The first step of our stability analysis concerns the definition of the NE and a description of its main features. Perhaps it is more accurate to say that we are seeking a ‘vision’ of the NE. As noted by Schumpeter, a vision helps to single out the set of phenomena we wish to investigate, and acquire intuitively a preliminary notion of how they hang together (see e.g. 1954:41–2).
This description, or vision, must capture the full complexity of the NE and single out most of the likely sources of structural instability. In the light of our previous remarks, it should be clear that the elaboration of such a description cannot be carried out by relying exclusively on the methods of standard theory. This is because standard theory takes both dynamic and structural stability for granted and regards the NE as merely a technology breakthrough to be dealt with through the use of simple production functions involving a number of restrictive implications (technological determinism, atomism, institutions that remain in the background, neglect of qualitative change, focus on long-run equilibrium, etc.). The formal tools of standard analysis, in addition to the empirical evidence it considers, are bound to lead to a flawed depiction of instability factors. For example, standard analysis implies that all instability can be attributed either to imperfections in the working of markets, such as rigidities and lags in the adjustment of prices and institutions, or to the lack of productive factors.
In order to study the stability of the NE without assuming stability as a postulate, it is necessary to reject these reductionist assumptions. We therefore need to develop an alternative interpretation of the NE. In our view, the NE is characterized by the following features, which we refer to as the ‘objective’ dimension of qualitative change: (1) it is the product of a number of closely interrelated key factors, including globalization, weightlessness and technology; (2) it implies growing mutual influences between institutions/culture and economic factors; (3) it also implies a growing interaction between micro and macro features; (4) it consists of a number of irreversible trends that distinguish it from past stages of capitalism.
In what follows, we shall see that these features allow us to identify a few major sources of ‘subjective’ qualitative change and instability. In particular, our analysis shows that the instability of the NE appears to arise from significant changes in agents’
behaviour due to their changing perceptions of a few key dimensions, such as those of space, time, market and value.
In what follows, we shall outline a description of the main features of the NE that is consistent with our approach. It is arrived at through the use of the five broad categories or labels first suggested by the Italian post-modern writer, Italo Calvino, in his Norton Lectures at Harvard University, to characterize the last century in general. They are:
‘multiplicity’, ‘rapidity’, ‘lightness’, ‘precision’ and ‘visibility’. Besides avoiding
excessive fragmentation in listing many heterogeneous facts, the advantage of this classification is that it is in line with the broad definition of the NE pursued in this book.
The NE as consisting of a number of key factors
As already noted, standard theory regards the NE essentially as a technology breakthrough. Gordon (2002:49), for example, defines it as ‘the post-1995 acceleration in the rate of technical change in information technology (ICT) together with the development of the Internet’.1 In our view, however, this definition is inadequate in capturing the complexity of the NE. While ICT undoubtedly plays a central role in the NE, other factors, such as finance, globalization and certain policy stances, also seem to be involved.
Another aspect of the complexity of the NE is the blurring of the traditional boundaries between economics and culture. This is happening to such an extent that we tend to subscribe to a maximalist interpretation of the scope of the current transformation:
the NE is producing not just an E-conomy but also an E-society and an E-polity as well as a genuinely new E-culture. Thinking along these lines, Castells (1996), for example, argues that we are witnessing the development of an ‘informational mode’ that is transforming production, experience and power, and that is giving rise to a society fundamentally based upon networks of information exchange (see also Cohen et al.
2000). Consequently, in principle, a proper account of the NE calls for an interdisciplinary perspective.
One way of developing such a perspective is by exploring analogies between the definition of the NE and other broad ‘sociological’ or ‘philosophical’ definitions of modern society advanced in the literature over the past thirty years. Definitions of information society, post-modern society and post-industrial or post-Fordist society all seek to deal with perceived changes in society with respect to some past period taken as a benchmark (see e.g. Kumar 1995). In principle, the ‘post-modern’ concept is much more complex than the others. It can be seen not only as an historical phase (the last phase of capitalism) but also as an existential state or condition, a style and a critique of modernism, taken as the culture of modern society (see e.g. Cullemberg et al. 2001:5 and Chapter 4). In general, these concepts all emphasize a number of key aspects. Following the interpretation of post-modernism as the last phase of capitalism, Jameson (1992), for example, focuses on characteristics such as mass commodification, globalization and new technologies (see Kumar 1995).
The two aforementioned considerations (namely, the plurality of key factors constituting the NE and the blurring between economic and political cultural spheres taking place) help us in our search for the sources of instability. Intuitively, instability seems more likely to occur when not one, but a number of key factors are considered, and when the focus is not only on the economy but also on its relations with society at large.
Moreover, these considerations also provide a prima facie justification for using Calvino’s labels to identify and classify the main features of the NE. In line with our broad perspective, these labels refer to several features of a complex reality, and characterize not just the economy, but also the twentieth century in general.
