What's so 'new' about the new economy?

From a talk on the knowledge economy given by John Kay, a director of Halifax Plc to the Royal Society for the Arts
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The Independent Online

You read constantly that there is a new economy in operation and a new economics is required in order to deal with it.

You read constantly that there is a new economy in operation and a new economics is required in order to deal with it.

Well, is it? The new economy is very much an invention of journalists. The phrase seems to come from, or was certainly popularised in, the United States by the editors of Business Week. And of course, the idea that there is a new economy, and in particular the idea that all the old rules of economics are no longer valid, is one which is immensely popular, immensely appealing.

It is very appealing for students. They love to be told that the old rules no longer apply and the old learning is no longer relevant. It saves them spending time in the libraries learning about the contents of the now useless books that are there.

It is equally popular with business people, in the main who never went into these libraries and always had a suspicion that what was contained in them was not actually going to be of much help.

And, most of all, it's popular with consultants like Andersen Consulting, for whom the idea that the old rules have changed and new concepts - new paradigms, to use their favourite phrase - are required is their equivalent of new Pedigree Chum, new Persil or all the other new products with which we're regaled when we go to our shops.

So the claim is that there is a new economy and new economics needed for it. What I want to suggest is that this is not really true.

If you look at what is happening today in that kind of historical perspective, it's quite difficult to argue that what we're experiencing today is not just the continuation of past trends but something that actually marks a dramatic break in past trends.

Compared with the development of land and personal transport from a world in which most people had never been more than 10 miles from the place in which they were born; compared with air transport that meant that even people like us have typically historically been able to go to a foreign country only once or twice in our lifetimes - and the vast majority of the population had never dreamt of doing it at all; compared with these things, the ability to buy books on amazon. com, while it is useful, I'm not clear it has quite the same epoch-making significance that some of the other events I've described have.

What we have seen, particularly in the last two years and in the financial community, is the generation of a mass hysteria of a kind which is familiar in financial markets and, indeed, more widely in terms of the evolution of modern economic history.

Broader markets are increasing the rewards for talents and distinctive capabilities. These talents have more of a winner-takes-all characteristic, and this leads to the increased inequality of incomes in the economy which we've seen generally.

We can react to that kind of increase in inequality in one of three ways. We can accept it in terms of widening income differentials, which has essentially been the American solution. We can resist it, as has tended to happen rather more in Europe, so that we see increasing unemployment in rich countries.

Or we can seek to manage the problem, essentially by internalising this problem both within firms, which have to accept some narrowing of market-generated income differentials in order to sustain employment, and governments, which have to use the tax and benefit system in order to achieve the same result.

We have to follow, I think, one or other of these routes if we are to manage the process of handling a knowledge economy in a globalised environment.

In conclusion, the new economy is, I think, a fabrication. We don't require new economics to understand it. Indeed, we understand it better if we actually bring old economics to bear on it.