Atelier N°.17, Article13

William K. Tabb :
Monthly Review, April 2001

                                            New Economy…Same Irrational Economy
                                                                    by William K. Tabb (*)

                            What can we say about the assertion that there is a "New Economy"?
                            That depends on what we mean by this term. It is nonsense to claim, and
                            few do any more, that the business cycle has been eliminated or that the
                            contradictions of capitalism have been resolved. In 2000 we witnessed a
                            massacre of technology and Internet stocks ending what many considered
                            the country’s biggest financial mania of the past hundred years. The
                            NASDAQ lost over half of its value, a paper loss of 3.33 trillion dollars,
                            the equivalent of a third of the houses in the United States sliding into the
                            ocean, as one Wall Street wag tells us. While only a few months ago, all
                            we heard about was the magic of the market and that crises are the result
                            of bad government policies, whether "crony" capitalism or simply failure to
                            make information available to markets in a full and timely fashion, and that
                            the new information technology now makes markets even more efficient;
                            all of this talk is now shown to be the usual exaggeration we find in the up
                            stage of most long expansions. As in the past it disappears as the
                            economy weakens. Indeed as inventories pile up the nature of capitalism
                            becomes clear to even the financial press and the politicians.

                            As to the permanently high plateau we were said to be on thanks to the
                            great increases in productivity brought about by the New Economy, it
                            now appears to many New Economy enthusiasts that this has been a
                            cyclical phenomenon. As the Financial Times writes editorially, a New
                            Economy "driven by a productivity miracle now seems even more
                            far-fetched."1 By early 2001, as companies cut their investment spending
                            substantially, capital budgets for equipment and software declined,
                            mocking the claims that informational technology would be relatively
                            immune to the business cycle.

                            The notion that better information alone guarantees that markets will
                            allocate resources efficiently has always been a major misrepresentation.
                            The idea that policy makers and private decision makers now have
                            "reliable information about the future thanks to the IT revolution" has
                            proven equally chimerical. In Mexico in 1994, for example, the data was
                            available well before the peso crisis erupted, as it was in Thailand and
                            elsewhere before the East Asian financial crisis broke in 1996. In every
                            expansion, as Keynes and Marx before him explained, there is the
                            tendency for investors to be overconfident and shrug off the warning signs.
                            The information can be available and transparent, but the interpretation of
                            events and data during the expansion leads to piling speculation upon

                            Until the high-tech bubble burst, there was a widespread belief that this
                            business cycle was different. This was usually supported not only by the
                            length of the expansion, but also by the lack of inflationary pressure in the
                            face of prolonged growth, and in the second half of the 1990s by the rapid
                            increases in productivity. But it is now evident that the talk about the end
                            of the business cycle as a result of a "New Economy" was as misguided
                            as similar talk, which always sprouts toward the end of long periods of
                            expansion, has always been. There has been talk of a "New Economy"
                            toward the end of every long boom, when it is said that the business cycle
                            is passé and that there are new rules. In the 1920s, amid such euphoria,
                            many working people were seduced by the promise of capital gains to be
                            made in stock speculation in such "high tech" New Economy firms as
                            General Motors and RCA; they began to buy as the party was about to
                            end. Capitalism grows through alternating periods of expansion and crisis;
                            that remains its nature. Does this mean that nothing has changed, that there
                            is no "New Economy?" I do not think this would be right, either.

                            The truth is that the "information revolution" does not change the basic
                            nature of the way capitalism works, even if it enhances productive
                            efficiencies just as the telegraph and transoceanic cable did in an earlier
                            era of capitalist development. More important is the basic continuity of the
                            system. Technology in a capitalist economy is embedded in a set of social
                            relations. These include the patterns of ownership and the speculative
                            growth of fictitious capital that results from the drive—on the part of those
                            who make a living buying and selling claims to future surplus
                            extraction—to overvalue assets. In this fundamental reality of the system
                            there is surely no New Economy. Those who said, "but this time it is
                            different," are quieter these days. At the start of 2001 the Goldman Sachs
                            Internet Stock Index was down three-quarters from its peak, leading the
                            Financial Times to editorialize that the words "New Economy" "will give
                            investors nightmares." But we should not move from acceptance of the
                            New Economy hype to the pessimism that it was all just a speculative
                            bubble, a high-tech tulip mania.

