Customer Reviews

The New Economy: What It Is, How It Happened, and Why It Is Likely to Last

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Roger Alcaly, an economist, makes a strong case that information technology, like electricity before it, will support economic growth for decades. Making a parallel with electricity, he notes that for decades, industrialists would electrify only parts of their plants, but only to supplement the older steam engines. It wasn't until the 1920s (40 years after the discovery of electricity), when new immigration laws slowed the arrival of cheap labor, that U.S. industry plugged fully into the new electric technology and reaped the resulting prodcutivity gains.

Alcaly suggests that a similar lag is holding up the computer revolution. He argues that the full impact of the New Economy won't be felt until vast sectors upgrade their basic processes, transmitting data over the Internet between suppliers and customers.

In his broad survey of an economy in transition, Alcaly ranges from the equity markets to manufacturing and the Federal Reserve. He makes a solid case that a New Economy is upon us, even if its power is hard to measure and predict.

      It was common in the latter stages of the Great Bull Market of the Nineties to hear talk, especially among Wall Street types, about a "new economy". What exactly the phrase meant was unclear, but all were agreed, (including the Chief Gnome himself, Alan Greenspan), that it was "a good thing." Since those heady millennial days however, the economy has soured somewhat, and with gas prices rocketing past the $50-per-barrel mark, and jobs disappearing into the all-consuming global Black Hole affectionately called "Out-Sourcing", one hears considerably less talk these days about the glitzy "new" high-tech economy that was going to make us all rich.

But ... not everyone has given up.

Roger Alcaly, a hedge-fund manager in New York City, remains bullish!

He believes that there really IS a "new" economy, and he provides a three-step argument to prove his position.

First, he says, the existence of the "new" economy is revealed by the recent remarkable growth in productivity.

Second: he claims that this sudden surge is a (belated) result of the IT-revolution.
[IT = "Information Technology"; i.e., personal computers and the Internet].

And third: because the new economy is the product of a technological breakthrough leading to higher productivity, it is part-and-parcel of a capitalist pattern of technologically-driven growth which can be traced back at least as far as the First Industrial Revolution (1750 and after). This is why Alcaly babbles on so much (albeit unconvincingly) about Schumpetrian periods of "creative destruction."

Unfortunately, Alcaly's tri-partite thesis isn't tenable, and he himself gradually and grudgingly admits this before we've even finished the First Chapter!

First, about the recent surge in productivity growth: Alcaly admits "it's still too soon to know for sure whether a lasting new trend has been established, or how powerful it will be ..." (p. 34).

This leaves us, and him, on pretty thin ice. I mean, if the productivity growth is a mirage, where's our "new economy"?
[In fact, the productivity growth is largely the result of a new accounting procedure introduced by the Commerce Dept.'s Bureau of Economic Analyis! See page 40, and following.]

Second, the alleged connection between technology and growth (now or in the past) is not entirely self-evident. In fact, as Alcaly admits, "technological breakthroughs cannot be identified unambiguously, and some scholars reject the view that there have been a number of relatively discrete bursts of critically important innovations over the last two centuries." (p. 30) In other words, economic historians have long since dropped the simplistic notion that new gadgets "cause" economic growth. And Alcaly's own attempt to tie technological change to the business cycle (pp. 25-35) also comes a cropper! (Think about that! He provides TEN pages of evidence to DISPROVE his own position!)

So, before we've even come to the end of his FIRST chapter, Mr Alcaly's entire case for a "new economy" has collapsed! So much for the superior knowledge of Wall Streeters! (Now might be a good time to check your retirement portfolio!)

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That said, there really IS a new economy. We may characterize it as we will, but what it clearly is NOT, is a manufacturing economy. The "old" economy (Made In America) has long since disappeared, and will never return to these shores. In its place we have the Post-Industrial Economy. We don't make anything anymore; we flip burgers. We don't even earn enough to buy what we import; we have to borrow ... $2 billion per day ... from foreigners!

This "new" economy, unlike the old, is dedicated exclusively to improving the lot of the rich as it ignores the growing ranks of the poor. Because Economists have always been cheer-leaders for the Haves, we should perhaps not be surprised that Mr Alcaly finds this "new economy" so heady. But he might find it less exciting were he to acquaint himself with its real human costs. Ms Ehrenreich's Nickel and Dimed [ISBN: 0805063897] would be a good place to start.