Under the label of ‘lightness’ we group stylized facts that reflect the major role played by
‘weightless’ factors, including services, intangibles and financial assets, in the age of ICT. Here again, it is important to emphasize the complex nature of the links between these factors and ICT. For example, it can be argued that the increased expansion of financial markets is an important requirement for the development of ICT and of the high-tech industry in general. But the opposite is also true, for ICT has an undeniable role in improving the efficiency of financial markets. In this chapter, we shall point out possible interactions between financial markets and ICT and other features of the NE, without singling out particular causal relations, although for the purposes of description we shall focus on the weightless factors mentioned earlier.
Once again, we must note that lightness is not a new phenomenon. As Dunning writes, for example,
over the last three centuries the main source of wealth in market economies has switched from natural assets (notably land and relatively unskilled labour) through tangible created assets (notably buildings, machinery and equipment, and finance) to intangible created assets (notably knowledge and information of all kinds).
(2000:8) Like other features of the NE, lightness grew in relevance following implementation of the key legal and institutional changes—such as the deregulation following the demise of the Gold Standard, limited liability, the stock market and investment banking—
characterizing the rise of modern capitalism (e.g. DeLong and Summers 2001:40). One need only note the crucial role played both by the stock market and by banks in ‘freeing’
investment and consumption from the constraints of the quantity of resources available at a given point in time (e.g. current income or cash flow).1 Due to the very nature of ICT, however, the NE undeniably implies a dramatic acceleration in lightness compared to the past
it has, for example been estimated that, whereas in the 1950s 80 per cent of the value added in the US manufacturing industry represented primary or processed foodstuffs, materials…and 20 per cent knowledge, by 1995, these proportions had changed to 30 and 70 per cent respectively.
(Dunning 2000:8) Like multiplicity and rapidity, lightness too, in the opinions of many economists, tends to have predominant stabilizing effects on the economy. This is because lightness leads to
the extension of market logic to new ‘immaterial’ areas, such as culture or entertainment, and the further expansion of financial markets and electronic money, with positive effects on global trade and employment. However, many other researchers warn that lightness brings with it the danger of instability, which may even outweigh the potential gains. For example, pricing problems related to intangible goods may cause important markets to become increasingly unstable or volatile. In this chapter, we shall focus on both the positive and negative implications of lightness, comparing the signs of acceleration or differences of recent trends with those in past decades. As in the other chapters of this part of the book, we shall limit ourselves to listing the mechanisms that appear to be at play, postponing a full theoretical discussion concerning the prevailing scenarios to Part V.
Extension of the market logic
Lightness in the age of ICT may reduce cyclical instability for a number of reasons related to the new hierarchy of goods and significant changes in the composition of production implied by the NE. Financial and intangible goods are the key drivers of the production of wealth (Eustace 2000:5). At the macro level, the economy is dominated by certain sectors, such as financial services, middlemen and communication, with a stronger basis in the management and production of knowledge than in transactions of material and physical products. This clearly accounts for the growing contribution of services relative to goods in the GDP of most countries and the increasing weight of financial over physical assets in world trade.
At first it may seem that the shift towards ‘lightness’ in these sectors is nothing new.
In fact it has been a relatively constant trend in dynamic economies since at least the start of the second industrial revolution. This can be seen quite clearly in the crucial shifts from agriculture to industry, and from industry to services, which many credit as having contributed to greater economic stability, especially after 1945 (see e.g. Mc Connell and Perez-Quiros 2000; Blanchard and Simon 2001:155; DeLong and Summers 2001:21;
Turner 2001:12; the Economist 28–9–2002).2 However the NE contains a few key elements that may account for even greater stability than in past decades.
One major source of stability is that the NE boosts commodification. This refers to the tendency for the market logic to carry over to new ‘immaterial’ areas of contemporary life beyond standard manufacturing to include such services as science, education, environment and entertainment. Other important aspects of the NE include phenomena such as the progressive loss of autonomy of the cultural sphere from the economic one as witnessed by the growth of markets for cultural artefacts (see e.g. Rifkin 2000;
Cullemberg et al. 2001:7–8). In other words, it can be argued that knowledge in general is treated like any other commodity in the NE (see e.g. Soete 2002:36–7). In principle, this move could contribute to stability because it compensates for the reduction of employment caused by the shrinking of the ‘old’ narrowly defined industrial sector.