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Interrelations among economic factors
The criticism laid against standard macroeconomics in the previous section must be clarified. We are not claiming that standard theory neglects the existence of other factors beyond ICT, such as globalization or finance; in fact, these are sometimes even regarded as the key features of the NE within standard approaches. What we object to, instead, are two distinct features in the way these factors are handled in standard macroeconomics.
The first is that they are each dealt with separately, relying on the ceteris paribus clause.
The second is that, even when they are recognized, the relationships between several factors are dealt with in a reductionist fashion, that is, they are considered only in so far as they are affected by ICT. For example, Gordon (2002:4) stresses that the new technologies are responsible not just for productivity gains, but also for the stock exchange boom and income distribution effects (i.e. growing inequality). In other words, these interpretations appear to fall into the trap of technological determinism, according to which a number of economic phenomena, including macro outcomes, are causally related to technological change.
These two features of standard theory, which are clearly involved in the use of production functions and the performance of growth accounting exercises, are subject to serious limitations. It is increasingly observed that causal links and interactions are not predetermined in the NE and that they have become much more complex. Phenomena can be imputed to multiple causes, and the key causal factors are often interrelated.
It is important to note, however, that these limitations have not gone unnoticed by perceptive standard theorists. In the general field of macroeconomics, Blanchard and Fischer (1989) admit, for example, that the causes, even of trends in macroeconomic time series (and unemployment), are complex, and they acknowledge the inadequacy of monocausal theories of the business cycle.2 As for the analysis of the NE, Baily (2001), for example, rejects techno-deterministic accounts of the growth process and lends support to a broad definition of the NE that will encompass a wide set of factors. He makes the case that the role of ICT in relative economic performance should not be overemphasized. In particular, ICT is not the only reason for the lack of convergence between the US and other countries. Preventing a more complete convergence, instead, is the interaction between ICT and other factors. These include barriers to the process of creative destruction, and even more importantly, a lower level of competitive intensity in Europe and Japan (Baily 2001:223). Moreover, in another contribution, Baily points out that the causality issue is one of the reasons why the growth accounting approach may be misleading in thinking about productivity rise. For example, once having noted the correlation between the rise in productivity and investment, Baily argues that correlation determines neither the existence nor the direction of causality. In addition to the growth accounting story, that is, the surge in ICT causing the productivity surge, an over- investment story involving the reverse causality is also possible. This amounts to suggesting that when profitability was high in the mid-1990s, the stock exchange boom led to the creation of an investment bubble that burst when companies realized they had overinvested in ICT (Baily 2002:7–8).
In our view, insights concerning the causality issue and the role of ICT need to be generalized for stability analysis to be carried out. We give particular weight to two issues: first, the NE is based on a set of relatively autonomous key factors, that is, not
necessarily causally related with each other; second, these factors may all be related in various ways, that is, we do not assume a predominant, one-way causal relation.3 General interaction of this kind is likely to account for important sources of instability. It can be argued, for example, that the stronger interaction between globalization, finance and ICT occurring in the NE is likely to lead to important changes in agents’ behaviour, such as in their perception of ‘space’, because of the drastic reduction of distances and various other barriers (transaction costs, psychological barriers, legal barriers, etc.) which these phenomena involve. Once we allow for this effect, we should be able to identify new indicators of instability, such as the faster transmission of financial and real shocks from one country to another and the greater volatility of financial markets.
The formidable task in developing our stability analysis is in overcoming the limitations of standard methods and managing to consider the entire gamut of interactions, both at the descriptive and analytical level. In general, standard theorists usually limit themselves to making a few critical remarks before resorting to familiar methods, such as growth accounting exercises, to get precise ‘results’. It is a long- standing habit to combine criticism or insight on how proper analysis should be carried out, on the one hand, with reliance on standard analytic tools for want of better alternatives (due to tractability problems, for example), on the other. The challenge is in overcoming this ‘split personality’ and verifying whether the insights into the need for capturing interaction can actually be developed into a coherent new methodology following the lines of the neo-modern perspective.
In what follows, we make a few moves in this direction. In the first descriptive stage of our analysis, we try to capture interactions while refraining from rigid specification of causal links. At this stage, it would be a mistake to assume any particular causal link, for example, between finance and technology. Moreover, we must allow key factors to vary independently of one another. For these purposes, the use of broad categories such as Calvino’s proves very useful. Indeed, these labels help sustain a very general description of the NE, as they allow interactions at the descriptive level to be accounted for in a relatively loose way, that is, without assuming any causal links. For example, we cannot simply make recourse to the ‘technological change’ label because that would imply emphasis on one particular causal relation, that is, from innovation to finance. The
‘rapidity’ label, instead, is more general and, in principle at least, allows the causation link to go in both directions.
Similar considerations apply to the other labels. Instead of using the label
‘globalization’, it seems preferable to rely on the ‘multiplicity’ label, as this does not imply that globalization is the cause and say, technology, the effect—or the other way round. Again, instead of using the label of ‘finance’, which seems to assume that finance comes before technology, we use the ‘lightness’ label instead. In addition, our labels perform another important task. They can also be regarded as involving ‘horizontal’
simplification, that is, they are devices that allow the grouping of heterogeneous and unrelated elements. For example, the ‘lightness’ label covers the case of production using less raw material as well as finance having greater weight.
