Long after the New Economy

by John Quiggin on October 7, 2004

Back in January, about a decade ago in Internet time, Kieran announced

This week at Crooked Timber, at the suggestion of Daniel, some of us will be discussing Doug Henwood’s new book, After the New Economy.
Henry followed up and Daniel gave us a series of Real Soon Now posts, which I suppose constitutes as good a representation of the New Economy as any.

At the time, I had a pretty good excuse for not joining in – the book hadn’t gone on sale in Australia. Brad de Long kindly sent me a copy, and, a mere eight months later, my review is done, at least in draft form. Comments much appreciated.

I’m not going to say a lot about Henwood’s chapter’s on work and income, but they alone represent enough reason for buying and reading the book. They represent a tightly argued demolition of claims that the New Economy provided prosperity for all, a humanisation of work and so on. Henwood is excellent on technical issues such as hedonic pricing and multifactor productivity as well as on the broader social implications of increasing working hours and work intensity

In the chapter on income, he documents the growth in inequality in the United States, while taking note of countervailing trends such as the gradual reduction in the gender gap in wages. On income mobility, he demolishes the assumption, almost universal on the political right, that greater income inequality in the US, compared to other developed countries, is offset by greater income mobility. In fact the reverse is true. Henwood gives a devastating critique of the slipshod but surprisingly popular, book Myths of Rich and Poor by Cox and Alm.

A general problem with debunking arguments is that, in the absence of a clear alternative model, critics of an orthodoxy tend to employ different arguments at different points, often producing internal inconsistency.

In reading Henwood, I could find only one, partial, example of such inconsistency. In criticising US productivity growth, Henwood correctly observes that output per hour is lower in the US than in several European countries. By contrast, in the discussion of international inequality, he observes that the gap between European and US income per person has not been reduced in the past decade or so.

But this point, which reflects reductions in European working hours, is a minor one in the context of the broader argument. Overall, Henwood presents a clear case for the interpretation of the New Economy labour market in the familiar terms of supply, demand and class conflict.

The chapter on globalisation is similarly strong. Although silly claims about globalisation and the New Economy have been refuted before, in broadly similar terms, Henwood rightly notes the need to ‘kick the thing while it’s down, to make sure it won’t get up again. Globalisation wss one, in the 1990s of those ‘vogue’ words that suddenly become ubiquitous. They seem to promise understanding of the ills and hopes of the day, and yet no one seems to know precisely what they mean. Henwood has some innocent fun with the hopelessly tangled definitions offered by sociologists and international relations analysts for ‘globalisation’ and its idealised opposite ‘place’, but doesn’t offer an alternative, except for replacing globalising by internationalising

Henwood observes that from the first, capitalism has been an international and internationalising system. The period from World War I to the breakdown of the Bretton Woods agreement, during which capital flows were tightly controlled was the exception rather than the rule. In a sense, as Henwood hints, 2003 is 1913 plus fibre optics.

Henwood criticises the kind of naïve enthusiasm for globalisation typified by Thomas Friedman. However, his primary ire is reserved for localist and nationalist leftwing critics of globalisation, such as Ralph Nader. As he says, these critics implicitly idolise a golden age of capitalism that never existed. Moreover, they tend to focus more on the moral evil of excess consumption than on real responses to exploitation. Faced with the dilemmas associated with low wages and poor working conditions in Third World factories, their solution is to boycott Nike, reducing its workers from low wages to no wages at all.

This point seems to have carried the day on the left. Those who once protested against globalisation now call themselves anti-capitalists. And on the moderate left, the issue now is not ‘for or against globalisation’ but ‘what kind of globalisation’.

The really interesting arguments in the book are found in the first chapter on the novelty or otherwise of the new economy and in the last on finance. Henwood begins with the observation that, in most respects the 1990s boom was a common-or-garden speculative bubble; the term ‘New Economy’ and even the ‘web’ metaphor for communications have been used many times before. And the boom was well underway before the spectacular Netscape IPO in 1995 focused attention on the Internet sector. In this discussion, Henwood draws heavily on the work of Robert Shiller, whose term ‘irrational exuberance’ came to characterise the entire dotcom mania.

More original and interesting is Henwood’s discussion of the body of rhetoric centred on the trope of ‘weightlessness’. This term is used to encompass a range of real and illusory trends, from the growth in the service sector to corporate restructuring designed, in large measure, to replace unionised workers with subcontractors.

The most striking point identified by Henwood is the way information and capital are conflated as exemplars of weightlessness. Improvements in information and communications technology have greatly reduced the cost of shifting information around the world, and, among other things have facilitated international financial transactions of larger volume and shorter timescale than previously feasible. Theorists of the new economy often treat this as a qualitative rather than a quantative transformation, apparently unaware that global financial markets have been linked by instantaneous communications since 1866, when the first transatlantic telegraph cable was laid. The resurgence of global capital flows owes more to the deregulation of the 1970s than to technological change.

