Chicken little told us that the sky was falling. Alan Greenspan and his cohorts at the Fed would have us believe it just might—what with the “irrational exuberance” of the capital markets and their increasing fear that inflation may soon rear its ugly head. I’m here to assure you that Chicken Little and Alan Greenspan have a lot in common; they fret for no good reason. The sky—that is, the U.S. economy—is just fine, thank you. In fact, it’s never been better—sturdy, resilient, and raring to grow. And it will remain that way for years and years to come if the government just manages to stay out of its way.
The new economy is strong because it is based on a business system that works. It makes sense—simple as that. Any business system that relentlessly drives out inefficiency, forces intelligent business process reengineering, and gives customers more of what they want will be sustainable. On top of that, the new economy is strong because it is built on several important factors to which traditional economists don’t usually lend much credence: America’s admiration for entrepreneurs and its tolerance of failure, not to mention its easy access to capital. The new economy is strong, too, because it is attracting the best and brightest minds in the country. There was a time when all the smart MBAs went into consulting and investment banking. Now they’re becoming entrepreneurs or zipping off to Silicon Valley to join an existing team, where they turn the cranks and pull the levers that make the new economy thrive. And finally, the new economy is strong because it’s spreading. It may be primarily an American phenomenon now, but in a few short years, it will start to show its effects everywhere, making the whole world more productive.
I am not claiming that the road ahead is without potholes and sharp curves. Some of the fastest, shiniest companies in today’s economy may very well crash—and big—even Yahoo! or Microsoft. Some of the most promising new technologies fueling the economy’s growth, such as Internet telephony and gene mapping, may never fully pan out, or more likely, they may change abruptly, making huge investments obsolete. But that is what the new economy is all about—companies attacking the status quo and entrenched players, and experimenting to find new technologies that improve or replace earlier ones. Such activity presents no cause for alarm. The economic, social, and cultural factors undergirding the new economy are rock solid. All we have to do is leave them alone.
The New Business Model
In the old days—until about 25 years ago—the U.S. economy was characterized by relatively inefficient, bloated companies that were protected by carefully constructed entry barriers. Due to limited financing, start-ups were few and far between. In 1975, for instance, there was virtually no venture capital money floating around the economy and no money for initial public offerings. That is not to say the U.S. economy was terrible; it just wasn’t particularly competitive. Companies could keep their costs high, and their prices came along for the ride.
We all know what happened next. Foreign competition poured cold water on the party. The oil supply dried up, and prices rose precipitously. The Federal Reserve raised interest rates to counteract inflation, making it harder and more expensive to raise funds to finance investment. Large numbers of people were laid off, but few could start their own businesses because there was still no venture capital available. Things got ugly very quickly. And boy, are we lucky.
The tough times of the early 1970s planted the seeds for the entrepreneurship of the late 1970s and early 1980s. That’s when little companies such as People Express, Staples, Dell, and Home Depot started popping up, with founders who said, “We went to work for the ‘safe’ big company and it wasn’t safe at all! The current system stinks. Prices and costs are too high. Customers aren’t getting what they want. We’re going to do things differently. If we fail, at least it won’t be because some bureaucrats made stupid decisions.” These companies began to seek a new Holy Grail—a business model so efficient that costs would radically shrink, prices would drop commensurately, and volume would soar. And if that model meant reengineering the company’s business processes from end to end, they said, so be it.
The quest for a new business model was perfectly timed; indeed, it coincided with critical changes in the American competitive scene. The first—deregulation in several large markets, including transportation and financial services—occurred in the mid- to late 1970s. That made it possible for newcomers like People Express to enter the field. Even though some of the companies born of deregulation ultimately failed, they forced significant restructuring in the industries they entered.
At roughly the same time as deregulation, the microprocessor and the tools of genetic engineering were developed. These new technologies were not embraced by the leading companies of the day, but they were quickly seized by new entrants like Apple Computer, Microsoft, Amgen, and Genzyme to attack the status quo.
