The 'New American Economy' (1997)

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This document briefly outlines literature which identifies the growth of a 'new' style of economy in the United States, and suggests implications for Queensland. No attempt has been made to fully analyse the information which has been assembled.

The key themes addressed are as follows:

October 1997

1. What is the 'New Economy'?

Some characteristics of the (so called) 'new economy' are: emphasis on knowledge based (rather than manufacturing) activities; global orientation; and an organisation style using telecommunications and networks of enterprises, rather than hierarchy in large firms

Overview: Big companies and 'economies of scale' succeeded in the slow moving four decades to the mid 1980s. But now only small companies, and large companies which have restyled themselves as networks of entrepreneurs, will survive. Fifty percent of US exports are from companies with less than 20 employees. Big companies are de-constructing themselves as networks of autonomous units. Economies of scale have been replaced by economies of scope. Global businesses are collections of local businesses, with intense global coordination, limited central headquarters, and a search for small company benefits of quick time to market and elimination of bureaucracy. As the world economy integrates, the component parts are becoming smaller. Computer and telecommunications systems are vital to allowing network organisations to operate. Strategic alliances are needed for strong performance. This is an alternative to companies getting bigger. (Naisbitt J. Global Paradox, 1994).

Big Companies: Major companies such as GM and IBM typify changes which occurred in large US companies which had long had market dominance. They found themselves as high cost producers with centralised / high cost management structures, with declining market share, and were obliged to shut many facilities. In recovering, individual business units (even administrative units) were given the autonomy to operate as separate businesses. This allowed better understanding of profitability, as well as removing centralised administration which had impeded change in fast moving markets. Autonomy allows costs to be cut, and technology to be introduced more readily; though it does reduce the scope for centralised strategy. (Peers M. 'Tough times for American titans', Australian Financial Review, 2/9/92)

Contributing Changes: In 1995, the USA looks back on 5 years of growth whilst Japan has been struggling. Industry has changed its structure, gone on a diet and become more quick witted. Many companies have been radically transformed, and the US is on the ground floor of new information businesses. Significant changes include: shift from domestic to global market focus; big companies have learned to behave like middle sized companies; short term financial approach has been able (in venture capital) to be replaced by long term approaches; business and universities have begun to take manufacturing more seriously; people are treated as company's most valuable resource; and barriers to cooperation between organisations have been removed (with firms seeing everything as being in their supply chain). ('American Business: back on Top?", Economist, 16/9/95)

Impact on Cities: A new information based economy has changed the economic dynamic of metropolitan regions. A second key element is globalisation (which has led to both growth and restructuring). In the new economy, information and technology are used to build newer high quality products. This requires innovation at all stages. Metropolitan regions are the centre of the new economy. They now demonstrate greater specialisation by firms, flexibility and diversification of activities within a centre. Clusters of complementary firms are important. There are 18 major clusters in US economy, in each of which a number of technology based firms are rapidly growing. (US HUD, America's New economy and the Challenge of the Cities, October 1996)

Attachment A outlines some other sources, whose major themes are similar, namely:

2. Why Change was Needed

The need for change in the US economy appeared essential as a consequence of the competitive challenge which had emerged in the 1970s and 1980s.

Because of improved transport and communications, industries involving mass production manufacturing (which until the 1960s had been the major basis for the high productivity of developed economies in Europe and North America) were increasingly transferred to newly industrialised countries (NICs) with lower wage rates, and sufficient skills to deal with mature technologies.

This transfer occurred through the agency of multinational enterprises, and the development of strategies in NICs, especially those in East Asia which (following Japan's example) focused on the capital intensive strengths of the developed economies - rather than pursuing their comparative advantages in labour intensive production.

This transfer led to the phenomenon of 'de-industrialisation' in Europe and North America, and to the need for economic restructuring. Generally it seems that innovative and knowledge intensive industries would offer the best prospects for diversification whilst achieving the high value added required to support comparatively high incomes.

For example, the rate of return to successful innovators (who capture temporary quasi-monopoly profits) is traditionally greater than that obtained in mature production where competition bids prices down to near costs.

However, in seeking new opportunities, the US economy initially generated large numbers of jobs in low productivity, low wage service industries. In manufacturing, the US seemed unable to cope with Japanese competition (see Section 3). However US performance in job creation was seen as vastly better than Europe's (where there was no net job creation at all over a long period) though it was poor in creating 'good' (ie high wage) employment.

