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Technology and the New Economy

Editor: Chong-En Bai, Chi-Wa Yuen
Publisher: Cambridge, MA: MIT Press, 2002
Review Published: March 2004

 REVIEW 1: Suely Fragoso

Despite our saying that all Brazilians are natural born football coaches and economists, I am aware that I am neither. To date, my ignorance of sports has been no threat to my academic career, but my interest in what has come to be called digital media has made avoiding economics increasingly difficult. With unsettling frequency, occasions have arisen wherein understanding one point or another of interest has been dependant upon the decoding, no matter how precarious, of an idea that it has become customary to express with a vague expression: that of "the new economy." With the hope of finally understanding something about this, I volunteered to review for RCCS Technology and the New Economy, edited by Chong-En Bai & Chi-Wa Yuen.

Upon receiving the book, I discovered that it consisted of edited versions of selected lectures that had been given by specialists in the field as part of the commemoration of the ninetieth anniversary of the University of Hong Kong over the period of 2001 and 2002. At first I thought that previous knowledge of various notions and theories of economics of which I was ignorant would be essential to understand most of the book. I thought that I had jumped in over my head and I decided to send the book back with my most embarrassed excuses for not being able to write the review for RCCS. However, I could not resist the opportunity of reading the book and trying to learn as much as I could before sending it back. Very quickly I discovered that the organizers had not been bluffing when they declared, in the Introduction, that the book is "written in accessible language" and "valuable to a wide audience, including academics, undergraduate and graduate students, and the general public with some basic knowledge in economics" (2). When you are dealing with a collection of papers from different authors the level of expertise required inevitably varies somewhat from chapter to chapter. Nevertheless, it is certainly true that a layperson can explore this book and obtain a reasonable understanding of most of the questions addressed. It is also true that those questions -- and the answers the authors offer to them -- are highly interesting to people from different backgrounds. So I decided to go ahead and write a non-specialist review of Technology and the New Economy, aimed primarily at other non-economists in RCCS' readership.

The connection between the popularization of the term "new economy," both in the media and within academia, and the significant impact of Information and Communications Technologies (ICT) on many aspects of the economy in the 1990s is declared and shown right from the start of the Introduction to the book. Boyan Jovanovic and Peter L. Rousseau, the authors of the first chapter, "Stock Markets in the New Economy," made me feel much more comfortable with this premise with their recognition, within the first few paragraphs, that there have been many new technologies and each has, in some manner, generally driven new economies. Looking back in time, these two authors identify three waves of technological innovation that had great impact on the 20th century economy: the first of them, at the beginning of the century, being the development of electricity and internal combustion systems; the second, halfway through the 1900s, was that of chemical and pharmaceutical innovation; with the ICT revolution being the third, starting in the last decades of the millennium.

Drawing on data relating to the USA stock market, Jovanovic and Rousseau suggest that each of the three waves of technological innovation was followed by a "vintage" of stock market listed companies, of which a significant number have produced higher-than-average rates of return on investment. Comparisons between the present wave of innovation and its predecessors provide a series of interesting analyses and serve as a basis for hypotheses concerning the future. Similarities between the ICT and electric revolutions, for example, allow the authors to reject what is called the "bubbles view" and the authors suggest that, despite Nasdaq's post-2000 crash, the present wave of innovation is far from over.

The sober but enticing considerations and conclusions throughout much of the chapter are not matched by the not so solidly grounded vision of the ICT revolution as leading to a worldwide "democratization of knowledge" solely comparable to that provoked by the development of the printing press in the 15th century. Neither original nor consensual, this proposition allows for a nice closure effect, but is lacking in solidity when compared to the other considerations made throughout the chapter. Reading further chapters made me consider the possibility that it may be traditional to add some enthusiastic and cheerful views about the "amazing times ahead" at the end of each academic paper in economics.

Focusing more tightly on the ICT period, T. F. Bresnahan and F. Malerba address the intriguing persistence of the leadership of the USA in the international computer industry despite there having been considerable changes in both markets and technologies. Chapter two, "The Value of Competitive Innovation and U.S. Policy Toward the Computer Industry," seeks first to explain these changes in markets and technologies, which are said to break down into five different "eras" of the computer industry. Having done this, the chapter moves on to locate the forces which have led to the concentrated location of rent-generating supply [1] within each segment of the computer industry in a single country and to discuss which forces have selected the US for persistent success.

The authors reject the broad theory which suggests that US persistent leadership is due only to its position as an early mover, with a large domestic market, and the convenient support of having the Department of Defense as a price insensitive and nationalistic buyer in the industry's formative years. On a short-term basis, Bresnahan and Malerba recognize the powerful advantages of being a first-mover. They challenge the validity of a similar reasoning over longer time scales, based on the dramatic changes in the technology itself, in the market structure and among the dominant players during the transition periods within the ICT era (from mainframes to minicomputers to PCs to client-server computing to the Internet). Their thesis is that in the long run, only a reasonable breadth and variety of research and capabilities accompanied by market selection (as opposed to a coordination of efforts on a single goal) can result in persistent national leadership within a constantly changing environment. The authors stress, however, that this does not imply that governments and other national institutions should be totally passive, leaving it all to "the market forces alone." Their claim is that national institutions and governments have a fundamental role in fostering policies which encourage a wide range of research and the exploration of different technological possibilities. The long term maintenance of international leadership by the USA is supposed to demonstrate this.