In the midst of this economic upheaval, a few companies achieved unexpectedly rapid success. And they didn’t do so quietly. In fact, many watched in wonder as they went public with a bang. (The initial public offerings of Apple Computer and Genentech in 1980 are two notable examples.) The venture capitalists who had backed these companies prospered, and others tried to replicate their success. Before long, the venture capital industry was burgeoning, and eager investors were literally going in search of little start-ups to finance. Such funding launched many businesses toward successful IPOs, including some of today’s most important new economy companies. And so a virtuous circle of entrepreneurship and investment had begun.
Enter the Internet, circa 1994. This advance continued to fuel the trend toward a more entrepreneurial economy. If new companies were working assiduously to cut out inefficiencies before, the Internet made the cuts deeper and faster. It also lowered or eliminated entry barriers in dozens of industries. I won’t bore you with all the ways in which e-commerce has rearranged business thus far; they’re cataloged daily on the front pages of newspapers, covers of magazines, and the like. You just have to turn on the radio to hear about the latest Internet offering: from on-line wedding registries to on-line obituaries.
What’s more important here than the details is the big picture. The combination of entrepreneurship and the Internet has allowed new economy companies to achieve those very efficient business models they were after. Costs came down and are being pushed lower every day. Needless to say, prices are sinking, too. In fact, the new economy has created such downward pressure on prices that it is safe to say inflation is dead—dead as a doornail. That is, unless the Fed gums things up by raising interest rates or unless other government agencies interfere with the competitive process. The business model of the new economy, you see, works perfectly on its own. It creates a system in which both businesses and their customers win.
The new economy has created such downward pressure on prices that it is safe to say inflation is dead—dead as a doornail.
Take the case of FreeMarkets Online, a company based in Pittsburgh. FreeMarkets has developed software that enables large industrial buyers to organize on-line auctions for qualified suppliers of semistandard parts like fabricated electronic components. In the 48 auctions that FreeMarkets has conducted to date, most participants have saved more than 15%, some as high as 50%. FreeMarkets is growing at 40% per quarter. The company believes that its auction technology is applicable to over $300 billion worth of industrial purchases in the United States alone.
You may wonder why suppliers would want to get involved in these auctions if they drive down prices. After all, in the old days, high-cost (and high-price) suppliers could still sneak by because buyers were not aware of lower-cost options or because of personal relationships between purchasing agents and salespeople. But now that auctions exist, suppliers have no choice but to participate; some even want to. Auctions allow suppliers to lower their own costs; paying a national sales force, with all its travel and other overhead, is expensive. Auctions also allow suppliers to reach previously inaccessible customers. Who wouldn’t want that? Also, it’s not always the low-price bidder who wins—companies can still charge a price premium for high quality. The big difference now is that companies without such differentiating capabilities can’t justify higher prices.
Buyers also have no choice but to get into the auction action. Once one company in an industry starts buying online, its costs will drop. It can then lower its prices to the end user in order to grab market share, or it can allocate some of the savings to other areas like marketing or R&D or both. In any case, the rules have changed. Buyers who play by them will become more efficient and their customers happier. Those who don’t will be out of the game.
FreeMarkets’ auction model is being rolled out in essentially every other sector of the economy, from beanie babies at eBay.com to steel at MetalSite.net. One company, VerticalNet.com, has established e-commerce sites for 40 industries and has announced plans to offer auction capabilities for at least 15 of those industries. At the same time, an important variation on the auction model is emerging, in which consumers themselves post what they are willing to pay for products or services. Priceline.com, for instance, allows consumers to set the price at which they will buy an airplane ticket. Airlines can then decide if they want to “hit the bid” and fill a consumer’s order. They will do so if the marginal revenue they receive exceeds the marginal cost of supplying the seat—better to fly a full airplane than a half-empty one. The Priceline idea has caught on so quickly that the company has extended its model to hotel rooms, mortgages, and cars.