Broader concept of value and capital
A second source of stability deriving from the NE is the potential for creating new ‘light’
industries as well as new goods and services within the old manufacturing sector. It is generally a mistake to identify lightness with ‘de-industrialization’ tout court or solely with the emergence of new industrial sectors. The new sectors are almost always inevitably light. For example, the ICT sector uses fewer raw materials than the old industries, and this has a rather obvious positive impact on stability (and sustainable growth).3 However, it is not that old-style manufacturing has disappeared in the weightless economy but that it has been reinvented. Even in old or mature industries, managers emphasize that a new value chain has been established. The creation of value no longer occurs mainly in the physical transformation or traditional manufacturing of goods but in services (e.g. customer care and assistance and long-term customer relations), which allow higher profit margins than standard material products (see e.g.
Eustace 2000:16; Rifkin 2000:127–8; Arena and Feustré 2001:5). Moreover, as a result of ICT, the competitiveness of old sectors now strongly depends on intangible assets ‘such as R&D and proprietary know-how, intellectual property, workforce skills, world-class supply networks and brands’ (Eustace 2000:5).
These microeconomic changes also significantly affect macroeconomic analysis and stability. They have led to an increasingly broad definition of investment and capital beyond tangible assets in the NE, in line with increasing awareness that growth is crucially dependent on such factors as knowledge and investment in human capital, R&D and public infrastructure (see e.g. Stiroh 2000:43).4 The greater role assigned to intangible assets accounts for a change in the notion of value. Indeed, given that knowledge is a commodity in the NE, we discover that the basic ingredients of value are no longer things, but ideas, concepts and images instead. The value of the new ‘light’
products, which represent an increasingly higher share of national GDP and command higher prices in many advanced economies, lies in the knowledge they incorporate and not in the stuff embodying this knowledge (see Quah 1999; Rifkin 2000). While knowledge was indeed as important an element in past economies as it is in the NE, as DeLong and Summers (2001) note ‘knowledge was of how to create a useful, physically embodied good’ like a barrel of oil or an ingot of iron. We are now moving instead ‘to an economy in which the canonical source of value is not a barrel of oil but a gene sequence, a line of computer code, or a logo’ (2001:17). In principle, this move may also contribute to stability by compensating for the reduction of value and employment in activities more closely linked to the old way of doing business.
Faster expansion of financial markets
A third source of stability deriving from lightness is that financial assets tend to develop more quickly than other tangible created assets (see e.g. Toporowski 2000). As many have observed, the creation of more efficient and sophisticated financial markets improving the mechanisms of resource allocation have been favoured by ICT and by substantial institutional changes, such as the recent move towards deregulation (see e.g.
Woodford 2001:297).
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In fact, it has often been remarked that the reduction in transaction costs granted by ICT favours broader and more liquid capital markets. In principle, this should lower the risk for financial crises and negative shocks, as reduced transaction costs contribute to more complete markets, including those for futures and contingencies (Shiller 2004).
Moreover, ICT makes it possible to create ever-new forms of electronic money, thus contributing to stability by allowing further expansion of the market and globalization (ibid.).
As for deregulation, first of all it must be noted that this phenomenon is not unique to the NE. For example, it underwent significant expansion when the banking system was freed from the external constraint imposed by the Gold Standard. Today’s deregulation, however, is subject to drastic acceleration. As pointed out by the Economist, in reference to a paper by Borio and Lowe:
Until the 1980s growth of credit was constrained in some way. After the gold standard collapsed, this discipline had been provided by tightly regulated financial markets…credit controls… Since then governments have set their financial systems free. In the 1980s money supply targets helped to curb credit, but these, too, were abandoned…
(the Economist 28–9–2002:29) Borio and Lowe suggest that today’s combination of a liberalized financial system, a money standard with no exogenous anchor such as gold and a monetary policy focused only on short term inflation, makes strong expansion of credit possible. This may lead to beneficial results, as it implies that: ‘savings are better channelled to borrowers with profitable investment opportunities than lying idle under the mattress’ (ibid.).
There are various ways in which the more efficient financial system brought about by the NE achieves this result, thus favouring greater stability. The first is by facilitating investment financing. One can cite the recent stock market boom—attributed by many authors to the increased importance of intangible capital in the information economy, leading to increased profits and the improved valuation of many large companies (see Mandel 1996; Baily 2001:242–4, 2002:14; Hall 2001)5—which allows firms to raise money cheaply on the stock exchange.
