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
from the economics editor at Business Week. And here's economist Hal
site on the
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
But you don't have to
arrive at these same conclusions to get something out of the grand tour we're
about to take.
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
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,
nation has been experiencing a higher growth rate of productivityoutput
per hour workedin 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.)
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.
"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
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.
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
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
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 individualismall 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,
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,
andlast but for our purposes not leastthe 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,
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.)
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
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 capitalismabove all as practiced in the largest mature economy,
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.
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
and Michael Porter of Harvard have helped refine the measure. What it shows in
each recent year is a
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
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 employmentor 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
Abstract of the United States 1998, and the corresponding tables in earlier
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
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 workersor 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
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.
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,
Comparing per capita GDP
across countries requires one more step. Except for the
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
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%.
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,
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 economybut 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
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
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
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."
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 Westnot
only Florida and Texas, that is, but also Arizona, North Carolina, and
Washington. (MAP 1).
CORE LEGACY: THE
MANUFACTURING BELT AND THE PERIPHERY
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
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
- 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
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
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,
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 vehiclesand 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
Westwith 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 Yorkand 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
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
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
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
Beltwhich 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.
SHIFTS: A PRIMER
A valuable checkpoint for
state population trends is a Census Bureau
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
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
Growth=the Natural Increase (Births Deaths) + Net Immigration
Click on item 2 of the
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
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.
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
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 states 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
As a geographic
concept, the "Southern Rim" may have missed the mark, but modified to the
"South and West," Sales thesis hits the target. Six successive elected
presidents spanning the last 9 elections have hailed from outside the North.
first [was] the
consolidation of federal control at the turn of the eighteenth
introduction of Jacksonian democracy in the early nineteenth
- the third
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.
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.
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.
[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
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
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
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
(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
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
(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.
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
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
While far from
definitive, this list would seem to be consistent with the thesis of a new
economy. What are its implications?
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?
- First, the growth
sectors of the U.S. economyat least as perceived and valued by Wall
Streethave shifted to new activities.
- Second, there is a
preliminary suggestion here of heightened entrepreneurial performance in
- 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.
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).
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.
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.
- 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
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.
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:
The Midwest comeback
in the 1990's illustrates the first processwhich 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.
- 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.
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
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.
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 companiesin 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?
Recovery and the Restructuring of the Defense Industries," Luis Suarez-Villa
analyzes the states 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 wasnt a factor. "Rather,
Californias recovery was a product of the upswing in the national
economy, which boosted demand for many of the states products, and of
the rise of many small and medium-sized firms in a few
." 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
Californias striking share (25 percent) of all the nations firms
that doubled in size between 1989 and 1994. In general, such firms are known as
. Also see
the New Economy
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.
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
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
"A new economy
has emerged in the last two decades on a worldwide scale."
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
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
- 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.
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' paradigmwhose 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
the fundamental stuff of which new organizations are and will be made."
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
." (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
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 corporationthe 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
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:
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).
- 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.
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
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
Warwhich 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:
of an immediate military establishment and a large arms industry is new to the
In the councils of government, we must guard against
the acquisition of unwarranted influence
. 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
In a 1989 essay, "The
Triumph of Capitalism," Robert Heilbroner, perhaps the best known American
historian of economic thought, declared the
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
, 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.
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,
(5) semiconductor equipment,
(6) communications, and
(7) medical technology (biotech and
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
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
LONG WAVES AS NEW
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
cyclesand 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
Revolution (1787-1842): cotton textiles, iron, steam power
2. The Bourgeois
Kondratieff (1842-1897): railroadization
New-Mercantilist Kondratieff (1897-1939): electricity, automobile
Cold-War Kondratieff (1939-1989): defense, TV, mainframes
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
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:
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
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.)
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
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