                            The New Economy thesis does raise two significant areas for
                            investigation. The first is in what sense can it be said there is in fact a
                            "New" economy? This involves the thesis that we have entered a third
                            industrial revolution. Perhaps the term "industrial" is outmoded since it is
                            being suggested that a "knowledge" or information economy has emerged,
                            in which we have increasing returns to scale. The distinction is not simply
                            the stress on information as opposed to physical production; rather it is the
                            idea that since knowledge can be used by others without additional cost,
                            the more output the knowledge economy produces the lower the cost per
                            unit of its production. Instead of diminishing returns we have increasing
                            returns. This, it is suggested, promises a more rapid rate of growth in the
                            future. Some theorists carry this line of thinking quite far, claiming that the
                            old rules and relationships no longer apply. However, this thesis has hit
                            some speed bumps as the speculative bubble that accompanied these bold
                            assertions collapsed. At a more fundamental level, many of the innovations
                            of the past created increasing returns to scale and network effects; the
                            idea that the more people use a technology the more they will want to use
                            it, like the Internet or a video format, while accurate enough, forgets that
                            the telephone and other innovations had this same property.

                            The New Economy thesis also raises questions about its effects on the
                            masses in their roles as workers, consumers, and citizens. Has the New
                            Economy empowered workers by leveling the hierarchical structures of
                            the corporation and by increasing the value of the knowledge workers
                            possess relative to that of "mere" capital? Or has the New Economy led
                            to a greater concentration and centralization of power made possible by
                            the new technology available to management? With the new technology
                            comes a class recomposition, but what exactly is its nature and what are
                            its consequences likely to be? Despite the optimism on these matters in
                            some circles the increase in job insecurity, the stagnation of real earnings,
                            the loss of health care coverage and other benefits, and the increased
                            political power of corporate capital to claim ownership of intellectual
                            property would seem to argue for the dismissal of such Panglossian

                            This discussion too has become more subdued in recent months as a result
                            of the fallout from the major market "corrections" we have experienced.
                            These are nonetheless important questions that retain long-term salience.
                            Here we will look at the question of what kind of newness we should be
                            talking about, and then we will say some things about the shape the U.S.
                            and the global economy are taking in this period after the bubble has

                            I do not know how to compare the impact of Crompton’s mule, which
                            revolutionized the spinning of cotton, to that of the personal computer, or
                            Watt’s steam engine to the Internet. Can we, should we, attribute the
                            current restructuring of the economy to the lower costs of data processing
                            in the same way we have learned to see the declining cost of output in the
                            textile industry as the basis of England’s fortunes? As the cost of steam
                            power fell dramatically it sped industrialization more broadly in the
                            eighteenth century. I think there is already enough evidence of similar
                            cost-reducing capacities in information technology. These new processes
                            are somewhat analogous to those of the second industrial revolution a
                            century ago when breakthroughs in chemical and mechanical industries,
                            and the impact of electricity and the electric motor on industrial output,
                            vastly changed the nature of production and social life. The new sources
                            of energy, electricity and petroleum, made possible the radio, television,
                            automobiles, and trucks. Among other society-reshaping innovations we
                            might point to the telephone and penicillin as changing the possibilities for
                            people and capital. Is the growth of information technology—by
                            increasing the speed and lowering the cost of data collection, storage,
                            retrieval, processing, and dissemination through networks that include
                            entertainment and business-to-business channels—changing our world
                            dramatically? I think so, but perhaps significantly less dramatically than
                            was the case for the first two industrial revolutions. One prominent
                            productivity expert suggests, for example, that it is not clear that the
                            computer has been as important to economic growth as the air conditioner