Henwood again criticises leftists (like Manuel Castells and Jean Baudrillard) along with rightists like George Gilder for their naïve boosterism. The weightless corporation, epitomised by Enron, turns out to be one more example of a string of Ponzi schemes that rest on stripping assets while leaving someone else stuck with unrepayable debts.

As Henwood shows in the finance sector, faster communications have done nothing to improve the performance of capital markets in allocating resources. The repeated financial crises of the late 1990s have undermined the ‘Washington consensus’ in which financial markets were viewed as stern but fair guides to errant national governments.

After all this battering, not much of the New Economy edifice is left standing. But in important respects, Henwood falls victim to the same fallacy he criticises, that of identifying information and capital. Information technology and the Internet may not have changed the nature of capital or of financial markets, but that does not mean they are not sources of profound change.

The economy is the wrong place to start looking for these changes. Although it has important economic effects, and requires substantial economic inputs, the Internet is, in its essentials, a non-economic phenomenon. The important technologies that have been derived from the Internet and used to increase the productivity of businesses and governments have arisen, not from the pursuit of economic goals, but as a by-product of social interactions.

Throughout the history of the Internet, most of the innovation has come as a by-product of efforts to facilitate communication within social groups of various kinds (academics, bloggers, peer-to-peer file sharing), rather than as the result of profit-oriented investment. Rather than taking the lead, the business and government sectors have adopted innovations developed in Internet communities, and realised significant productivity gains as a result.

An economy in which innovation is, to a significant extent, a by-product of activities associated with the creation of social capital will have very different properties from those traditionally considered by economists. In part, the New Economy theorists were right about this. To make profits in this kind of economy, it’s necessary to follow the model pioneered by Netscape, of producing a valuable free good in the hope of making profits from associated private goods. Unfortunately, as the Netscape example shows, there is no guarantee that this strategy will work.

In general, the rise of the Internet as the dominant source of innovation will have results opposite to those assumed by the advocates of the New Economy. In particular, capital markets will become less important, not more, as the relationship between innovation and profitability is eroded.

In turn, a decline in the importance of capital markets will create room for a wider range of political choices than those admitted by the theorists of globalisation, and symbolised by Friedman’s Golden Straightjacket. It remains to be seen whether we can take advantage of those choices to produce a fairer and more open society.

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john gibbs 10.07.04 at 12:30 pm

I haven’t read the book you are reviewing here, but there is enough in your discussion that goes to the zeitgeist of our age for me to want to weigh in. I guess the main thing that strikes me is how hardwired we homo sapiens seem to be toward the sort of wishful thinking and raw fear that feeds right into bubbles and Ponzi schemes. No matter how informed we become about the downside of information cascades, as soon as someone yells “fire” in a crowded theater, we are left with little choice but to stampede or get crushed ourselves. It is as though whatever advantages natural selection has granted us by way of these traits (we might call that the optimistic and risktaking upside of “irrational exuberance”) also makes us vulnerable to being suckered in situations whose structure resembles the prisoners’ dilemma. Human evolution does seem to have selected for us a blend of preditorial as well as cooperative traits. Where the left errs often has to do with its discomfort in acknowledging the realities of those preditorial traits with which natural selection has gifted us. The right, on the other hand, especially of late, unapologetically taps into that tribalistic “defeat your enemy” meme. The problem is that neither is a sufficient social strategy. Cooperative strategies that can’t punish cheap talk leads to bubbles just as surely as the deceptions slick talking con artists.


decon 10.07.04 at 2:27 pm

Is it against the rules to link to the subject of discussion?


slolernr 10.07.04 at 3:02 pm

Wasn’t the transatlantic cable 1858?


Dan Hardie 10.07.04 at 7:03 pm

slolernr- the Transatlantic cable was first laid in August 1858, but ceased to work after three weeks. The American Civil War delayed any further progress, and the cable was only relaid successfully in 1866. See this article: http://www.history-magazine.com/cable.html

With regard to John’s point (or John’s summary of Doug Henwood’s point) that ‘The resurgence of global capital flows owes more to the deregulation of the 1970s than to technological change.’, it’s interesting to note that the article I’ve cited above notes that ‘it was not until the 1960s that the first communication satellites offered a serious alternative to the cable’. If one hasn’t been written already, there’s probably a good economic history paper to be based around assessing the relative impacts of deregulation and satcoms on global capital flows. Anyone up for co-authoring one?


Dan Hardie 10.07.04 at 7:21 pm

An economy in which innovation is, to a significant extent, a by-product of activities associated with the creation of social capital will have very different properties from those traditionally considered by economists.’

Question: how much of the productivity gains in the US over the last 10 years can be (roughly) attributed to net-style ‘social capital-driven’ innovation, and how much can roughly be attributed to what might call ‘Walmart-style’ innovation? By Walmart style, I mean de-unionising workers, employing lots of women, keeping skill levels low and hence hourly wages and things like health benefits down. There has certainly been a lot of this happening, and the thrust of modern Republicanism is to make more of it happen. (See, eg, George Will’s op-ed in today’s WaPo, with its prediction that Bush, if elected, will crack down big time on the remaining pockets of unionised US labour.)