Inefficiency is also being driven out of the economy by the new on-line megamerchants like Amazon.com and eToys, with their ability to offer greater selection at lower prices, all while using dramatically lower amounts of capital. Amazon, to illustrate, requires essentially no capital to operate its on-line store: when you buy a book at Amazon, you pay immediately. Amazon pays its suppliers in 50 to 60 days. Amazon invests little in plant and equipment because it has modest inventories—it has outsourced many logistics and inventory functions to suppliers like Ingram. Yes, recent investments by Amazon in warehouses will require more investment, but not to worry. The cost of the warehouses, estimated at several hundred million dollars, will not materially affect the company’s business model relative to traditional book retailers. In fact, the new warehouses will bring Amazon closer to the customer by making much faster delivery possible—a change that will likely increase revenues by more than enough to offset the new costs.
At the end of the first quarter of 1999, Amazon actually had negative $50 million in operating assets to support a $1 billion plus run rate in revenues—that’s right, the number is negative because of the modest assets and large current operating liabilities. In contrast, Barnes and Noble’s bricks-and-mortar operations needed almost $3 billion in net assets (including capitalized leases) to support $3 billion in sales. Amazon can price its books lower than Barnes and Noble because it requires no capital to support the business. Amazon also has lower general and administrative costs because it has only one store, not hundreds. Amazon currently loses money because it spends a lot on sales and marketing to acquire customers. Yet if you look at the numbers carefully, you will discover that Amazon has invested less than $80 million in net cash to acquire over 8 million customers, which seems like a reasonable investment given the likely lifetime value of one of those customers. The existence of Amazon places intense downward pressure on book prices at the retail and wholesale levels as it increases in size and relative bargaining power.
The Amazon model is being rolled out across the economy in sectors ranging from pet supplies to pharmaceuticals to furniture. Without question, this new wave of competition is still in its infancy. As it gains momentum, pressure on existing industries will be intense. Within five years, no corner of the economy will be untouched by downward cost and price pressure. Companies will be forced to increase productivity, reengineer business processes, and basically delight customers in ever better ways. If that’s not an inexorable force for positive economic transformation, nothing is.
You might ask, “What will keep companies like Amazon from raising prices—especially once they control the market?” The answer is that there are other, even newer competitors like Buy.com, On-Sale.com, and ValueAmerica.com that sell products at or near cost. Buy.com’s unit, Buy-books.com, states that it will sell books for 10% below Amazon’s prices. Its strategy is to make money on advertising. And its model is being replicated in computers, videos, music, and numerous other categories.
Prices will also be kept down by the Internet’s ability to let people comparison shop. Services such as compare.net or MySimon.com search the Web for the lowest price for any given item. Talk about shopping around! Now consumers can make buying decisions as if they had an army of intelligent helpers running to all the stores around the world to pinpoint the lowest price. That could never happen in the physical world, yet on the Internet, it is relatively easy and instantaneous. And it almost always results in consumers getting a price near cost.
Is “at cost” too high for you? Still not a problem. Companies are now starting to provide items for free. Recently, for example, FreePC.com gave away a computer to the first 10,000 customers who signed up at its site. Over 1 million people registered. The company’s business model is based on selling advertising on the “free computers”—not unlike ads on your “free” television programs. It also sells the information on its customers to other interested companies. This same basic model is currently being replicated in services like e-mail and Internet access. It probably won’t be long before companies offer free phone service, perhaps over the Internet. We’ve come a long way very fast.
In all probability, it will not be long before companies go beyond free and start paying people to use products or services.
In all probability, it will not be long before companies go one step beyond free and start paying people to use products or services. Indeed, there is an early example of just such an approach at All-Advantage.com. The company passes through payments from advertisers to consumers who keep a banner open while browsing the Web. The company claims it will pay users up to $20 per month for keeping the advertising window open all the time.