Moreover, one could mention the policy of low interest rates, which has also favoured the rise in investment in ICT. However, while obviously important, these are certainly not new phenomena. Indeed, as stressed by Gordon (2002:28–40), highly developed capital markets, which emphasize short-run profit maximization and equity finance, have characterized the US economy for many years and are among the permanent sources of US advantage over other countries (see also Cohen et al. 2000).
What is peculiar to the NE, instead, is the appearance of new elements such as venture capitalists or new company practices such as changes in the prudent-man rule or the institution of stock options, which have greatly enlarged the scale of investment and alleviated the structural problem of small firms in obtaining funding for technology development.6 In particular, a virtuous circle between ICT and new financial tools and institutions has been observed in the NE, especially in the US: ‘the technological advance has made it easier for new firms to go public and raise capital. The ease of going public also encourages other financial intermediaries crucial to the creation of new firms, such
as venture capitalists.’ (D’Avolio et al. 2001:125; see also Baily 2001:215). Indeed, it is an extraordinary achievement of the US stock markets that firms not making money can list and raise capital to pursue their investment (see also Cohen et al. 2000; Banerji 2002:13–15).
Second, another way developed financial markets favour stability is by increasing the potential influence of the wealth effect on consumption. This is due to the unprecedented capital gains in equity markets and the dramatic rise in the aggregate ratio of household net worth to income in the second half of the 1990s (see e.g. Greenspan 2001) on the one hand and the increasing number of market participants, on the other (see e.g. D’Avolio et al. 2001:125).
A third means by which deregulation and other new developments in financial markets help stability is by improving the ability of consumers to smooth out their spending over time in the face of variations of income (Blanchard and Simon 2001:163).7 For example, Benjamin Friedman (2001:169) credits the removal of regulation W controls on consumer financing for the decline in volatility of consumer durables purchases in the US.8 Finally, another source of greater stability arising from the NE is the shift from bank debt to marketable debt, making the financial system more flexible and capable of reacting to exogenous shocks (Toporowski 2000; Cecchetti 2002).
Problems in the quality of goods
Now we shall turn to the potentially negative effects of lightness. Lightness may well generate forces that undermine the virtuous cycle described in the previous section. One factor of instability is represented by the central role played by the quality dimension of goods in the NE. The problem here is that differences in quality are not always reflected in the price system. Strictly speaking, this dilemma is not unique to the NE. It arises or is accentuated whenever goods cease to be relatively homogeneous and differ in objective or subjective characteristics, raising such complex issues as brand, reputation and trust.
According to Stiroh, it is true in this case that ‘prices may not adequately capture changes in the quality dimension…there are daunting practical difficulties if all attributes and quality characteristics could be correctly priced’ (Stiroh 2000:45).
However, there are at least two reasons causing the NE to exacerbate the pricing problem. First of all, as already noted when dealing with rapidity, new and better versions of the same goods tend to appear more often in the NE. As implied by Moore’s Law, for example, we tend to develop faster computers in shorter intervals of time. As this change in quality is only imperfectly measured by money prices, alternative approaches, such as the hedonic price method, have been proposed in the literature to account for it (see e.g.
Baily 2001:222; OECD 2001; Gordon 2002:50; Nordhaus 2002; Winnett 2004).
Second, for intangible goods, which are extremely characteristic of the NE, the quality dimension is even more important. As pointed out by Cohen, DeLong and Zysman (2000), ideas and ‘information goods’ have particular characteristics that distinguish them from ordinary goods:
These include 1) marginal costs of reproduction and distribution that approach zero; 2) problems of transparency (in order to buy it I should
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know what the information or idea is; once I know it, in many cases, there is no need to buy it); and 3) non-rival possession. (If you have a hamburger, I cannot have it. But if you know something, and I learn it, you still know it. Once I know it, I no longer have an incentive to compensate you to teach me.) Together, these characteristics conspire to make market solutions problematic.
(Cohen et al. 2000:62) These aspects have a clear impact on the definition of the market structure, that is, on whether the market for information goods tends to be more or less competitive. DeLong (1998) suggests that, as information assumes more of the value in goods and services produced and traded over electronic networks, markets appear increasingly less capable of pricing such items. He then argues that in an economy where the typical commodity is non-rival and not transparent, and most of the value produced is in the form of information goods, we can expect monopoly to become the rule rather than the exception in the structure of industry.