In Chapter 3, "Technology Dissemination and Economic Growth: Some Lessons for the New Economy," D. Quah challenges the power of analysis of the new economy focusing on the supply side. He considers that these analyses tend to lead to disappointment with the new economy -- whether accompanied, or not, by the conclusion that "there is nothing new" in the new economy. The author defends that the uniqueness of ICTs consists in their products behaving "as knowledge" -- that is, ICTs' products having two relevant economic properties: infinite expandability and disrespect of geography. Thus, he proposes, what is truly "new" in the new economy is the change in the nature of goods and services, which become more like knowledge. I would like to emphasize that Quah's claim that the new economy is "based on knowledge" is not the same thing as saying that "everything in the world is now equivalent to knowledge," a proposition that has been far from rare in the media and even in quasi specialist literature, but that does not hold up to well under examination. Nor does he argue that the novelty of the new economy consists solely in knowledge being used more intensely in production, which would qualify the novelty of the "new economy" merely in terms of its status as the most recent stage of an ongoing sequence of technical progress. Quah's main characterization of the "new economy" is based on the fact that a growing number of consumers have increasingly direct contact with goods and services that behave like knowledge (i.e., they can expand infinitely and are non spatial).

A very important claim of this chapter is that despite the apparent concentration of most analyses on the productivity aspects of the new economy, the demand-side characteristics have increased their importance in determining market outcomes: supply may not be able to create its own demand. The most serious obstacle to the progress of the new economy could therefore be the reluctance of consumers to participate in it: other factors are still part of the equation, but skilled, discerning consumers and increased levels of literacy are even more essential for economic growth.

The Technical Appendix at the end of this chapter is probably of great interest for specialist readers. For a non-initiated soul like myself, the few equations spread throughout the main body of Quah's paper are scary enough -- I made my way through the Appendix, but it was more effective in leaving me a little confused than in clarifying things.

J. D. Sachs and J. W. McArthur's chapter, "Technological Advancement and Long-Term Economic Growth in Asia," includes explanations of some basic economics that were of great help for a reader like myself. The section dedicated to the role of technology in economic development, for example, starts from Adam Smith's claims concerning the central role of market institutions, efficiency in transactions, and effective property rights in promoting high levels of living standards. After briefly reviewing the widely accepted assumption that savings, investment, and capital accumulation are the key drivers of gross national product levels and growth, Sachs and McArthur stress that even in Solow's model [2] "the long-term economic growth rate . . . is actually independent of the rate of savings and capital accumulation" (PAGE NUMBER). The authors claim that, in the long run, capital accumulation without technological advancement does not generate economic growth, but only stagnation.

Accepting that technological innovation is a core feature of economic growth brings to the center of the stage the difference between a) the few parts of the world that develop new technologies themselves, b) countries or regions which effectively adopt technological innovations devised somewhere else, and c) those which are not successful either in innovating or in adopting technologies developed abroad. Reflecting upon this three-tiered global divide in technological capability, Sachs and McArthur stress that economies that adopt technological innovations from abroad but do not themselves innovate will always lag behind the innovators. Furthermore, as demonstrated by the existence of a large group of nations completely excluded from the process of technological advancement, even effective technological adoption can be difficult without some specialized institutions to facilitate the diffusion of new technologies. The authors did not, however, in this article dedicate themselves to the problems of those excluded from the process of technological advancement: they are primarily concerned with East Asia's need to overcome its present position of a technological adopter in order to become a technological innovator. They stress that innovation is not a purely market-driven phenomenon, although markets have a great deal to do with it. Their list of basic requirements for achieving a high rate of innovation involves a mix of market and non-market institutions. The practical implications of those requirements are discussed with the US being taken as a recent example of successful achievement of high rates of innovation.

The chapter proceeds to suggest some issues Asia needs to address in order to surpass its present position as a technology adopter and become a true technological innovator. Most of the challenges the authors emphasize hit the mark for other developing countries such as my own: better investment in higher education (I am not sure about Asia, but here in Brazil this is complicated by the urgent needs of basic and secondary education); higher levels of investment in science and research; a more flexible and effective system of property rights; facilitating the process of starting up new businesses; closer ties between businesses and universities, etc. As the challenges are probably as difficult for Asian countries as they are for Latin American ones, it was pleasant to see the authors' enthusiastic confidence in China and India's ability to make the transition in the near future, thus beginning to "make dramatic contributions to global science and technology and thereby dramatic contributions to the welfare of the world" (183). May Latin America make the journey with them!