How Far Will It Go?
The drive for efficiency propelling the new economy is all well and good, some people say, but it has its limits. That is, some sectors of the economy simply can’t be transformed into lean, mean business machines. Take lawn mowing, for instance—an “industry” that is destined to be forever fragmented. And what about corner coffee shops? I can assure you they will never be replaced or made orders of magnitude more efficient by Internet alternatives, nor will the cottage industries that support fly-fishing tours and dude ranches. But even these industries will benefit by providing more information to more customers using the tools of the World Wide Web. Moreover, there probably is some enterprising entrepreneur out there who believes there are scale economies in “rolling up” the lawn-mowing industry to provide better service to customers. Indeed, that’s what is happening right now in the notoriously fragmented dry-cleaning industry. A new company called Zoots is reengineering the process of picking up and cleaning laundry by allowing customers to track orders and change dry-cleaning preferences 24 hours a day on the Web.
Other sectors that once seemed impervious to systematic improvement are also under assault—for the better. Take education. There are literally hundreds of new competitors in the field, from electronic extension schools to on-line, degree-granting universities. Many of these new entrants offer high-quality programs that are priced well below their traditional counterparts. Perhaps you can’t replicate a Harvard, Stanford, or Wellesley education online, but you can get quite a good education on your terms and at much lower cost.
How about health care? I will not attempt to address all the complex effects of entrepreneurial activity on health care costs. It is worth noting, however, that the biotechnology industry is dedicated to attacking the pharmaceutical industry by reengineering the drug discovery process. Companies like Millennium Pharmaceuticals are using computers to dramatically decrease the time required to find and evaluate new drug candidates, shrinking it from years to weeks. As this technology advances, pressure on drug prices will intensify—even though strong intellectual property protection remains in place. And the new drugs created by the biotech industry have the potential to increase the quality of life and decrease medical costs when compared with nondrug treatment alternatives such as surgery.
The Internet, meanwhile, can also push down health care costs by making more information available to both patients and doctors. Patients with minor ailments such as bone spurs or baldness can use the Web to educate themselves about treatment alternatives without traipsing from doctor to doctor and paying each along the way. They will be aided by companies like Silicon Valley-based Healtheon, whose stated mission is “to leverage advanced Internet technology to connect all participants in health care, and enable them to communicate, exchange information, and perform transactions that cut across the health care maze. This will simplify health care, reduce costs, enhance service, and result in more available and higher-quality health care.” For their part, doctors will be helped by Internet-based programs that keep track of whether their patients have purchased their medicines—no small matter since a major reason people land in hospitals and doctors’ offices in this country is a failure to buy and take their medications.
Whenever I extol the strength of the new economy to a group of economists, one of them always tries to trump me with an argument about inelastic markets, like energy, lumber, and perhaps most important, labor. How, the economist asks, will the new economy drive down prices in sectors where supply cannot be budged? That’s a good question—but not a case-busting one.
Take the situation in Silicon Valley. It’s said that the area actually suffers from negative unemployment: everybody has a job and two job offers! Obviously, that means the cost of labor is increasing there, although some of the demand for higher salaries is being met with stock options rather than with increased base compensation. And once again, the entrepreneurial sector is attacking inefficiencies as they arise: one former Microsoft executive has started a company, Aditi, that has hired and trained several hundred talented programmers in Bangalore, India, to provide outsourced programming support for U.S. companies.
Or take the shrimp market. The supply of shrimp decreased tremendously as the oceans grew polluted and over-fished. By 1980, the supply was so tight, in fact, that a pound of the frozen critters cost $15 (in 1999 dollars). Enter a group of entrepreneurs in Ecuador and Thailand who came up with a way to “grow” shrimp in ponds. Today they sell it for $6.99 a pound, and at that price, it’s no wonder that consumers are gobbling it up. Now over 60% of the U.S. shrimp supply comes from ponds rather than from oceans.