                            Capitalism does innovate and major new technologies do feed a
                            cumulative growth cycle as they spread through the economy, but this is
                            not anything new. As David Landes wrote of the first industrial revolution,
                            it "initiated a cumulative, self-sustaining advance in technology whose
                            repercussions would be felt in all aspects of economic life."2 The same
                            may be true of the developments visible in the present period even if their
                            extent may not yet justify calling this a third industrial revolution. They too
                            are embodied in capital and work processes, change the balance among
                            class fractions, and reconstitute classes and forms of industrial and social
                            organization. There has not, however, been the liberatory end to the
                            "inexorable demands of the clock," as some of its enthusiasts have
                            suggested. The PC, fax, and cell phone, rather than providing more free
                            time have enmeshed many in a world in which it is far harder to find
                            private, family, or non-work-related communal space. There is exposure
                            to greater speedup and intensified control over the labor process, and the
                            development of an enlarged, more flexible workforce on a global scale has
                            increased inequality everywhere.

                            Companies in the 1990s learned more brazenly to fire long-term
                            employees, outsourcing and subcontracting their jobs, replacing their
                            traditional workforces with contingent and contract workers, and shifting
                            core employment to a smaller New Economy cohort. The power of the
                            employer class to harness the technologies of the first and second
                            industrial revolutions led to decades of harsh working conditions,
                            intolerable hours, intensified work pace, and near starvation wages, until
                            the working class gained both an understanding of what had happened to
                            it and the self-organization to begin successfully resisting the depredations
                            of capital. In each case a smaller group of workers and a new middle
                            class benefited while public policy supported the intense exploitation of the
                            majority who were ground down by the reorganization of work. But in
                            both previous industrial revolutions a class-conscious working class
                            emerged. This third wave is different in that it is in the context of a greater
                            internationalization of labor. The next wave of popular resistance is
                            therefore likely to be more internationalist as well.

                            At the same time I think it is also true that new technologies do change the
                            way we live and the manner in which goods and services are produced
                            and distributed. It is unlikely that very many of the new start-up firms will
                            have staying power. But some of them will revolutionize the means of
                            production and there is reason to accept that this period is one in which a
                            wave of innovative synergies brought to us by the computer, and
                            microprocessors more broadly, the joining of laser and fiber optics,
                            satellites and a host of other critical technologies will in retrospect make
                            the present period appear unique in much the same manner as the earlier
                            industrial revolutions appear to us today. Whether one wants to stress the
                            disjuncture of such developments, or their essential continuity, seems

                            Why Marxists should be surprised by the extent of such developments
                            and their widespread impacts I do not know. "The bourgeoisie cannot
                            exist without constantly revolutionizing the instruments of production, and
                            without them the whole relations of society," as Marx and Engels wrote in
                            The Communist Manifesto. Globalization, which they presciently
                            described in that document among others, continues the search for
                            lower-wage workers through geographic expansion that has long been
                            central to the operation of the capitalist system. Landes writes of early
                            industrialism, "…rural manufacturers expanded easily by opening new
                            areas—moving from the environs of the manufacturing towns into nearby
                            valleys, invading less accessible mountain regions, spreading like a liquid
                            seeking its level, in this case the lowest possible wage level. It was in this
                            way that the woolen industry filled the dales of Wiltshire and Somerset
                            and came to thrive all along the Welsh marshes by the end of the sixteenth

                            Likewise, the Internet will surely continue to revolutionize the economy,
                            offering unexpected opportunities as it dramatically lowers the costs of
                            doing conventional business tasks. Product development time is cut by
                            computer-aided prototype design and testing. Warehousing control and
                            just-in-time delivery cut down the scale and cost of inventory
                            management. Truckers, while on the road, can check in real time for
                            business on the route they are traveling. Construction subcontractors can
                            share blueprint changes instantly and schedule site activities. Medical tests
                            can be processed faster and results delivered, along with diagnoses, to
                            remote sites. Goldman Sachs estimates initial business-to-business savings
                            in the 10 to 25 percent range for industries such as aerospace machining,
                            forest products, media and advertising, auto and steel.4

