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
speculation.
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
interpretations.
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
burst.
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
was.
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
secondary.
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
century."3
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
prefer.
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.
NOTES
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).