Labor and shrimp are one thing, you may say, but what about the tough stuff, like fuel? Again, not a problem; entrepreneurs are on the case. Consider, for example, a little company in Woburn, Massachusetts, named Quantum Energy Technologies. It has figured out a way to reengineer diesel fuel in order to increase efficiency and lower emissions, and thus the costs associated with them. A company called Trexel, also based in Woburn, Massachusetts, has invented a revolutionary process for creating durable foamed plastic using 25% to 50% less plastic than traditional methods (the key is inserting more air in the plastic without sacrificing strength).
Entrepreneurs have even found a way to cut inefficiencies out of the new economy’s leanest and meanest operation, Microsoft. When its operating systems flaunted high prices and profits, programmers responded by developing new operating systems, the best example being Linux. This operating system is now being used on more than 12 million systems and has the ultimate low price—free. One company in the Linux software market, Red Hat, recently went public and quickly attained a multibillion dollar market capitalization. Red Hat sells free software packaged with a very good manual and strong customer support, which people are willing to pay for. In the new economy, one company’s monopoly profits represent an overwhelmingly attractive business opportunity to another company.
The Changing Role of Distribution
When it comes to doubting the new economy, the final argument is usually that distributors will eventually bite back. They will block the new economy’s forward march to total efficiency. Now, it is true that manufacturers around the world have long relied on distributors to perform valuable services, ranging from holding inventories to servicing products. And it is also true that many distributors are unhappy with the way the Internet is squeezing them out of the value chain equation. After all, if everyone starts buying their wardrobes on-line, that doesn’t bode well for the trucking companies that ship the clothing from factory to warehouse to retail outlets.
But distribution is expensive, and businesses have always tried to bypass it or to reduce its costs. The new economy is doing that, just faster and better than ever before. It is making distribution more efficient—better, cheaper, and more responsive to the consumer. And therein lies its power and its sustainability. Indeed, efficient distribution capabilities will be vital in the new economy and will be justly rewarded.
A case in point is Dell Computer, the Texas-based computer giant that was launched in 1984, long before the Internet became a force in the economy. When Michael Dell started the company, he had a simple plan: to eliminate distributors (retailers such as ComputerLand or BusinessLand) from the computer-buying process and sell directly to consumers over the phone. As for service, Dell arranged for a nationwide network of computer technicians that would fix computers within four hours—a system that was better than what the retailers offered. That was phase one of the Dell story. During it, Dell was able to compete successfully with IBM and Compaq, which were still clinging to the direct sales model. Indeed, it was able to sell comparable computers for 15% less than Compaq.
In its second phase, beginning in 1996, Dell changed its approach to distribution again—squeezing out more inefficiencies. It got rid of its large inventories of parts and finished goods and assembled computers after they were ordered. That approach worked very well, but then the Internet came onto the scene, allowing Dell to build an even tighter ship.
In its third and current phase, Dell is moving online with gusto. Already, about 30% of Dell’s revenues—more than $18 million per day—are being generated over the Web, and the company intends to go even further. The move is allowing Dell to eliminate many sales representatives and is simultaneously helping its customers make better decisions about what to buy. It is pouring information about its products and services onto its Web site, allowing purchasers to personalize their orders. Moreover, it is setting up tailored sites for corporate accounts that integrate seamlessly with each company’s purchasing system. As for the actual delivery of products to the customer’s door—that’s taken care of by companies like Federal Express and UPS at a cost that is lower than ever for Dell and the customer. And the cheaper and faster logistics services like those provided by Federal Express and UPS become, the more chances there are for new business models like those at Dell and Amazon to succeed.