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The overlap between the economic and socio-institutional spheres
As already noted, standard theory regards the NE essentially as a technology breakthrough. Due to its reliance on the use of production functions and the performance of growth accounting exercises, this theory is bound to regard technological change essentially as an exogenous shock or residual. This means that no assumption is made about the affect of institutions on the innovation process; this is treated as purely exogenous. The fact that the environment, the institutional context, is taken as given is not surprising in view of the fact that neoclassical theory is based on a mechanistic view, according to which it is possible to think in terms of atomistic relations, that is, in terms of relatively isolated subsets of the complex socio-economic system. In line with the universalistic claims made by this theory, this amounts to assuming that it makes sense to isolate pure market forces, given that they tend to perform the task of allocation no matter what kind of shocks or institutional context are at work in the economy.4 For example, despite the huge institutional differences among countries, competition is assumed to bring about similar outcomes, such as the uniformity of prices across countries implied by the law of one price or the purchasing power parity theorem.
This feature of standard theory is also subject to serious limitations. In particular, as many commentators suggest, the NE is characterized by an increasing overlap between economic and the socio-institutional spheres. This is true to such an extent that one is tempted to think of them as mutual catalysts, or at the very least, to emphasize their growing complementarities. One implication of this increasing mutual influence (with causal links going in both ways) is that institutions no longer act as simple external constraints; rather, they ‘interfere’ with the spontaneous working of the market mechanism and perform roles which are inconsistent with the standard model; for example, they may affect the allocation of resources. It follows that it is becoming increasingly difficult to isolate the ‘natural’ features of economic systems and to justify the universalistic claims of standard theory. It can be argued, for example, that the role played by natural endowments and geographical location, which receives great emphasis in standard theories of international trade, is less relevant in the NE than in the past. The wealth of nations and the international division of labour increasingly depend upon non- natural, institutionally created resources, such as human capital or technology.
It is important to underline that this reciprocal influence between institutions and the economy is at least partly recognized by standard analyses of the NE. It is not just a matter of recognizing the need for new regulations (concerning issues such as privacy and intellectual property rights), connected to the introduction of the Internet (see e.g.
Cohen et al. 2000). Nor is it simply a matter of stressing the impossibility of ignoring the consequences of changing external constraints, such as exchange-rate regimes, the degree of capital mobility and methods of conducting monetary policy emphasized by political economy approaches.5 What we are referring to, instead, are the analyses of the sources of the ICT revolution carried out by various authors. Gordon, for example, focuses on the permanent institutional sources of US advantage, such as its large domestic market and other sources (e.g. education, government funded Military and Civilian research, capital markets with their emphasis on equity finance, venture capital and pension funds,
language and immigration) that would exist even if the productivity rise were to disappear (2002:28–40).
But this is not all. Some contributions assert that institutions lie at the root of key developments in modern capitalism and that in a certain sense they are its generative functions. This crucial point is made clear, for example, by DeLong and Summers (2001) when comparing the recent NE with the far-reaching economic transformations of the second industrial revolution driven by electrification and other late nineteenth-century general-purpose technologies. These authors suggest that although these technologies contributed to the diffusion of mass production, large industrial enterprises, industrial labour unions, and the social welfare state, increasingly rapid sustained increases in median living standards and the middle-class society, nonetheless, for these crucial changes to occur, a number of ‘fundamental’ institutions of modern capitalism were required:
[Y]ou needed more than improvements in production technology…in the US the economic transformation rested on legal and institutional and political changes
1 limited liability 2 the stock market 3 investment banking 4 the continentwide market
5 the existence of an antitrust policy.
(DeLong and Summers 2001:40) In our view, these insights are helpful for our stability analysis in two respects. First, they suggest the proper way of viewing the NE. De Long and Summers stress that a set of fundamental institutions underlies what we have labelled as the ‘modern economy’, that is, twentieth century capitalism. Now we argue that the same is true for the NE. It must be noted that we do not regard this as merely a formal analogy. We are not simply suggesting that the position of DeLong and Summers is consistent with the argument presented earlier that institutions can play the same generating role for complex, systemic patterns as mathematics does for the SFA patterns, and that we should look at the NE in the same way as they do for the modern economy. We believe, instead, that the analogy is even more resonant: the NE actually rests on the same set of core institutions as the modern economy. In our view, the point is that the NE is not fundamentally different from the modern economy; as we attempt to demonstrate in the following chapters, it merely accelerates some of its key features.
Thinking along these lines, what we actually propose to do is to generalize DeLong and Summers’ insights to all of the features of the NE and to look for the fundamental institutions that generate them. We thus stress the following points: (a) the development of globalization is due to institutional factors, such as trade agreements, exchange rate regimes and the factors that account for different models of capitalism; (b) legal and institutional changes, such as deregulation following the end of the Gold Standard, limited liability, the stock market and investment banking, largely account for the increasing role of financial assets in the modern economy; (c) technological revolutions
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