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The New Economy: A vague idea of change

ONE THING that is new about the New Economy is that it only dates back about five or so years, and then only in the US. The claim that fundamental changes are reshaping capitalism hangs on the thread of a few years' evidence from one country.

The New Economy is used pretty vaguely to cover several phenomena - high growth, rising employ- ment and low inflation in a record US business cycle; breathtaking rises in high-tech and Internet firms' share prices; and the increase in competition due to globalisation, IT and deregulation of financial markets.

But most intriguing is the possibility that techno changes now being implemented by businesses, mainly in the US but increasingly in Europe and Asia, will transform the economy and living standards in a new industrial revolution. We've got used to growth, but for most of human history - up to the first Industrial Revolution - the norm's been a stagnant economy. Can it really be true that developments like the Net and mobile phones point to progress on a scale that will change our lives profoundly for the better once again?

The US evidence is encouraging. During the present expansion, that started in mid-1992 and shows no signs yet of fading, high-tech industries, such as software, computer hardware and biotechnology, made up over a quarter of the growth. Advances in productivity in these industries boosted over- all US growth to rates above its long-term average - and this is still accelerating.

The spur for this step-change in technological innovation and productivity seems to have been increased competition, making firms work harder when they can't up prices.

The e-commerce craze is just the surface froth on changes in how business is done. Consumers' ability to book air tickets or buy books online is less important than changes in the way firms source their supplies or arrange their payroll, or rearrange employment patterns.

The 1840s' railway mania is an instructive parallel. The bubble in rail shares eventually burst. Yet the railroads themselves laid the foundations for modern urbanisation by making it possible to ship more food into cities from the countryside.

One burst of technical progress also gives birth to others. Rail and steam gave way to automobiles chemicals, optics and telegraphy.

This type of potential could be unleashed by today's New Economy. Specific technologies matter less than the changes in production and social life they might unleash. This is why it is possible to be both sceptical of the Net share boom and yet believe modern capitalism is on the verge of a significant step forward.

Of course, if there is going to be fundamental social change, it is bound to be controversial.

So far a lot of US workers have done well. Many have also been rewarded for New Economy success with stock option schemes. But low-paid workers have lagged behind. A political backlash against silicon excess is taking shape, alongside a global backlash against the growing gap between rich and poor countries.