? What was the Old Economy? We might jot down a working list of some of its stylized features:

  • The vertically integrated corporation, mass-producing goods within the U.S.
  • Political party coalitions forged in the New Deal.
  • A hyper-industrial Manufacturing Belt, shipping goods to other U.S. regions.
  • After 1950, a mainframe culture: big computers in big organizations.
  • A military-industrial complex.
And we might assign it a life-span of 50 years, from the beginning of World War II in Europe (1939) to the end of the Cold War (1989).

A COLD-WAR ECONOMY?

A diverse tradition in the history of economics concluded that advanced capitalist economies inevitably tend to stagnate. Stagnationists like the Marxists Paul Baran and Paul Sweezy and the Keynesian Alvin Hansen (who all witnessed the transition) may well have viewed post-World War II America as a case in point. From 1939 to 1989, military spending justified both (1) Keynesian budget deficits and (2) an implicit technology or industrial policy. Pump-priming there was, along with any number of infrastructure and RD projects justified in the name of national security.

The cold-war economy was without question a new stage of American economic development. For example, President Eisenhower was elected in 1952 on a pledge to end the Korean War—which he did in 1953. But the arms budget grew relentlessly anyway through the 1950s. Alarmed by this unprecedented "peacetime" build-up, Eisenhower uttered a famous warning on leaving office in 1961:

The conjunction of an immediate military establishment and a large arms industry is new to the American experience. …In the councils of government, we must guard against the acquisition of unwarranted  influence…by the military-industrial complex . The potential for the disastrous rise of misplaced power exists and will persist. (Dwight David Eisenhower, 17 January 1961, in T. Augarde [Ed.], The OxfordDictionary of Modern Quotations [London: Oxford University Press: 1991], p. 73.)

Hence stagnationists might well have concluded that the Great Depression of the 1930s marked the end of the private economy's capacity to grow steadily on its own.

And it is true that today we tend to forget the shock to the economic system that ensued with the end of the Cold War. After the post-Vietnam retrenchment, the Reagan arms build-up of the mid-1980s had given new life to the military-industrial complex. But between 1987 and 1995 defense spending fell from 6.4 to 3.9% of GDP. In those same years the U.S. lost over a million well-paid, defense-related jobs: more than one in three. Hard-hit though a few key states, were, however, by the mid-1990s the transition was complete. The proof? Today's unemployment rates below 5% in every region.

What happened to make the economic exit from the Cold War relatively smooth? A partial answer is that the private sector was more resilient than many had thought. In particular, a new core sector had been forming for some time, one capable of driving the economy to a subsequent basis for expansion.

INFORMATION GOODS AND THE NEW ECONOMY

In a 1989 essay, "The Triumph of Capitalism," Robert Heilbroner, perhaps the best known American historian of economic thought, declared the stagnation thesis dead. "The long-term process of expansion has bypassed saturation by discovering or creating new commodities." (Heilbroner, quoted in Jonathan Schlefer, "Making Sense of the Productivity Debate," Technology Review, August/September 1989, p. 33.)

What were these "new commodities," so powerful that they could swamp any tendencies the economy had toward stagnation? Today, of course, the answer is obvious. They were information goods , old and new, that can be digitized.

But how have such information goods become so prominent in the economy? The answer entails three landmark events: the invention of the microprocessor in 1971, the introduction of the IBM PC in 1981, and the commercialization of the Internet in 1994.

For purposes of understanding the transition of the 1980s, in which the old economy expired and the new one gathered its forces, we can focus on 1981.

THE PC REVOLUTION

Before that year there were three major technology industries: mainframe computers, electronic components, and medical instruments. These, plus a few other activities employing high proportions of scientists and engineers, used to constitute the "high tech" sector of the economy. The market for computers per se had only two components. Fortune 500 companies used big computers to compile databases for customer billing and employee records. The federal government (where the Defense Department and NASA relied on mainframes and supercomputers for military and space programs and the Census Bureau kept counting) was the other.

The IBM PC broadened the market from corporations and the federal government to include all manner of businesses, large and small, and households as well. The definition of I.T. changed accordingly.

Today, due in large part to that one significant product introduction in 1981, virtually every person, company, and government is a customer for technology products. The definition of technology industries has expanded from large computers to include personal computers, software, semiconductors, semiconductor equipment, communications (both telecommunications and data communications), and medical technology (biotechnology and medical devices). (Michael Murphy, 1997, p. 47.)

In this view, the information technology sector today has seven components:

      (1) large computers,

      (2) personal computers,

      (3) software,

      (4) semiconductors,

      (5) semiconductor equipment,

      (6) communications, and

      (7) medical technology (biotech and instruments).

