Under this label we shall group the above-mentioned stylized facts concerning the effects of technological change in the age of ICT. The label is fitting, for one of the main characteristics of the NE is, in fact, to effect such change more rapidly than in the past.
Before going into detail, two points need to be made: first, as already noted, one of the reasons we use the label ‘rapidity’ is that it does not refer merely to purely economic and/or technological factors. In particular, we do not subscribe to a deterministic techno- centric vision. While technological change is obviously important, it does not play a unique causal role. Rather, it contributes to determining outcomes by interacting with other factors, such as globalization. In what follows, our choice to focus on technology was made only for the sake of simplicity.
Second, the emphasis in this section is on technological change in general. This is a departure from other approaches that narrowly regard the NE as consisting of the effects of ICT alone. In our view, ICT is not the sole factor in what happens in the NE (productivity gains, for example); there are a number of other independent technological improvements that interact with it. As Blinder puts it:
Even today there are other important sources of technological improvement. Biotech, for example, looks now to be starting to deliver on its promise. And even old-line industries like steel making, automobile assembly, and textiles have registered notable technological gains in the last 10–15 years (aided, of course, by computers). Important as it is, ICT is not the whole technology show.
(2000:3) In what follows, we have found it convenient to make reference to ICT, but this broader perspective concerning the scope of the NE needs to be borne in mind.
What we have been experiencing in recent years is clearly not the first major technological revolution in contemporary history. As emphasized by Schumpeter long ago and by many economists in modern times, the capitalist system is inherently dynamic and its history is characterized by discontinuous waves of technological revolutions. This has been especially true since the beginning of the twentieth century, which was marked by a number of crucial legal and institutional changes such as the rise of the trade unions, deregulation, limited liability and the development of financial markets (see e.g. DeLong and Summers 2001:40). Even the improvement in information technology generated by ICT, which is almost universally regarded as unique to this recent NE, is not a novel fact in and of itself.1 However, the NE undoubtedly leads to an acceleration in the rate of technological progress. This can be seen, for example, in indicators of the increased importance of innovative activity, such as the recent unprecedented jump in the number
of patent applications in the US (see e.g. Audretsch 2000:66),2 or in Moore’s law, according to which transistors on a silicon chip—and thus the power of a chip—double every eighteen months (see e.g. Cohen et al. 2000; Gordon 2002:50–1).
Most economists do not deny that this trend towards acceleration in technology, like globalization, has dual effects, that is, it entails ‘losers and winners’. For example, it implies the production of new goods and the replacement of old ones. Some, however, predict that it will bring about mainly positive effects on the stability of the world economy by improving the supply side of the economy and by increasing the system’s ability to react swiftly to changes. Others point out that more rapid technological change might render the system generally more vulnerable through its effects on the demand side. We shall not be discussing the theoretical foundations of either claim in this chapter, for as we have already noted, theoretical frameworks will be dealt with in Part V Instead, what we propose to do here is to take stock of the various stability and instability factors, placing the emphasis on signs of acceleration and the differences between recent trends and those of past decades.
Productivity growth
Many commentators believe that technological change in the age of ICT may reduce instability primarily because of its positive effects on the supply side of the economy.
Baily, for example, notes that the NE gave rise to an increase in the rate of productivity growth in the second half of the 1990s. This has led to a significant virtuous cycle, especially in the US economy, in terms of ‘faster GDP growth, lower inflation, lower unemployment, faster real wage growth, a strong stock market, inflow of capital, budget surpluses, and improved living standards’ (Baily 2001:256).3 In particular, by boosting productivity, ICT has generated a permanent increase in the level of potential output and a lower rate of inflation. Or, as some say, it has lifted the economy’s safe speed limit before inflation starts to rise (see e.g. Blinder 2000; the Economist 1–4–2000; Krugman 2000; Baily 2001:238), bearing positive consequences also for the rate of unemployment and the trade-off between inflation and unemployment. As Blanchard points out, although there is no evidence of a systematic positive relation between productivity growth and unemployment, it can be argued that the natural rate of unemployment in the US has diminished since the advent of NE in the 1990s (Blanchard 2003:169).