                            Just as a hundred years ago the giant industrial corporations that were to
                            dominate the U.S. economy for most of the coming century, the U.S.
                            Steels and the Standard Oils, were formed in breathtaking mergers, so
                            today we may be seeing the basis of the twenty-first century economy
                            being created. Many of the new behemoths like Cisco, Lucent, and
                            Nortel, are hardly household names, and even those that have become
                            familiar, like Microsoft and Intel, are new to the landscape. Of the
                            twenty-five largest American corporations in 1960 only four are still on the
                            list at the start of the new millennium. Similar changes are taking place
                            globally as old corporations fade and their space is taken by new ones
                            prominent in the cyber-economy: Nokia in Finland, Ericsson in Sweden,
                            and others. A prime example is the U.K. firm Vodafone, not two decades
                            old when it swallowed Mannesmann, which had existed in various forms
                            for more than a century, in the largest merger ever and the first hostile
                            merger in Germany by a foreign firm. The struggle to dominate the terrain
                            of the New Economy is accelerating.

                            The cost of being part of the New Economy declines as its benefits
                            increase. The price of a new computer has fallen at an average rate of
                            almost 20 percent a year since the early 1950s. Spending on information
                            technology was less than 7 percent of total equipment investment in 1954,
                            but is 50 percent of total equipment investment today. Meanwhile the
                            structures of twenty-first-century industries are continually transformed
                            through convergence. There is interpenetration of content and delivery,
                            fixed and mobile telephony, and voice and data transmission. Telephone,
                            radio, and television can be delivered together and in a number of
                            competing ways. But these innovations have lengthened the working day
                            as people can be reached twenty-four hours a day, seven days a week.
                            These innovations have enhanced management’s ability to monitor their
                            employees’ work and communications. Sophisticated software scans
                            employee e-mail for words such as "union," while the number of orders
                            processed, words typed, and requests fulfilled are computed automatically
                            and arrayed by employee for supervisors to compare. Personal users of
                            the Internet are tracked and their inner secrets pried out by compiling the
                            sites they visit and the purchases they make; their consumer profile is then
                            sold to advertisers to customize the sales effort.

                            Just as in earlier waves of capitalist expansion, maximization of private
                            profit collides with social needs, and technologies are developed in ways
                            that serve capital at the expense of working people. As David Coates has
                            written: "Globalization in its modern form is a process based less on the
                            proliferation of computers than on the proliferation of proletarians. The
                            growth in the size of the world’s proletariat and the change in its
                            geographical centers of gravity—and not simply the enhanced mobility of
                            capital—are among the defining features of the current phase of global
                            capitalism."4 In mainstream discourse this is usually ignored, or denied,
                            while the intensified exploitation of labor is celebrated as a factor
                            contributing to the marvelous performance of the New Economy.

                            High tech, of course, does not supply high-wage employment to most of
                            its workers. Below the dot-com former zillionaires (many of whom are
                            unemployed while others remain multimillionaires), and the stock-option
                            staff (who may wish they had opted for health benefits, job security, and
                            pensions instead), are the subcontract fulfillers who never had much of
                            anything and vastly outnumber the higher profile masters of the high-tech
                            universe. Silicon Valley’s electronics industry remains part of the global
                            assembly line. The underside of the valley is inhabited by Mexicans and
                            Cambodians living in crowded conditions at exorbitant rents, and who are
                            paid four or five dollars an hour for work they are forced to take home
                            when delivery deadlines have to be met. Forty percent of the homeless in
                            Santa Clara County have jobs; they just can’t afford housing on what they
                            make, nor can teachers, firefighters, or police. Jobs are available in the
                            valley, indeed more than a third of local "high-tech" jobs go begging
                            according to a survey of employers. That’s because many of these are in
                            sub-contract manufacturing and the outsourcing of service jobs that keep
                            costs down for the dot-coms, some of whom are the most profitable
                            companies in the world. The majority of the valley’s residents are
                            nonwhite, largely Mexican immigrants. Forty-two percent of Santa Clara
                            County’s work force are part-time, temps, contract workers, or
                            self-employed, compared to half of that proportion in the 1980s. The
                            recovery and the prosperity have not been shared. Generally in this
                            country the low unemployment rate is hardly an indication of well-being.
                            Real wages for most workers have been stagnant and for the bottom 40
                            percent or so have fallen substantially.