What was so revolutionary about the personal computer? The microprocessor, as put to use in the Apple II and then the IBM PC, carried the world from an analog to a digital mode of representing ideas (language, numbers, images and sounds). Five basic ingredients in this change are

What is new to the Information Age, in other words, is the ability to do things in a digital way. (This elegant formulation is explained in The Big Picture, a web site and CD-ROM that provides a tutorial on the digital revolution.) Today, for example, we can sample CD's or videos on the Internet before paying for them, again on the Internet. Why? Because the sounds and images are digitized. For such generalized purposes, mainframes and minicomputers were all but irrelevant, tools from the era of mass production, automation, and top-down bureaucratic management. The coming of the PC thus rendered anything and everything subject to the power of the computer, while retaining the crucial dimensions of human scale, decentralized decision-making, customized design, and creativity.

In that light, it is striking to find that U.S. Commerce Department data ( Figure 6 of the on-line version of The Emerging Digital Economy) on I.T.'s share of corporate investment in business equipment show sharp jumps after both the PC and the Internet. The data show the I.T. share jumping from about 10 percent in 1979 to 25 percent in 1985 and again with the Internet from about 33 percent in 1994 to 45 percent in 1996. (Department of Commerce, 1998.)

While we are at it, other indicators in the report show similar shifts in the economy toward digitized products and processes. For a quick introduction to the Commerce Department report, The Emerging Digital Economy, go to chapter 1, "The Digital Revolution," and check Figures 1-5. For the White House web site on digital commerce, including the famous White Paper's guidelines for regulation, see ecommerce.

LONG WAVES AS NEW ECONOMIES

And yet, to repeat, this is not the first or even the second or third new economy. On the contrary, and from one point of view, world development unfolds through a succession of "new economies." The roughly 50-year rhythm of the sequence can be seen in TABLE 4. The table is based on a review by Nobel-Prize-winner Simon Kuznets of Joseph Schumpeter's 1939 book, Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process. The waves labeled "Kondratieff" refer to Nikolai Kondratieff, the great Russian economist of the early 20th-century who first posited and explored such 50-55 year cycles—and died at the hands of Stalin. (Kuznets, "the father of national income accounting" in the U.S., was also Russian-born.)

TABLE 4. LONG WAVES OF CREATIVE DESTRUCTION

1. Industrial Revolution (1787-1842): cotton textiles, iron, steam power

2. The Bourgeois Kondratieff (1842-1897): railroadization

3. The New-Mercantilist Kondratieff (1897-1939): electricity, automobile

4. The Cold-War Kondratieff (1939-1989): defense, TV, mainframes

5. The Information Age (1989- ) PC's, telecommunications, entertainment

Source: Adapted by the author and updated (in the bolded items) from Simon Kuznets, "Schumpeter's Business Cycles," American Economic Review, June 1940, p. 257.

The first was the beginning of the Industrial Revolution and the factory system, the second had as its symbol the railroads, the third electricity and automobiles, and the fourth (for the U.S., at least) the military-industrial complex of the Cold War. The fifth wave, the Information Age, is today's new economy. (TABLE 4.)

The series of five "new economies" corresponds in its logic to Schumpeter's theory of creative destruction. In Capitalism, Socialism, and Democracy (1942, 1962, p. 83), he wrote that innovation "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism" (p. 83). In a footnote, he points out that the years of "comparative quiet" can make us miss out on the longer rhythm:

These revolutions are not strictly incessant; they occur in discrete rushes which are separated from each other by spans of comparative quiet. The process as a whole works incessantly, however, in the sense that there always is either revolution or absorption of the results of the revolution, both together forming what are known as business cycles. (Schumpeter, 1942, p. 83.)

Strictly speaking, not many economists today view such long waves as technically measurable. Numerous attempts to quantify and measure price and output fluctuations to validate more formal Kondratieff Cycles have proved unsatisfying. But then the same thing is true of "business cycles" of any duration: economists have come to doubt any regular cycle of business fluctuations over time. In any case, in this softer version, as labels for distinct technology regimes through the stages of the Industrial Revolution, long waves seem useful constructs. By this I mean that they can provide a framework for understanding other seemingly autonomous (i.e., seemingly independent or free-standing) changes that catch our attention.

Consider, for example, globalization. One of the organizers of the World Economic Forum in Davos, Switzerland, sees globalization as the hallmark of the 1990s. In turn, globalization in her view awaited the end of the Cold War. When the U.S.S.R. was dissolved in 1991, she says, "That unleashed all the capital and energy that had previously been locked in this global power struggle" (Maria Livanos Cattaui, in Diana B. Henriques, "Sewing a Label on a Decade," The New York Times, 4 January 1998, p. C3.)

Fair enough. Globalization seems on the surface to be "what the 1990s are all about." (My phrase, not hers.) But what is it in the 1990s that has stepped up the pace of global communication? As a commentary in Newsweek put it in September, "Globalization has become the decade's most overused word. But at its heart, it embodies a real truth: technology has made this a planet of shared experiences." (Quoted by Seth Stevenson, "In Other Magazines, Slate, September 1, 1998.)

Here we have it. In the 1990s, "Technology has made this a planet of shared experiences." The technology in question is digital.

The next section of the chapter is a case study on the birth of the digital economy, as it unfolded geographically. The theme to be developed now is that the presence of younger regions (regions of creativity, one might say), gave the U.S. geographical sources of rejuvenation not available to its competitors in the world economy.



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