Strictly speaking, this scenario is not unusual. A productivity increase per se is nothing new. Indeed, the evidence suggests that the impact of computers and the Internet is nothing extraordinary in comparison with other general purpose technologies like the telegraph, steam engine and electric motor, all of which engendered significant productivity improvements by facilitating substantial restructuring of the whole economy and the development of complementary innovations. It is telling that despite the advances in and proliferation of computers in the 1970s and 1980s, economists have been waiting for years to see the wonders of computing show up as results in national productivity.4 As noted, for example, by Atkinson and Court (2000), growth in per capita GDP, productivity and wages since the 1980s have lagged behind growth rates in the 1960s and early 1970s (see also Mueller 2001:2–3). While job growth was stronger in the 1980s and 1990s than in the 1960s and 1970s, productivity and per capita GDP grew about half as
fast. Acceleration in the growth of productivity has occurred only very recently (see e.g.
Blinder 2000; Krugman 2000; Gordon 2002).5,6 Moreover, part of this growth is not permanent but stems from the processes of corporate ‘downsizing’ or reorganization taking place as part of normal cycles.
Nonetheless, it is still possible to argue that ICT improves stability due to its relative advantages over other general-purpose technologies. One advantage is that it involves higher potential increases in productivity. As pointed out by Cohen. DeLong and Zysman, the current technological revolution is creating the most all-purpose tools ever—
tools for thought—thus allowing a more rapid transformation of the whole of society.
They observe, for example, that ‘the capabilities created to process and distribute digital data multiply the scale and speed with which thought and information can be applied.
And thought and information can be applied to almost everything, almost everywhere’
(2000:4).7
Second, thanks to the extraordinary build-out of the communications networks linking computers, the ICT has emerged faster and has spread more rapidly and widely throughout the economy than previous technological revolutions.8
Third, another difference from the past is that, in the NE, a wider share of the rise in productivity is accounted for by technological progress, as measured by the standard growth accounting framework, where it appears as total factor productivity growth residual. The evidence shows that while capital accumulation was the dominant force behind the growth in capital services in the US in the period 1958–98, the contribution of capital quality for the most recent period has increased its influence (e.g. Jorgenson and Stiroh 2000; Stiroh 2000:38–40; DeLong and Summers 2001:12).
Fourth, another advantage of the NE over other technological revolutions is that productivity improvements derive from a variety of relatively new sources. Among the drivers of productivity acceleration not only do we find new technology but also other factors, such as the greater competitive pressure induced by globalization, organizational improvements, big-box stores and a shift to higher value goods associated with the growth of high-income consumers (see e.g. Baily 2002:11, 16).
Acceleration of positive feedbacks
The NE may further contribute to stability, and to price stability in particular, by accelerating and generalizing to the economy as a whole the positive feedback that occurs in those sectors of the economy more or less directly involved in the technological innovation. As noted, for example, by DeLong and Summers (2001:30–1), while the old economy was characterised by negative feedback (rising demand involves higher prices, more production and less demand), the NE involves positive feedback, instead, thanks to the smooth behaviour of demand. Rapid technological progress leads to rapidly falling prices of ICT products. If demand for these products is sufficiently price elastic (as it is likely to be, given that ICT is a general-purpose technology), there will be increasing demand, leading to greater efficiency and higher returns, lower prices and still higher demand. This, in turn, will lead to rapidly growing expenditure shares, a rising share of income attributable to the ICT capital stock and the growing economic salience (i.e. a
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contribution to productivity growth) of this technology (Oliner and Sichel 2000; DeLong and Summers 2001:24–5).9
Additionally, a number of economists believe that the stabilizing effects of this model can be further increased by two other characteristics of the NE. One is the reduced volatility, especially of aggregate consumption, which has recently been observed (e.g.
Blanchard and Simon 2001:159). The other is that network effects in the NE—that is, the value of a network to each user is proportional to the number of people on that network—
become more pervasive (see e.g. Shapiro and Varian 1998).
Greater flexibility of the goods market
Another reason why ICT may increase stability is that it is capable of inducing greater flexibility in the supply side of the economy than other general-purpose technologies.
According to many economists, the faster transmission of information and greater rapidity of decisions that is favoured by the new technology leads to increased market flexibility, allowing the economy to cope with shocks more effectively; it explains, for example, why recessions often last longer in Europe, where markets are more rigid than in the US (see e.g. Kumar 1995: ch. 6; Castells 1996; Greenspan 2001; the Economist 28–9–2002).