If ‘Walmart-style’ productivity growth turns out to be as important as, or more important than, ‘social-capital driven’ innovation, then the economy and society of the coming decades will look rather different from Henwood’s prediction.

Again, this might make a good basis for a paper, if one only had the time. And John, I will try to read the book, but…


Giles 10.07.04 at 8:38 pm

“a decline in the importance of capital markets will create room for a wider range of political choices than those admitted by the theorists of globalization”

I’m not sure that capital markets alone restrict political developments – the old chestnut of the late 19th century I think debunks that idea in that it was an era of larger capital flows and I think (possibly) greater political diversity.

The power of Globalization always derived from its historical invetiablity thesis – countries that ignored its rhetoric (provided over the internet?) were free to do with their capital markets what they will – as Malaysia proved.

But the converse is just as untrue, and probably more dangerous, that the end of globalization means countires can forget capital markets. Capital flows are mainly determined by real factors – principally in the late 20th century demographic factors. Ignoring these factors is not likely to be optimal.

On a separate note, perhaps the current fad on “outsourcing” is a reaction to the death of globalization – it seems to me an attempt (by principally American pundits) to justify capturing the “super normal gains of Globalization in the 1990’s. So maybe debuning globalization debunks the need for control over outsourcing?


John Quiggin 10.07.04 at 10:17 pm

dan, I’ve written quite a bit on intensification of work in the context of the Australian productivity ‘miracle’, for example here and here

An important point is that the productivity gains from Walmart-style speedup are
(i) bounded
(ii) hard to sustain

There’s already evidence that Australian workers are finding ways to reverse the increase in work intensity that took place in the 1990s.

I’d be interested in working on a paper on telecommunications vs deregulation as sources of expansion in global capital flows. My view is that the big expansion in short-term flows owes a fair bit to telecoms, but that expansion in long-term flows is due to deregulation. But I don’t have a good idea how to test this.


Cranky Observer 10.07.04 at 10:44 pm

> There’s already evidence that
> Australian workers are finding ways
> to reverse the increase in work
> intensity that took place in the
> 1990s.

In white collar jobs those “ways” are known as the Internet and blogs!



Kevin Carson 10.08.04 at 2:23 am

Caveat: Since I haven’t yet read the book, this comment is in response to Henwood as he is portrayed in your review.

Despite his facile dismissal of the antiglobalists, the only question is NOT what kind of globalization.

The question is how much globalization. Given the fact that current levels of international trade reflect massive subsidies to the export of capital and to long-distance distribution costs, it makes sense to assume that eliminating such subsidies would result in a much more decentralized economy of smaller-scale production for local markets.

After all, when you subsidize something, you get more of it. When the government externalizes the inefficiency costs of global corporations on the public, the TNCs have an artificial competitive advantage against more efficient local firms. It’s easy to talk about increased “productivity” when you use the state to shift the cost side of your ledger to someone else.


jet 10.08.04 at 3:11 pm

Holy crap, did someone just compare the 1866 trans-atlantic cable to the internet and say that instataneous communication between markets has existed for that long? And then did everyone else accept that at face value?

My prescription for crazy pills has ran out, can someone share theirs?


John Quiggin 10.09.04 at 3:06 am

jet, what part of “instantaneous” don’t you understand?


jet 10.09.04 at 4:57 am

John, let me be more clear. This “Theorists of the new economy often treat this as a qualitative rather than a quantitative transformation” is what caused me pause when reading your argument. This seems like a fairly vague statement, but could certainly be applied to horse and buggies vs. automobiles. Yet would anyone think to argue that automobiles were merely a quantitative improvement over horse and buggies?

Oh, and let me apologize for my flippant language earlier. I need to remind myself that while posting on sites that tend to differ from my views I need to remember that most people will not assume my benign intentions and might take affront. Given the way you write, I’m guessing you are from academia, a place not known for inserting jokes into their critiques.


John Quiggin 10.09.04 at 9:01 am

I agree that horse and buggy to motor car is a qualitative transformation in all sorts of ways.

Now looking at financial markets, there’s clearly a qualitative transformation with the telegraph. Someone in London can decide to sell all their US stocks, or vice versa, and the order will be executed within minutes. This happened, pretty much, in various late c19 panics.

With the Internet, the time might be reduced from minutes to seconds (though I imagine the need to check for errors puts a lower bound on things) and the complexity of the transaction can be greatly increased, but that doesn’t seem to me to be a qualitative transformation.


jet 10.12.04 at 8:54 pm

I’ll certainly concede the point as it isn’t that substantial to your argument, but I do think there are significant counter-arguements including cost and accessability.


Petr 10.13.04 at 6:56 pm

Alan Green span made the pronouncement of “irrational exuberance” with regards to the dotcom mania and Shiller co-opted it.


Petr 10.13.04 at 6:58 pm

Alan Green span made the pronouncement of “irrational exuberance” with regards to the dotcom mania and Shiller co-opted it.

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