This is obviously bound to influence the general stability of the economy. For example, monopolistic markets may be more inefficient and involve higher and less flexible prices than more competitive markets (see e.g. Brynjolfsson and Smith 2000), thus potentially exerting adverse consequences on aggregate consumption as well.
Moreover, the price of information goods is determined on the basis of consumers’
subjective assessment concerning characteristics of the goods, rather than on the costs (see e.g. Varian 1997). Although assessment differs across consumers, externality effects cannot be ruled out. This becomes even more serious when problems of transparency concerning particular goods overlap with general confidence problems concerning the economy as a whole, thereby undermining aggregate consumption.
This potential source of instability of markets is likely to be even more significant in at least two cases. The first is when quality depends more closely upon trust and interpersonal relations, as is the case in the markets for labour or credit or financial assets. While trust can be taken for granted in the case of ordinary physical goods, as there is an institutionalized or standardized market, this is not true for at least certain types of labour skills or credit contracts. In these cases, trust rests on more fragile conventions, because standardization is limited. For example, it is difficult to inspect these goods or provide objective criteria for the assessment of their quality. Stability in these markets may therefore be more easily upset if the system is exposed to general shocks in confidence.
The second case is that of knowledge capital, and in particular, of the key source of new knowledge: R&D. As already noted, intangible capital is inherently different from the more traditional inputs of labour, tangible capital and land; in general its economic value is uncertain and asymmetric across agents, and its productivity is difficult to measure (e.g. Audretsch 2000:66; Baily 2002). However, the problems for R&D are even more serious. R&D capital is fundamentally different from tangible and human capital; it appears to be non-competitive, since many producers can use the same idea simultaneously, and the returns may be hard to appropriate due to the potential production of spillovers (see e.g. Stiroh 2000:43–4). As a result, incentives for private investment may be rather weak.
Instability due to deregulation
A second source of instability brought about by lightness is the recent wave of deregulation and financial innovation, which has revealed to be ‘a two-edged sword’ (the Economist 28–9–2002:7; Simonazzi 2003). The potential for deregulation to create instability has been recognized since at least the first widespread US bank failures in the nineteenth century. However, there is reason to believe that its impact may be even worse in the NE, because it favours sectoral imbalances that can amplify the business cycle.
As can be seen in the recent evolution of the American economy, the new financial instruments induce households to assume too much debt during the boom. This is not to say that increased consumer credit is an invention of the NE; on the contrary, it was one of the pillars of mass production following the First World War. However, the decline in recent years in national private-sector net savings in the US is unprecedented. Indeed it is fair to say that although swings in credit growth and asset prices have always played a part in business cycles, ‘their role seems to have increased of late’ (the Economist 28–9–
2002:29). This has been clearly pointed out by Godley and Izurieta (2002), who emphasize that the main engine of growth during the so-called ‘Goldilocks’ period was
‘an exceptionally rapid, credit-financed expansion of private expenditure that stimulated and was stimulated by the huge boom in asset prices’ (ibid.: 41). In their view, this type of engine of growth, which is based on a highly elastic credit creation, is quite fragile and bound to make a deep recession more likely.9 In particular, slow growth will follow if the savings rate rises back to its long-term norm and the stock market collapses, inducing a negative wealth effect on consumption.
But the recent wave of deregulation and financial innovation may also negatively affect the behaviour of firms. Not only does it generate excessive credit creation, resulting in firms overborrowing like households, but it may also induce other distortions that undermine investment stability. Stiglitz (2002b, 2003) points out, for example, that excessive deregulation of financial markets in the NE has stimulated declining accounting standards and companies’ avidity, as shown by the recent scandals at US energy companies and telecoms groups. In particular, he stresses that the stock options and other financial innovations make budget assessments more difficult and tend to stimulate fraudulent practices, such as bogus revenues and inflated accounts, which mislead small shareholders and shake financial investors’ confidence (see also the Financial Times 18–5–2002). Moreover, the diffusion of stock options, along with tax cuts for higher income brackets in various countries, also undermines stability because of its adverse income distribution effects.
Erratic behaviour of financial markets
A third source of instability in the NE induced by lightness is the erratic behaviour of financial markets. These seem to be dominated by speculation and proceed in a series of alternating periods of ‘irrational exuberance’—where share price increases are not driven by ‘fundamentals’ but by fads (see e.g. Shiller 2000)—and periods dominated by overpessimism. That speculation may play a key role in financial markets is, of course, nothing new. Indeed, one characteristic of stock markets has always been the formation
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