Dell’s changes in distribution have an important and direct impact on the health of the new economy. Because personal computers have the potential to make other sectors of the economy more efficient, lower PC prices benefit the economy as a whole. And with intensely efficient distribution, Dell can push its prices as low as dirt. There is another key shift at Dell that is similar to that at Amazon. In 1990, Dell had sales of $546 million and required $126 million in net operating assets (accounts receivable plus inventories plus net plant and equipment less accounts payable) to run the business.1 By fiscal 1998, Dell was able to generate $18.2 billion in sales using only $493 million in net operating assets. In other words, over that time, operating assets as a percentage of sales has declined from 23% to 3%. Had Dell maintained the same ratio of operating assets to sales in 1998 as it had in 1990, it would have had to invest $4.2 billion, almost ten times as much as actually invested.
Because Dell has modest capital at stake, it can charge lower prices and still achieve a reasonable return on capital. From 1990 to 1998, Dell’s gross margin declined from 33% to 23%, although operating margins increased from 8% to 11%. Operating margins increased because SG&A declined from 20.9% in 1990 to 9.5% in 1998, a trend accelerated in the post-Internet period beginning in 1996. Dell’s return on invested capital is huge: over 400%, up from 36% in 1990.2 This helps explain why Dell’s market value has gone from under $500 million in 1990 to over $100 billion at the end of 1998.
The American Way
The unrelenting drive for efficiency in the new economy is a marvelous thing and will certainly hold down prices and stave off inflation. But the new economy is strong and sustainable for other interrelated reasons. Let’s take a look at them.
The first is straightforward enough. But it has important implications. Americans love entrepreneurs. They are heroes in our society—examples range from Sam Walton at Wal-Mart to Sandra Kurtzig at ASK Computer Systems to Jeff Bezos at Amazon. They make news wherever they go. Entrepreneurs write best-selling books, and books are written about them. Recent best-selling entrepreneur-authors include Howard Schultz at Starbucks, Michael Dell, and Bill Gates.
The new economy will be sustained because Americans love entrepreneurs. They are heroes in our society.
The American love affair with entrepreneurs couldn’t happen if we didn’t have such a high tolerance for failure. Americans admire people just for trying—the harder, the better. We find something honorable—gutsy, even—in a businessperson starting company after company until he or she gets it right. Many of our entrepreneurial heroes came perilously close to failing—like Fred Smith at Federal Express—or actually did fail—like Jerry Kaplan, former CEO of Go (which “went”) and current CEO of the Internet company OnSale. Indeed, failure has so little stigma in Silicon Valley that it is simply synonymous with experience (as long as it is not caused by unethical behavior).
Because entrepreneurs are such heroes in America, two things are happening—now more than ever, in fact. The first is that entrepreneurship is attracting the best and brightest minds in America. Consider some statistics from my backyard, Harvard Business School. In the academic year that ended in June 1999, an astonishing 35% of the graduates went to work in new economy companies and the venture capital firms that support them. During the school year, there were at least 100 teams of students working on business plans, most focused on the Internet, and one very likely to succeed plan aimed at building nail salons in airports around the world. During the year, well over 30 teams actually started businesses, raising capital in amounts from a few hundred thousand to tens of millions. Students used to take more conservative paths upon graduation—to consulting firms and investment banks—but they no longer perceive great risk in jumping on the entrepreneurial bandwagon early in their careers. Indeed, they view the real risk as missing the greatest wave of opportunity in history. As a result, these young, ambitious entrepreneurs are running the new economy.
The second impact of America’s love affair with entrepreneurs is that money is flowing to them with enormous ease. In fact, the United States has the most entrepreneur-friendly capital markets in the world. Last year, a remarkable $26 billion was invested by professional venture capitalists, one quarter of which went into new e-commerce companies. The public capital markets, too, have been very receptive to new issues. A company like Amazon has been able to raise well over $1 billion in the capital markets despite reporting large losses. At the peak, the market assigned a value to Amazon of over $30 billion, significantly higher than the market capitalization of a traditional retailer like Sears. FedEx, too, was able to attract millions of dollars in funding in its initial public offering, despite asking for it with perhaps the scariest prospectus I have ever read. It cataloged the company’s operating challenges, its near bankruptcy episodes, and certain highly unusual company-saving financing tactics that stretched the rules more than a little. Investors apparently found this never-say-die story charming—and thank goodness.