The problem which USA experienced in the 1980s also had a macro-economic dimension.

The USA has both high trade deficits, and high budget deficits - which can not be sustained especially with a strong currency and low interest rates ('Why America cannot pay its way', Economist, 13/7/85). This situation had emerged partly because of the 'supply side' economic theories under President Reagan in the early 1980s; whereby an unbalanced budget (involving large additional 'Star Wars' military spending) drove rapid growth - and hence rapidly increased imports at a time when US competitiveness was declining.

Soaring deficits will quickly make the USA the world's biggest debtor economy ('Uncle sam's deep dive into debt', ICC Business World, April-June 1985)

3. Explaining the 'New Economy'

This section speculates about the significance and implications of the (so-called) 'new economy', though doing so is necessarily superficial and premature.

First: At the most obvious level, the phenomenon can be regarded as a cyclical recovery in the US economy. However there is more to it than this, as in the 1980s the US economy was seen to be in decline, and incapable of responding to Japanese competition.

For most of the 1960s and 1970s the US lost out economically to Japan. Manufacturing capacity was wrecked. When Japan was forced to re-value in the mid 1980s, this provided financial power (which was used to acquire financial assets) and also to invest in new production capacity. It did not lead to growth in Japanese consumption, but to increased strength to penetrate export markets. For the past 5 years US firms have [in 1990] responded with financial re-engineering, anything but making a serious attempt to match Japanese competitiveness. Even in the US, Japanese firms are proving superior competitors. Japan's economy is driven by market share, not by a search for profits. This change is needed (Clark G. 'The wages of American Free spending is annihilation', Australian, 19/1/90)

Furthermore Japan's competitiveness involved the use of methods which were quite different to those deployed in Western societies, for example:

Now the US economy is not only growing but also, apparently, its firms are regaining competitiveness.

Second: Since rapid economic growth first emerged in history with the start of the industrial revolution, growth has appeared to run in 'long waves' (of about 60 years duration) first identified by Kondratief in the 1920s; and associated with the emergence of new batches of technological innovations by Schumpter in the 1930s. Thus the phenomenon can be seen as the consolidation of a new long wave - associated with micro-electronic, communication and other technologies. The US, which happened to have strong position in those technologies, could thus benefit (and be much less likely to make technology available to imitative competitors).

Third: International trade is a major factor in economic growth, because (under the theory of comparative advantage) all countries can be better off by specialising in the areas in which they have greatest productivity, and trading with others. As a result of the economic failure of communism, there has been a major increase in the number of persons worldwide living in market economies, and hence in potential for trade. The global market strategies of 'new' economy firms, help in explaining the strengthening US performance.

Fourth: Suggestions have been offered that the US economic performance has improved because Alan Greenspan as Chairman of the Federal Reserve Board pursued a policy for financial strength in the USA in the 1990s, by pursuit of 'sound money' principles - which resulted in declining money supplies (Newton M. 'The Marvellous Miracle of the Disappearing Greenback', Australian, 6/12/88)

Fifth: It may be that the organisation of production, which appears to have been fundamentally altered towards a more networked (rather than hierarchical) style partly through the use of information and communication technologies, has provided a new basis for productivity. Historically it has not been technologies alone which have allowed rapid growth, but also innovations in the organisation of production.

For example: the industrial revolution was associated not only with the deployment of steam power, but also with development of organisational arrangements required for mobilising capital (joint stock companies, and non-usurious financing). And the growth cycle associated with motor vehicles, was also attributable to Ford's 1920 techniques for mass production.

Analysis of economic growth, shows that a substantial portion of growth is attributable to productivity (ie to factors which are not just due to increased inputs of labour and capital). Productivity is largely a consequence of the use of knowledge, which allows transient competitive advantages to be obtained (eg from reducing costs, from better quality or market focus, or from new products). Such competitive advantages allow prices to exceed costs (until competitors catch up). Achieving high productivity requires a constant stream of competitive advantages.

Japan's competitiveness had been based on a superior ability to 'learn'. The 'networked' style of the 'new economy' may also allow a much better learning capability - because it: allows more scope for initiative to link 'thinking' and 'action'; relies less on a few 'big' ideas (ie the plans of central management of large firms); and is also less susceptible to those 'big' ideas being 'reverse engineered'.