In the book’s fifth and final chapter, "Monetary Policy in the Information Economy," M. Woodford addresses the impact of ICTs on monetary policy actions and decisions. The development of ICTs is already making financial markets better interconnected and reducing the cost of trading in them. Market participants have increasingly faster access to information about market developments as well as to general economic matters. Some fear, according to Woodford, that such changes will make central banks less able to do their job (i.e. to preserve macroeconomic stability) as a) their ability to surprise the market is reduced and b) the private sector's demand for monetary base diminishes. Let us address each of those two points. The first depends on agreeing with the principle that surprising the market is a requirement for the effectiveness of monetary policies, a basic condition for claiming that providing "too much" information for market participants will hinder the effectiveness of central banks' policies. For a non-initiated in economics, it seems to be a simple case of substituting the "surprise factor" by "knowledge" when conceiving monetary policies [3]. Woodford's many pages of detailed considerations concerning the anticipation of central banks' monetary policies and actions gave me a glimpse into what must be the state-of-the-art on this matter (there is a lot to it!). Woodford does not agree that the effectiveness of monetary policies depends on the ability of central banks to surprise the market or on their capacity to manipulate market distortions. He argues that central banks can use signals of future policy intentions in their favor and that tighter linkages between interest rates directly affected by central banks actions and market rates can make monetary policies even more effective. Transparency appears to be the key to the central banks properly playing their roles in the new economy -- in fact, according to the author, if they were willing to conform to systematic rules of behavior and general economic models and to explain these clearly, central banks could be even more effective in the future than they have been so far.

The second point, the reduction of the private sector's demand for base money, means that by becoming more efficient, the private sector becomes also more independent of the central banks -- and therefore the leverage central banks now have over the private economy will tend to be reduced. In other words, the role of "base money," whose supply is controlled by central banks, will become less important as information technology transforms the means of payment, which is said to potentially undermine central banks' capacity as guarantors of price stability. Here again Woodford argues against the pessimistic views, stating that in the new economy central banks are likely to "retain the ability to control the level of overnight interest rates, and by so doing to regulate spending and pricing decisions in the economy in essentially the same way as at present" (212). The author carefully reviews the grounds for this fear before developing his arguments, which is of great help. The model detailed in the Appendix and the explanations about what is meant by "a channel system" are particularly didactic. Even so, I feel that I have missed some of the notions used here and there, which, nevertheless, did not make it impossible for me to more or less follow the reasoning all the way. With regard to the first point, Woodford concludes that the expected advances in information technology are likely to require changes in the way central banks do their job, but will not necessarily make them less able to play their role.

It is interesting to note that this is the only chapter in which the US is not named as an example of how to be successful in the new economy. On the contrary, Woordford stresses that the US Federal Reserve should get "up to date" in order to keep up with the new economy's conditions and requirements, and gives many examples of other countries' central banks which already made many important changes in that direction.

As I reached the end of the fifth chapter of Technology and the New Economy, I was starting to feel relatively confident about my own knowledge on the matter. I had learned so many interesting things with this book that I was starting to think of myself as some type of "amateur economist" -- it was therefore providential to have had my presumptions thrown out of the window by the co-editers' Postscript. In those final few pages, Chong-En Bai & Chi-Wa Yuen introduce some other equally important issues. Carefully organized into thematic sections dedicated respectively to the further implications of ICTs for a) industrial organization; b) financial markets; c) international trade; d) growth and development; e) income distribution, and f) business cycles, the Postscript made it clear that I have a great deal more to learn and to think about before I can even consider myself an amateur in economics. By the end of the book, however, I had the sensation of having exceeded my initial intention of understanding what is truly new about today's economy and what the IT revolution really has to do with it. I had also started to understand the implications of those technological changes for the world's economy and even to foresee some of possibilities of what could be around the corner. Knowing that this is just the beginning does not seem so scary if I am encouraged to imagine that other books on this subject can be equally enticing.

I hope to have been able to give my fellow non-specialists a fair impression of the contents of Technology and the New Economy, and also not to have exasperated the economists out there with the limitations of my lay understanding.

1. The authors were kind enough to lay readers to include the explanation that, in economic science, "rent" means a high return to an asset, factor of production, or capability.

2. Solow's work is mentioned in nearly every chapter in this book -- it is a bibliografic reference even for the Introduction. If one manages to get to chapter 4 without a good idea of the contents of Solow's 1956 paper, Sachs and McArthur are kind enough to explain its general ideas before discussing them.

3. Having watched quite a few changes and maneuvers by Brazilian economists, I dare say that it strikes me even as a matter of substituting a desire for surprise for some more realistic recognition of facts about the market players.

Suely Fragoso:
Suely Fragoso is a tenured lecturer of the Center of Communications Science at Unisinos, South Brazil. She obtained her Ph.D. in Communications from The Institute of Communications Studies, The University of Leeds, UK and her M.Sc. in Communications and Semiotics from PUC, São Paulo, Brazil.  <suely@icaro.unisinos.br>

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