Stock Markets in the New Economy

The term "new economy" has, more than anything, come to mean a technological transformation, and in particular its embodiment in the computer and the internet. These technologies are more human capital intensive than earlier ones and have probably hastened the pace of the shift in the U.S. economy towards the service industries. The new economy is also commonly associated with economic "globalization" as reflected in the expansion of trade and the integration of capital markets, but this can be viewed as much as a symptom of technological change as an independent phenomenon. Upon reflection, however, it is clear that the new economy is not entirely "new." There have always been new technologies, and each has, on the whole, demanded new skills. Technologies that have driven "new" economies of the past include steam, electricity, the internal combustion engine, antibiotics, and chemicals, and these were in turn refined in a host of smaller innovations. Here we will draw upon this rich past to see what today's new economy may hold in store. The evidence shows quite clearly that we are in the midst of a major episode of Schumpeterian-style creative destruction, something like the electrification episode 100 years ago that Paul David describes. Moreover, far more than electricity, we believe that information technology or "IT" represents an "invention in the method of inventing," as Zvi Griliches put it when describing the advent of hybridization. This means that we will probably see a wave of new products, new firms, and faster productivity growth worldwide than we saw during the 20th century.