                            Despite its importance for the stock market the New Economy is not
                            producing a general prosperity; frequently it is an enclave economy.
                            Indeed, it is part of the growing inequality at home and in "Belinda."
                            Belinda is that paradigmatic country with a dual economy. While it has a
                            high-skilled capital-intensive sector comparable to Belgium, most of its
                            citizens live under conditions comparable to India. Not only is India itself a
                            Belinda, so are South Africa, Brazil, and many other countries with gross
                            inequalities. Such a pattern of combined and uneven development is
                            nothing new of course.

                            It would be well to remember that 99 percent of the billion or so workers
                            who will join the labor force over the next quarter century will live in what
                            are today’s low- and middle-income countries. According to the World
                            Bank, "there is no worldwide trend toward convergence between the rich
                            and the poor workers. Indeed," their annual report has noted, "there are
                            risks that workers in poorer countries will fall further behind."5 This means
                            that not only will there continue to be immigration, documented and
                            undocumented, but that a vast labor reserve exists, and a vastly larger one
                            is coming into existence. This poses a threat to the living standards of the
                            higher-skilled as well as the lower-skilled workers in the core. Relatively
                            low-wage skilled workers exist in increasing abundance in the periphery,
                            ranging from computer programmers in Bangalore, India, to the highly
                            skilled technicians fashioning replacement teeth and crowns in Merida,
                            Mexico, for the U.S. market.

                            The New Economy allows companies to dump noncompetitive or
                            redundant workers while adding new ones at home and abroad. In 1999,
                            at what may prove to be the peak of the longest recovery in the nation’s
                            history, reported layoffs in the U.S. reached 675,000 according to
                            Challenger, Gray & Christmas, the personnel-consulting firm that monitors
                            reported layoff plans. The comparable figure was only 111,000 in 1989
                            during a period of recession. The Bureau of Labor Statistics, whose
                            figures include layoffs that aren’t publicly announced, said the total
                            exceeded one and a half million lost jobs in 1999. The ideological climate
                            has changed so much that companies feel they suffer no adverse
                            consequences from disposing of some workers while hiring others they

                            The connections between a rising high-tech segment of the stock market,
                            widespread stagnation elsewhere, and more or less constant and falling
                            real wages for the majority, need to be made clearly so that the
                            celebration of the New Economy by politicians and the financial press can
                            be better understood. Beneath the technological progress are the same old
                            instabilities and social relations of capitalism.

                            At the start of 2001 Stephen Roach, chief economist at Morgan Stanley
                            Dean Witter, called what we are experiencing "the recession we needed."
                            There had been indiscriminate buying by firms of unnecessary computers
                            and software upgrades, savings had plunged, the U.S. had borrowed too
                            much from abroad, and a recession would take care of it all.6 But, if
                            spending on computers and technology generally had been overdone, it
                            was also responsible for the increases in measured productivity and the
                            general optimism and prosperity of the market, however narrowly shared.
                            This optimism was based on borrowed money and spending that reflected
                            inflated paper wealth from stock holdings. While we may need a
                            correction the downside is not easy to predict and many are worried.

                            With American success in the 1990s came greater dependence on foreign
                            money, and increased consumer and corporate debt. Foreigners had more
                            than six trillion dollars invested in the U.S. (Americans have about 2.5
                            trillion dollars invested abroad) at the beginning of the new millennium. The
                            current accounts deficit, the net flow of goods and services including
                            income earned on foreign investments, is currently above 4 percent of
                            GDP, a level that would result in capital flight in many other countries, and
                            as the economy slows it is widely understood that foreign investors cannot
                            be counted on to finance the record-high $400 billion current account
                            deficit. Capital flight can happen here. Maurice Obstfelt of the University
                            of California at Berkeley and Harvard’s Kenneth Rogoff suggest the dollar
                            could fall by as much as the Mexican peso did in 1995. Princeton
                            economist Alan Krueger worries that this could be a real problem since
                            there is no international monetary authority that is large enough to bail out
                            the United States.