Money in this country flows toward big dreams. Louis Borders, a man with absolutely no experience in the food industry—he started the bookstore chain—recently came up with the idea that he could create a same-day grocery delivery service. Within months, investors had given him $600 million to launch Webvan. (He needs $400 million more to get going, he says.) Or take Bill McGowan of MCI fame. Between 1972 and 1982—prior to the Justice Department consent decree with AT&T—he was able to raise almost $500 million to free consumers from the tyranny of AT&T. Nantucket Nectars used to be a tiny company run by two friends who sold their wares off the back of a boat. An entrepreneur fell in love with their business plan and gave them several million to expand the business before it was purchased by Ocean Spray for almost $100 million. And three young Harvard Business School classmates, David Thompson, Bruce Ferguson, and Scott Webster, were able to raise millions to launch a commercial satellite into space. Their company, Orbital Sciences, is now listed on the New York Stock Exchange with hundreds of millions in revenues. Americans believe in the dreams of entrepreneurs, it seems, because they so often come true.
The World Economy
The new economy is largely an American phenomenon at the moment, but part of its strength is that it is spreading. What makes me say so? The first answer is entirely anecdotal. In the past, my foreign students received their MBAs and stayed right here, joining U.S. companies with great enthusiasm. Today, the majority grab their MBAs and run home to start their own local versions of our successful new-economy ventures. A great example is AsiaMail, a company that intends to provide free e-mail and other e-commerce services to users throughout Asia. The team, led by two recent JD-MBAs from Harvard Business School, has raised well over $20 million to finance its plan. Yet another team of foreign-born MBAs is starting a company to reengineer the drug delivery system in Europe, along the same model as the one used by Drugstore.com and PlanetRx.
To be sure, new economy business models are also sprouting up abroad without the help of U.S.-educated MBAs—and with great fervor and promise. Two 26-year-old entrepreneurs have launched OfficeNet in Argentina—a Latin American version of Staples that appears to be doing very well. Another example is Patagon.com, a company based in Buenos Aires that is trying to offer electronic trading for financial securities in Latin America. Again, the founders are two young native-born entrepreneurs who have been able to attract significant amounts of venture capital.
These examples are not meant to demonstrate a tidal wave of change. The globalization of the new economy is still a ripple. But the world today is so connected by the mass media, e-mail, and the Internet that it is only a matter of time. When something works as well as the new economy, everyone wants a piece of it. Indeed, entrepreneurship will continue to flourish as inefficiencies—and thus, opportunities—across world markets attract more human and financial capital.
The Golden Age
The naysayers of the new economy argue that the stock market has run amok and that doom looms ahead. Yet from a different perspective, the “irrational exuberance” of the stock market has actually played an important role in increasing productivity and decreasing inflation. Why? The more money that flows into the disruptive companies of the new economy, the better the new economy’s inefficiency-busting, inflation-crushing model works. As new economy companies grow stronger, they put more competitive pressure on existing players, pushing prices and costs down, down, down. The real threat to the economy right now is not growth but the government putting an artificial stop to it by raising interest rates.
The real threat to the economy right now is not growth but the government putting an artificial stop to it by raising interest rates.
The new economy is strong and resilient. At the same time we are experiencing dramatic growth, we are experiencing deflationary pressures. Granted, the road ahead won’t be easy for business executives. That’s a given. After all, companies new and old will be under constant attack, having to reinvent themselves or get out of the way. Today’s media heroes may well be tomorrow’s goats. And labor, too, will pay a price. Many workers will be required to learn new skills or find new jobs altogether. As in every revolution, not all will benefit equally nor will the pain be spread evenly. But years hence, we will look back at this time as a golden age. That is, if the policy makers don’t turn it to lead.