While ICT is presumed to improve flexibility in all markets, here we shall focus primarily on the goods and labour market. Because ICT gives rise to a smoother production system, the market for goods is bound to become more flexible. This tendency has several consequences. First of all, as many suggest, the huge reduction in information transmission costs made possible by the new technologies implies a higher opportunity cost for the use of hierarchy in place of the market in the sphere of production. The NE thus provokes a decline in the rigid and hierarchical Fordist organization in favour of more flexible web-like organizations that allow firms to adjust output more rapidly to changes in sales (see e.g. Rifkin 2000: ch. 2; Brynjolfsson and Hitt 2002:26).10 In practice, this means that ICT favours smaller firms and less vertical integration and a decrease in the average size of firms. This tendency has moved some commentators to speak of the ‘vanishing hand’ of the NE as opposed to the ‘visible hand’ of old managerial capitalism (see e.g. Langlois 2001). Indeed, as the evidence shows, ICT investment is higher in organizations that are decentralized and have a greater investment in human capital (e.g. Brynjolfsson and Hitt 2002:35).
It should be clear, however, that the trend towards sectoral disaggregation does not necessarily mean that all markets are populated by small, atomistic, firms alone. It is frequently noted that some mechanisms in the NE favour market concentration and even the formation of monopolies. The ICT industry, for example, typically exhibits increasing returns to scale as a result of low marginal costs and externality or network effects. Firms in this industry have high initial investment and marketing costs but low distribution costs (e.g. Shapiro and Varian 1998; Quah 1999; Atkinson and Court 2000; Rifkin 2000:129). On the other hand, there are also those who emphasize that monopolistic positions are not permanent, given that one of the major implications of rapid technological change is to reduce the power of existing firms by allowing the introduction of new technologies (see e.g. Teece and Coleman 1998).
Yet rather than simply generating stronger ‘anarchy’ or more competition between firms, the NE also exerts pressure in the opposite direction. One important effect of ICT is that it requires the growing synchronization or coordination (‘co-specialisation’ or
‘coo-petition’) between firms for the efficient working of markets. In general, the intellectual capital required is rarely the property of a single firm: ‘for a firm to increase or deploy its own knowledge effectively, it may have to complement this knowledge with that of other firms, and more often than not, by way of some kind of collaborative agreement’ (Dunning 2000:10). For example, firms need to cooperate in the definition of technical standards, that is, the creation of a network of compatible technologies (e.g.
Varian 1998:12–13).11
Second, ICT is a time and space-shrinking technology that facilitates firms’ decisions in several ways. For example, it allows improved inventory control, thus reducing the inventory-driven component of business cycles (see e.g. Arena and Feustré 2001:3–5;
DeLong and Summers 2001:14; the Economist 28–9–2002).12 Moreover, it shortens the life cycle of products, accelerates the launch of new products, and hastens improvements in the intangible aspects of existing products, such as convenience, timeliness, quality and variety. Also, while it is true, as suggested by Gordon (2002:66–71), that unlike the great inventions of the late nineteenth century, ICT does not really create truly new products or activities but rather reduces the cost of performing old activities, it is also true that it allows continuous progress in product differentiation. New, and often more expensive, versions of the same goods are produced in ever shorter periods of time.
Indeed, the increasing ratio of high-value to low-value goods can be taken as an indicator of rapidity.
Greater flexibility in the labour market
The NE tends to increase flexibility and deregulation in the labour market. One place this can be seen is in the decline of unionization, as measured in terms of the numbers of trade union members as a proportion of the labour force, and another is in the proliferation of part-time and temporary jobs. Higher labour flexibility is generally regarded by economists as increasing stability. First of all, it is one of the factors involved in the reduction of unemployment rates (see e.g. Blanchard 2003:169). Second, it favours higher elasticity of employment, that is, the translation of income growth into employment growth. As noted by Baily (2001:234), in the NE, a given pressure of demand in the economy is associated with a lower structural unemployment rate or Non Accelerating Inflation Rate of Unemployment (NAIRU).
Third, higher flexibility makes the labour market more efficient. The decline in unionization, together with the increase in competitive intensity due to globalization, has made it harder for workers to garner wage increases (see e.g. Katz and Krueger 1999). As a result, while wages in the past were influenced more by equity considerations and institutional conditions, in the NE they have become more market-determined phenomena. Over the past fifteen years, structural change in Europe and the US has resulted in an increased need for skilled labour devoted to the creation, processing and interpretation of information (see e.g. Pryor 2000:65–6). The lower demand for non- qualified workers than for qualified workers is reflected in a wider wage distribution,
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showing that workers get their marginal productivity (see e.g. the Economist 21–10–
2000; Baily 2001:237–8; Blanchard 2003:278–81).
