The emperor's new clothes

UNESCO Courier, Dec, 1998 by Sophie Boukhari

Noted American economist Paul Krugman believes there may be less to the 'new economy' doctrine than meets the eye

The "new economy" has arrived! An era of prosperity and social well-being has dawned for America, and hence the world. There will be limitless growth and in all likelihood recessions will be a thing of the past. This is the message that a section of the American press has been proclaiming in the last two years.

"All the elements are in place for an era of long-term growth," trumpeted Business Week in August 1998, going on to say, "You ain't seen nothing yet. We're just at the start of a powerful surge in technology that will boost economic gains into the next century." The monthly Wired, a pillar of the "connected society", has devoted several issues to this new economy based on a logic of networks and cyberspace which, so it is claimed, has superseded the old economy of the industrial era. Supporters of the new economy doctrine maintain that the health of the American economy in recent years (in 1997 gross domestic product grew by almost 4 per cent, unemployment fell to 4.6 per cent, and inflation was less than 2 per cent) is not a passing phase. They regard these good results as the first fruits of a profound and lasting change due to increased business productivity, and insist that they are revolutionary. If they attract relatively little notice, it's because they don't show up in the usual statistical indicators, which were devised for yesterday's economy.

However, those who sing the praises of the new economy have been pilloried by a number of leading economists, headed by Paul Krugman of the Massachusetts Institute of Technology. Krugman admits that "for the first time since the invention of printing, information processing and distribution has become one of the leading sectors," but he also warns that the very low rates of inflation and high profits recently recorded in the United States do not justify the "millennial optimism" expressed in the business press and by some intellectuals.

Above all, he believes that these good results are not linked to an exceptional degree to the extraordinary productivity increases associated with information technologies. Krugman and another American economist, Robert J. Gordon of Northwestern University, believe that periods of rapid growth in productivity have systematically been made possible by fundamental innovations ever since the beginning of the Industrial Revolution. This process occurred with the coming of electricity and the internal combustion engine, and the same thing is happening today as a result of the Internet and electronics.

Krugman estimates that the major aggregates of the American economy are continuing to obey classical mechanisms. He believes that even if the statistical apparatus may be out of date, that is no reason to underestimate the productivity figures.

The "fundamentals" improved in recent years, he wrote in Foreign Affairs in May 1998, because "we have had a favourable turn in the business cycle ... probably also helped by shifts in the labour market that have reduced the bargaining power of workers and therefore allowed fuller employment without accelerating wage increases. The success is real, but it is also modest, and falls far short of justifying the triumphant rhetoric one now hears so often."

Finally, believers in the new economy doctrine maintain that if the United States has recovered its position of world economic leadership it is because of America's advance in new technologies. Wrong, says Krugman. America's economic competitors are not lagging behind because of their slowness to enter the new economy but for other reasons - Japan is enmeshed in crises, especially in banking, and Europe is facing constraints imposed by the construction of monetary union. "Our current sense that we are on top of the world is based on a huge exaggeration of a few good years here, a few bad years elsewhere," he says. He notes that one good old maxim should not be forgotten: never underestimate the competition. A precept that not even the new economy seems likely to disprove.