Sixth: contributions to improved performance may have been made by techniques for regional economic development, through private / public partnerships which have deployed the new techniques for organisational learning across the economy as a whole, including the public sector. The application of such techniques to leading industries, and also to rural regions, is outlined in Attachment B.

4. Assessing the 'New Economy'

4.1 Negative Views

Despite the appearance of new competitive strengths and productivity in the US economy, not all are convinced.

For example, Fingleton E., in Blindside (1994), argued that Japan's strategy for gaining dominance of global natural monopolies is still on track.

These is more-over evidence of substantially improving original technological capability (eg Japan set to come out winner', Nature, 18/9/86; Head B. 'Research Points to Japan as world's best at innovation', Australian Financial Review, 8/3/88; and Johnstone B. 'Japan's creative Catalyst', Far Eastern Economic Review, 23/2/89). And Japan is (reportedly) now positioned to launch many new innovative consumer products - possibly demonstrating that 1980s programs designed to develop creativity in Japanese society were successful.

Problems for Japan

Despite this, Japan appears to be encountering significant difficulties - partly a consequence of the losses incurred after the collapse of the 1980s 'bubble' economy, and partly due to the emergence of stronger competition from East Asia (eg Korea, Taiwan and increasingly China). However it may also be that the centrally orchestrated processes which were so efficient in accelerating Japan's catch up, are a fundamental constraint on the flexibility to get ahead. [President Clinton it is noted recently offered US help in deregulation of Japan's 'high-tech' markets (Wilson P. 'US economy the model for all, Clinton lectures his G7 guests', Weekend Australian,21-22/6/97). Such help would be of little use as, despite the Strategic Impediments Initiative, the USA does not appear to understand Japan's economy]

However: the USA still runs large trade deficits with Japan - though these are influenced by Japan's typical East Asian (communitarian) style of market economy, where commercial relations are based on social connections, rather than on price / quality criteria. Also it is noteworthy that Japan's solution to its fiscal losses in the 1980s, was to make credit available to financial institutions at 0.5% interest, which they lent on (often to USA) at higher interest rates. Thus not only did the USA pay towards the losses incurred by the Japanese financial institutions (by borrowing to finance expansion and a stock-market boom), but the US has become more exposed (economically and therefore politically) to decisions made by Japan.


A concern which many have expressed about economic changes over the past two decades is that they have been accompanied by a decline in real incomes for many, and a growing inequality of wealth.

The US economy has recovered from the recession of 1990-91, with many indicators showing great strength as a result of restructuring and downsizing. Investment has risen quickly, with inflation low. Productivity has risen rapidly, which is supposed to indicate benefits to the community. However average US living standards have not risen. Average weekly earning of lower 80% of workforce fell 18% in real terms since 1973. Growing inequality of wealth is thus a threat to society. Gains have been made by owners of capital, and the new technical aristocracy. 'Lean' production technologies developed by Japan have been deployed worldwide in manufacturing - whose main gains come from simplification of production process (simplification discovered through teamwork) which permits use of less skilled employees. Out-sourcing allows costs to be reduced by purchases from companies where employees do not receive traditional benefits. In services, re-engineering has allowed information technology to be used to re-organise work, and employees require less skills and education. Retraining can help displaced employees to some extent, but the economy of lean production has no need for large numbers with technical skills. (Head S. 'The New, Ruthless Economy', Prometheus, V14, N2, Dec 1996)

[Comment: the above suggestion that changes have been accompanied by reduced requirements for employee skills, does not accord (a) with the competitive reality that activities with only a requirement for low skills will tend to migrate to low labour cost countries (b) with observations of the rapid growth of employment in knowledge intensive categories in OECD countries. The problem of inequality is real; the explanation of it in the above article is probably not]

Social Stresses

There is now a gun for every person in the USA, though some do not yet have theirs. 15m live in a poverty which is unknown in other first world countries. The income of the middle class (65% of population) has fallen 13% since 1973. People take many jobs but are still broke. The government is no longer seen to represent people. Officially the US: has less unemployment than Europe; pays less taxes; and has faster growth. But the permanently unemployed are no longer counted; and there are fewer services from taxes. Accumulated provisions for social security were spent on the cold war, and replaced by IOUs (Treasury bonds). (Vidal. G 'The United States of Clinton', Weekend Australian Review, 1997).

Similar conclusions emerge in other items referenced in Attachment A.

