New economy is a term often used in the media to describe changes that have taken place in business since the widespread adoption of the Internet. The term has been applied to a wide range of situations and issues, most notably the rise and fall of high-tech and Internet startup companies. During the 1990s, as the United States experienced a long economic expansion and the stock market soared, many people started to think that basic economic principles no longer applied.
The basic idea behind the new economy was that computer and Internet technology had fundamentally changed the ways of doing business. Analysts and investors alike focused on technology adoption and stock price valuation rather than revenues and long-term business plans when evaluating companies. As a result, high-tech startup firms staged public stock offerings before they had turned a profit and still attracted huge numbers of eager investors. Employees gave up the stability of traditional firms to work long hours at dot-coms in hopes of achieving a windfall in stock options. The workplace at high-flying tech-companies evolved to include rooms full of toys and games to encourage employee creativity.
According to an article in Business Week, people made several assumptions about the new economy that ultimately proved to be false. First, they assumed that information technology was so important to business productivity that companies would always buy new systems and software, even in bad times. This belief caused big computer firms to give inflated earnings estimates which, when they were not met, contributed to the fall of the tech-heavy Nasdaq in 2000, signaling the dot-com bust. A popular assumption widespread in the 1990s was that economic growth had become so stable that investors would no longer require a risk premium for stocks over bonds. Some analysts predicted that stock market averages would continue to increase indefinitely. In actuality the tech driven expansion increased the risk and volatility of stocks.
Another assumption concerning the new economy was that companies would no longer lay off workers during downtimes because high-tech labor is so scarce. As a result, many people were lulled into believing that they had greater job security than they actually did. Employees gave up the stability of employment at traditional companies for the big signing bonuses and stock options offered at dot-coms. "It used to be that when you went to a startup, you were an individual with a very-high-risk tolerance and probably had an ideal you were trying to achieve," technology company president Christine Heckart told Paul Prince in Tele.com. "But a lot of people with very low risk tolerance left very good, secure jobs at the height of the frenzy to get rich quick in the world of startup-dom. And all of a sudden, before their dreams were achieved, the bubble burst."
When the Internet boom went bust and the U.S. economy slowed significantly in the early 2000s, many companies began laying off workers. As a result, employees began looking for jobs with more conservative companies once again. "Many [job seekers] are bent on finding a company with a future they can believe in, a dependable path to profitability, and a stable working environment where they won't be required to work around the clock for little more than stock options that may never pan out," Prince wrote. "Internet companies and technology startups in general must find a way to prove their stability and financial viability while giving employees some of what they gained in the new-economy environment. That includes room for creativity, as well as a sense of passion and ownership."
Some experts, even in the roaring 90s, claimed that the new economy was largely illusion. It was just the same old economy integrating technological breakthroughs. Supporters of the designation have been hanging in there, however. In an article for Computerworld, for instance, Don Tapscott argued that the Internet provides a new infrastructure that lowers transaction costs and encourages collaboration among firms. He said that it creates a new platform for strategic ventures. "Some claim that there isn't a New Economy. E-business and the Internet are a bust, and it's time to go back to tried-and-true principles that have guided commerce and investing for decades, if not centuries," Tapscott wrote. "But heeding such advice would be a stunning mistake. There is a New Economy, with the Internet at its heart. Spurn this notion, and your company's failure is assured."
Tapscott wrote this before the terrorist attacks, of 9/11/2001, in a very real sense changed both the economic as well as the political atmospherics. The recession, already underway, took hold in earnest. Later, the economy began recovering in a unique way, labeled the "job-less recovery." The new economy appeared to have two faces, one radiating electronic light, the other one darkened by staggering trade and budget deficits, layoffs, sluggish job growth, ambiguous globalization, and the displacement of jobs overseas. In the new environment characteristics of the mid-2000s, a reassessment was underway. Surviving dot-coms had consolidated their positions and e-trade was growing at a brisk pace. At the same time economic insecurity was wide spread. Some analysts were looking toward the "next economy" or focusing on the core of the last one: innovation. Whether or not the term will survive another decade remains to be seen.
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Boatwright, Peter, Jonathan Cagan, and Craig M. Vogel. "Innovate or Else: The new imperative." Ivey Business Journal Online. January-February 2006.
Brock, Terry. "Old Principles, New Ideas Work in New Economy." Atlanta Business Chronicle. 3 November 2000.
Lofgren, Ovar, and Robert Willim, eds. Magic, Culture and the New Economy. Berg Publishers, 2005.
"The New Economy's New Reality." Business Week. 12 March 2001.
Paganetto, Luigi., ed. Finance Markets, the New Economy and Growth. Ashgate Publishing Co., 2005.
Prince, Paul. "Conventional Wisdom: Scarred by Dot-Bombs, Employees Are Fleeing New-Economy Flair for Traditional Nine-to-Fives." Tele.com. 16 April 2001.
Tapscott, Don. "Don't Doubt the Future of the New Economy." Computerworld. 19 February 2001.