Long after the New Economy

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.