And concern about the gap between those who have done well from the 'new economy' (the effective 'symbol analysts') and others is a cause for concern. It was a fundamental factor in critique of the 'elite' for having pursued their own self interest, rather than providing leadership to others in their communities (see Lasch P. The Revolt of the Elites and the Betrayal of Democracy, 1994).

4.2 Positive Views

However there is also a view that the overall situation is now more positive.

The US is enjoying the best economic and social conditions in 25 years. People are living longer, are breathing cleaner air, drinking cleaner water. Crime is in free fall, and down town areas once given up for dead are bristling with life. New York had the sharpest drop in crime, and a budget surplus. Houses are more valuable, marriages more solid, and teenagers better at math. The economy is solid. Unemployment is 5%, inflation is low, productivity is growing rapidly; though job insecurity and income inequality remain high. Major changes behind this include: end of cold war; consequent new global markets; major improvement in competitiveness from restructuring in early 1990s; and significant advance over competitors in computers and communication systems (Pooley E., 'Too good to be true?', Time, 19/5/97)

US success in lowering unemployment seems to be based on an ability to exploit the information economy, not just putting workers into low wage jobs. The US has created 12m new jobs since 1992. There are still insecurities and inequalities, but also a new wave of optimism. The European criticism that, while the US creates jobs those jobs are poorly paid, is now being discredited. The flexibility of US labour markets suits new information age economy (with small start ups and volatile industries). Workers are becoming better off. The nature of new technological industries (niche markets; requiring flexibility) places US in strong position. Information technologies have dramatically reshaped US economy. Around 1980s two events occurred with massive implications - deployment of personal computers, and breakup of 'Bell' system. These technological changes (together with biotechnology) will fuel a new long boom. Concerns by some that growth has occurred only in low paying jobs is disputed. Such jobs have grown, but not as fast as the number of high paying jobs (with those in the middle disappearing). Education is increasingly the most important factor in the labour market. While unskilled workers will suffer from the creative destruction of new technologies - the solution is education. (Ryan C. 'How the US has licked unemployment', Australian Financial Review, 20/6/97)

In the USA, confidence is the highest in a generation. This reflects more than just a cyclical turn around, but rather positioning for leadership in new industries, which is like US positioning early in the 20th century in industries like cars, steel and aviation. Slowing growth in 1980s disguised the fact that a lot of change was occurring. Technological change associated with computers (through transforming the nature of work) has improved productivity ('US Confidence keeps on rocking as good times roll', Australian, 26/7/97)

The perceived existence of a 'new economy' has been one of the factors which has supported the rise to high levels by US stock markets, with some views that a new higher level of economic performance is now a permanent phenomenon. Others are cautious.

The belief in the 'new paradigm' (ie that new technology and globalisation has rendered old economic rules redundant) could have dangerous consequences. Belief in the new economy has spread because it has some reality ie: trade has increased; information technology has altered the nature of US production, as well as the way firms operate. And traditional economic models do not explain this; so theories about the effect of information technology and globalisation are used. However serious academic economists are not convinced. Global competition does not alter the rate at which an economy can grow, which still depends on productivity (Economist. 'Old dangers lurk for US New Economy', Australian, 18/9/97)

[Comment: there seems to be a serious deficiency in the view that competitiveness is not linked to productivity. The ability to capture high value added (ie to achieve high productivity) seems crucially dependent on the ability of firms to create competitive advantages. Certainly growth is limited by productivity, but productivity depends on competitiveness]

Similarly there is a debate about whether the emergence of a 'new economy' in US has really allowed faster growth without igniting inflation (see Attachment A [2])

US economic anxiety was high in late 1980s as budget and trade deficits placed US in further debt to Japanese and European investors. This is no longer a concern, due to booming output, low unemployment and fiscal prudence. Yet US foreign debts are highest in the world and still rising. Borrowing is fuelled by the current account deficit, which is in turn driven by the economic boom. (Economist, 'US harnesses debt to power economy'., Australian, 7/8/97)

4.3 The Importance of Education

One consequence which seems generally accepted is that the 'new economy' makes education even more important than in the past.

