Compass Points

Economic Commentary

The New Economy: What Is It?

by Denise A. Harrison

Many mention the new economy: but what is it? In order to understand better what is meant by this term we have to look back in history at the new economy’s predecessors. In the 18th century, agriculture dominated the economy and wealth was often determined by the amount of land that one owned. People worked hard just to have the necessities: food, clothing and shelter. Weather dominated the economic cycles.

The industrial economy developed in the 19th century as individuals harnessed the power of steam and internal combustion. Capital assets determined wealth as mass production factories manufactured products that enhanced the quality of life, rather than just providing the basic necessities. This age brought us the car, phone, steamship and many other advances in communication and transportation. Society lived concentrated in urban settings as the mass population was needed to leverage the fixed capital assets. When a transaction took place a new product had to be produced for the next transaction; more labor and more raw materials were needed for each additional transaction.

Booms and busts were often caused by overproduction as long product development, capital expansion and manufacturing time caused disconnects between the consumer demand and production. Forecasts of prosperity caused speculators to believe upward growth would continue its trend indefinitely since weather no longer affected the business cycle. However, the speculators in the US in 1929 and in Japan in 1990 saw their bubbles burst when factors other than weather caused the economy to falter.

The Knowledge Economy

The new economy, sometimes referred to as the knowledge economy or the post-industrial economy is an economy where a great deal of economic activity occurs in the services sector. The economy is no longer solely dependent on the fixed assets of the industrial revolution, but rather the intangible assets like knowledge and creativity. In this economy rather than buying a product and then having to manufacture a new one for the next transaction Positioning Heady Gains Graphone can produce a “product” such as a software program and simply replicate it multiple times rather than actually creating it again and again. Little or no labor or raw materials are needed to produce incremental products.

Even in industries where the product is manufactured for each sale, the overall transaction cost has been significantly reduced due to the enhanced flow of information. Companies can react quickly to changing market needs. Inventories have shrunk due to enhanced supply chain management resulting from information sharing among suppliers and producers. New players gain market dominance by taking advantage of the lower transaction cost channels such as the internet: Dell sells more PCs than Compaq, eToys has a more successful Christmas season than Toys ‘R’ Us the once formidable category killer. The new economy is revolutionizing the way companies link to both their suppliers and customers.

The economy will develop the following characteristics with enhanced information flows:

  1. Markets once regional or national will be global. This will increase the number of potential suppliers, customers and competitors.
  2. Lower transaction costs will encourage people to make more transactions: for example the $10-20 stock trading fee has opened the doors for a full fledged day-trading industry not possible previously due to the lack of real time information and the high transaction costs.
  3. Lower transaction costs enable companies to offset the cost of higher labor and raw materials, thereby enhancing productivity.

The industrial economy is becoming a smaller portion of the US GDP, much like the agricultural economy did in the 19th and 20th centuries. However, it should be pointed out that the US produces moreEnding on a High Note agricultural products than it did in earlier centuries due to our enhanced capital and knowledge of the agricultural business. So manufacturing will not die and will probably grow, however, it will change radically. Those who take advantage of these changes to enhance their position in the marketplace will prosper. The others will not. It is important for your company to evaluate how it can best harness information resources - including enhanced knowledge and reduced transaction costs - to work with both customers and suppliers alike. How can your company leapfrog the competition as Michael Dell did? What partnerships will enhance your company’s ability to play in this changing environment?

Will the new economy end business cycles?

Up at Year EndAlong with the new economy have come forecasts that the business cycle is now recession proof. This is similar to the argument in the industrial era where once weather left the picture, speculators believed that the growth trend would spiral upward. While the new economy may no longer be subject to inventory swings, the new economy will still be subject to disruptions that cause occasional down-turns.

Many areas of the world are not fully participating in the new economy, many are still agriculturally based, and others are working through the industrial era. These economies will be tied to the old cycles as they learn to adapt to the new knowledge and information based economies.

International Recovery

In 1999 much of the world was recovering from a downturn that started in Asia in 1998. How did each region of the world fare in 1999? The graphs above show that a great deal of progress occurred during 1999 and these markets will demand US goods and services once again.

Denise Harrison lives in Wilmington, North Carolina and is a consultant for the Center for Simplified Strategic Planning. She presents the workshop, Simplified Strategic Planning for Small to Mid-Sized Companies. For more information about Denise, check out her bio page.

© Copyright 2007 Center for Simplified Strategic Planning

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