                            If spending on computers and technology has been responsible for the
                            higher productivity and prosperity, then overinvestment will be followed
                            by a period of slow growth. As a result productivity growth will slow and
                            unemployment will increase. As the dollar falls import prices will rise, and
                            inflation generally will accelerate, interest rates will rise, further
                            discouraging spending, and we may see stagflation once again. Michael
                            Mandel, economics editor at Business Week, has written a very
                            pessimistic book, The Coming Internet Depression, which paints a
                            bleak future for the New Economy. Whether such fears materialize
                            remains of course to be seen.

                            There are other areas for concern. Part of the New Economy was the
                            financial innovation of the 1990s that produced a host of new instruments
                            that were eagerly embraced, but which have yet to stand the test of a
                            downturn. While the ninety-plus trillion dollars in notional value of
                            derivative contracts exaggerates their importance, the existence of such
                            contracts, and the likelihood that in a real downturn many of them would
                            not be honored, suggests that the meltdown threatened by the near demise
                            of Long Term Capital Management, the highly leveraged firm run by
                            Nobel prize-winning financial economists and rescued through Federal
                            Reserve intervention in 1998, may prefigure far worse. As commercial
                            banks become less important as a source of funding relative to capital
                            markets, it will be harder for regulators to arrange workouts when
                            developing countries threaten the next round of defaults. Indeed, the
                            banks themselves have become major bettors, getting a larger and larger
                            share of their profits from high-risk loans. For Chase, venture capital
                            earnings were 22 percent of their 1999 net income, a remarkable figure
                            suggesting the risks involved for major financial institutions, and for the rest
                            of us who live in their shadow.

                            The New Economy, which in the 1990s was to have signaled a leveling of
                            corporate structures and an end to the power of existing firms (challenged
                            by brash upstarts who threatened to come from nowhere and "eat their
                            lunch"), looks somewhat different now. Mergers and acquisitions form a
                            record breaking wave of concentration and centralization akin to and
                            surpassing those at the turn of the last century. We are now seeing
                            cross-border mergers and strategic alliances representing fantastic
                            increases in economic and political power. The New Economy is very
                            much a reality, but the reality is that of runaway growth in the power of
                            capital at the transnational level. This is the reality of the New Economy
                            that calls out for attention and a response.

                            While Washington argues over how much to cut taxes for the corporate
                            rich based on bogus ten-year forecasts, the real needs of working people
                            for health care, education, and social welfare spending go unmet. It is after
                            all the same old economic system.


                              1."New Economy, new questions," Financial Times, February 8,
                                 2001, p. 14.
                              2.David S. Landes, The Unbound Prometheus: Technological
                                 Change and Industrial Development in Western Europe from
                                 1750 to the Present (Cambridge: Cambridge University Press,
                                 1969), p. 3.
                              3.Ibid., p. 57.
                              4.David Coates, Models of Capitalism (Cambridge: Polity Press,
                                 2000), p. 256.
                              5.World Bank, World Development Report 1995; Workers in an
                                 Integrated World (New York: Oxford University Press, 1995),
                                 pp. 7-8.
                              6.Stephen S. Roach, "The Recession We Need," New York Times,
                                 January 4, 2001, p. A27.

(*) WILLIAM K. TABB is a frequent contributor to Monthly Review. He teaches economics at Queens College and political science at the Graduate Center at the City University of New York.This essay was written for the 2001 Socialist Scholars Conference in New York City. The issues raised are discussed more extensively in the author’s most recent book, The Amoral Elephant: Globalization and the Struggle for Social Justice in the Twenty-First Century (Monthly Review Press, 2001).