A new global economy emerged in the 1970s and 1980s. It is characterised by:

Thus, new strategies for investment in education are needed, and changes in the process of education (Carnoy M. 'The new global economy, information technology and restructuring education', International Journal of Technology Management, V9, N3/4, Dec 1994)

Similarly in Attachment A articles suggest that: education, training, the ability to learn and access to relevant information are now vital to success [3] and that the current education system in the USA can not provide the skills required for success in the new economy [7]

5. Implications for Queensland

In assessing the developments outlined in this paper, it seems important to recognise that recent history suggests that it is unsafe to project trends such as those outlined above very far into the future.

Thus care is essential in responding to such trends. An incremental response which takes account of other emerging trends, is more likely to be effective than a plan based on historical experience. The latter would result in 'catching up with the past', rather than with the future.

Also the motivation which may exist for presenting 'propaganda' about the US economy from various different viewpoints should not be forgotten.

Despite this, some implications for Queensland can be suggested, on the assumptions that the 'new economy' is a significant phenomenon:

5.1 Queensland's Positioning

A need for restructuring of Australia's economy was identified in the 1980s, when the long term decline in relative income levels was seen to be associated with Australia's trade specialisation on commodities, which experienced relatively slow growth rates, and declining terms of trade over a long period. However this need for diversification was recognised at the same time that the standards required to do so successfully increased enormously - and too little progress has yet been made.

Queensland's 1997 State Economic Development Strategy contains a commitment to increasing the productivity of Queensland's economy.

With Queensland's preponderance of smaller enterprises, and its high engagement with information technologies, the state may wish to adapt to operating in a 'new economy' style. If so, there could (perhaps) be large productivity benefits - which could translate into higher growth, higher real incomes, more rapid growth to reduce unemployment, and a potential for higher savings to reduce current account deficits.

This would not be automatic, but would require significant adjustments and decisions, eg:

Furthermore Queensland's existing characteristics and values would require that any such arrangements be adapted to suit. For example:

Australian managers are different to those in the USA, and want to keep it this way because this fits into Australian history, culture and values. They object to people from other countries telling them what to do. The Karpin report of Australian management was an abstract study, which compared Australian managers with those in the US, but did not place them in context. A major factor in Australia is the 'tall poppy' syndrome. People in Australia who survive the 'tall poppy' syndrome, and become prominent, are those who have worked quietly behind the scenes in a self effacing modest way. This is the complete opposite of the way Americans celebrate success. (Moodle 'Australians reject US model', Australian Financial Review, 27/6/97, quoting Professor Robert Spillane)

Egalitarian ideals have traditionally been more influential in Australia than in many other countries (even amongst those who view society from an individualistic and entrepreneurial point of view) (Dorrence G and Hughes H., Divided nation: Employment and Unemployment in Australia, Institute of Applied Economic and Social Research, No 8/96, September 1996)

5.2 Regional Development

Techniques devised for private sector led partnerships with government could be considered. Difficulties in deploying such partnerships in Queensland's regional development arise from the lack of strong companies to take the lead. However techniques which encourage / allow the private sector to play a major role in taking initiatives in such frameworks can probably be devised.

Regional Queensland could consider opportunities which might flow from developing competitive advantages (and thus productivity) in areas oriented towards global markets, rather than reliance on comparative advantages (eg in resources). This is significant as a well placed observer recently commented on the continued inability of regions to focus on opportunities other than those linked to natural resources.

Traditional strategies based only on resource comparative advantages are limited because:

5.3 Investment Priorities

Infrastructure investment linked to the 'knowledge' economy, may be more valuable than those linked to capital intensive production. At present, little of the infrastructure investment by Queensland government flows towards the knowledge economy.

Investment might be needed, for example, in:

In considering such investment there is a need to differentiate between information technology (IT), and the information economy. It is knowledge which is of most significance in creating competitive advantages, and there is nothing intrinsically significant about information technology except perhaps that:

5.4 Education

If growth in future is linked to knowledge based sectors, then the ability to learn is vital to individuals and communities. Those individuals and communities which do not maximise their ability to acquire and use knowledge seem unlikely to prosper under such a regime.

Thus the debate about reform of education and training needs to focus more on whether the essential outcomes are being achieved, than on whether service costs are being reduced. In particularly, the debate about 'literacy' needs to be conducted in the light of recognition of its importance to individuals and communities.

5.5 Public Sector Reform

Current direction in public sector reform involve fragmenting the sector into a large number of 'business units'. The scope which this provides for initiative and learning may be more important to increasing the productivity of government than any scope it provides to centrally manage or measure performance.