More rapid obsolescence
Rapidity may also render the economy more unstable and vulnerable to shocks because of a number of factors undermining the virtuous cycle described in the last sections. One important factor to consider is that faster technological change and the time-shrinking nature of ICT imply that knowledge can spread more quickly than ever before, leading to both negative and positive effects. It has been pointed out, for example, that in the NE
‘…many kinds of knowledge (and particularly those which can be imitated) become obsolete quite speedily’ (Dunning 2000:10). Faster obsolescence likely makes it more difficult for investors to assess the potential returns of investment owing to the greater difficulties of anticipating and smoothly matching the growth of market demand. What appears to be a promising project today may be made obsolete by some other innovation tomorrow (see e.g. Freeman and Perez 1988:43). For this reason, herd behaviour among investors is likely to intensify. In other words, firms are more likely to carry out an investment simply to follow competitors that share particular optimistic expectations on future economic conditions and by so doing give more easy rise to such phenomena as over-investment in one period and excess capacity and slower investment in future periods (see e.g. Rennstich 2002:163). One can see, for example, that a rather severe crisis of over-supply has now emerged in the chip and computer industry. But it also accounts for the decreased importance of other factors determining investment, such as changes in borrowing costs. This in turn has negative implications for stability because, for example, ordinary monetary policy measures are less capable of checking investment during booms or reviving it during depressions.
Problems due to the nature of contemporary knowledge
The nature of contemporary knowledge, too, raises instability problems. First of all. the NE calls for a large amount of intellectual capital and thus runs the risk of facing increasing skilled labour shortages. Second, the fact that the intellectual capital needed in the NE is rarely the property of only one firm, forcing firms not just to compete but also to form cooperative arrangements, also creates new potential for danger. In particular, it may take some time before firms learn how to cooperate with their competitors and
‘coordination problems’ are likely to arise, possibly exacerbating investment volatility.
Third, contemporary knowledge makes ‘lumpiness’ a more relevant issue for investors than before. Indeed, this knowledge can be highly expensive: ‘…the cost of the next generation of microchips or new drugs frequently runs into billions of dollars’ (Dunning 2000:10). And finally, the propensity to invest may also be weakened by the fact that the outcome of much investment in augmenting knowledge, for example, through R&D, is highly uncertain.
Technological unemployment
A third possible negative consequence that rapidity has on stability is unemployment.
Although more rapid technological change does not necessarily cause unemployment, as Blanchard (2003:268–77) emphasizes, such a fear is not completely unjustified, especially when the new technologies are considered in the context of the new international division of labour favoured by globaliztion. While the main effect of technological change is higher productivity and the process of creative destruction, adjustment can take time and is accompanied by the inevitable loss of jobs and a decline in relative wages for many workers.
Product differentiation
A fourth source of instability induced by rapidity is related to product differentiation.
Indeed, as already noted, rapid technological change in the NE implies a continuous flood of new or differentiated products with a shorter life cycle. In particular, consumer goods often tend to be more expensive than older, mass-produced goods. While ICT has drastically reduced the cost of numerous objects such as computers and cell telephones and made them available to the general public with obvious welfare gains, ‘versioning’
may entail increasing costs. More generally speaking, it is not true that the new technology lowers all production costs. For example, while ICT implies lower costs in collecting information, it also entails higher costs in selecting which information is useful among the mass of data available.
However, the price dimension of product differentiation is not all that matters for stability. New versions of the same goods are also increasingly superfluous. In other words, they are linked to subtle aspects, such as status and identity, rather than to
‘objective’ needs. For this reason, it makes sense for producers to distinguish between different types of consumers according to lifestyles, such as achievers, emulators, sustainers and belongers (see e.g. Rifkin 2000: ch. 8), which entail quite different consumption patterns and motivations. This characteristic of consumer goods has some clear destabilizing consequences. In particular, it explains why firms tend to adopt ever more aggressive marketing strategies and pervasive advertizing in order to induce various types of consumers to revise their consumption patterns. It also explains why aggregate consumption in the NE turns out to be more fragile on structural grounds and dependent upon such volatile factors as the ‘general state of confidence’. It is clear, for example, that when global uncertainty prevails (as it did after September 11, 2001) consumers may not hesitate to postpone spending on those superfluous goods, which absorb a growing share of their budget.
Greater heterogeneity in structural conditions of the household
The last negative effect of rapidity we will mention stems from the creation not just of greater product differentiation but also of greater heterogeneity in structural conditions and agents’ behaviour. As just noted, rather than thinking in terms of a generic consumer,
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