June, 2000, Vol. 123, No. 6
Paradigm for the new economy
Précis from past issues
Paradigm for the new economy
Are we seeing a sea change in the way the U.S. economy operates at the dawn of this new century? W. Michael Cox and Richard Alm, in an essay published in the 1999 Annual Report of the Federal Reserve Bank of Dallas, present their case for a "New Economy." In this economy, they argue, the old guiding tenets that formerly served as buttresses against such elements as inflation or unemployment find themselves reshaped into new rules, new principles.
Specifically, traditional economic theories that have held sway for the past half-century now fail to explain the radical economic changes of the 1990s. Indeed, say Cox and Alm, during the past two decades, a new economy has emerged from a spurt of invention and innovation, led by the microprocessor. This tiny creation, leading our way into the 21st century, is a symbol of the paradigmatic shift signaling an economic era where "knowledge is more important to economic success than money or machinery. Modern tools facilitate the application of brainpower, not muscle or machine power, opening all sectors of the economy to productivity gains. . . . The most far-reaching implication of the New Economy centers on the trade-off between growth and inflation."
The invention of the microprocessing chip and its attendant devices have made possible such disparate advances as telecommuting, laparoscopic surgery, and structures equipped with synthetic "nervous systems," to name just three. The American workforce, while most of its members continue to commute in real time, contains an increasingly sizable cohort which commutes in virtual time: Working from a home complete with the requisite modem, FAX, and computing connections becomes easier and cheaper than slogging in to the job. The authors write: "Roughly 20 million Americans now telecommute, working at least one day per month from home during normal business hours. Studies show that telecommuting saves businesses roughly $10,000 annually for a worker earning $44,000—a savings in lost work time and employee retention costs, plus gains in worker productivity."
The invention of the microchip also has enhanced surgical procedures. The use of the laparoscope—now augmented with a tiny digital camera, fiber-optic cables, and video monitor—often allows surgeons to perform surgery through small incisions to the body. Thus, the more invasive and dangerously radical cutting of the older surgical techniques is avoided, leading to faster recovery times and shorter hospital stays. Moreover, "the 85 percent reduction in lost work time isn’t the only savings. The procedure itself costs roughly 10 percent less in hospital and physician fees."
Turning from the microscopic to a scale much grander, we see the same microchip technology employed in "smart structures," which are then embedded in the Nation’s largest infrastructures. Monitoring the health of large pieces of the economic infrastructure—bridges, dams, buildings, tunnels, and so forth—is a never-ending task. The mode of doing so in the past involved periodically drilling holes in each one to analyze its core sample, "a labor-intensive proposition," according to Cox and Alm. "But by equipping them with a fiber-optic ‘nervous-system,’ data can be collected continuously on structure strain, temperature, vibration, magnetic fields, cracks, and road-salt corrosion and penetration." With this type of constant monitoring, the preventive nature of repair and maintenance becomes simpler, and more cost-effective than ever before. Obviously, safety, too, is improved.
In the realm of commerce, technology continues to virtually revolutionize the economy. Who today has not heard of "e-commerce"? While it remains to be seen how new virtual marketplaces will ultimately affect trade and society overall, the authors predict that by 2003, the cyberspace marketplace will amount to $1.7 trillion, up by an order of magnitude from its nascent figure of $151 billion in 1999. Further, they note that "consumer purchases get most of the attention, but four-fifths of e-commerce involves business-to-business transactions." At the most fundamental level, "electronic commerce alters the economy’s cost structure by intensifying competition. The idea of rivalry among sellers driving down prices has a long pedigree in economics, dating back at least as far as Adam Smith." They point out that precedent exists for technology as an agent in promoting competition. The canals and railroads of the 19th century and the air transport and interstate highways of the 20th century certainly resulted in "expanded customer bases" and decreased costs of bringing goods and services to market.
Cox and Alm conclude the essay by stating their belief that the new economic paradigm "has brought us the best of all worlds—innovative products, new jobs, high profits, soaring stocks. And low inflation." Only time will tell whether this shift in economic thinking will prevail or if it is merely a technological blip on history’s radar screen.
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