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On the hype and pitfalls of the new economy

Dr Gianni Zappalà

(not to be cited without the author’s permission)

I’ve been asked to speak on the pitfalls associated with the new economy. Now less than 12 months ago, the ‘new economy’ was argued to affect everything from the value of the currency to the clothes people wear to work and even the presence of dog friendly workplaces! The term ‘new economy’ made an almost daily appearance in the pages of the financial press.

One thing in particular that stood out was the euphoric and almost evangelical tone of writings on the new economy and how it would impact on everything from economic growth to eradicating poverty and inequality. Expressing doubt led to being treated as a heretic.

Some new economy proponents, especially popular among US business schools, proclaim that the new economy will mean the end of poverty and disadvantage. They argue that we are witnessing the end of inflation, the end of the business cycle and recessions, a return to full employment, productivity increases, reduced monopoly power and an unleashing of entrepreneurial spirit. A new economy version of the trickle down theory will ensure that all sectors of society as well as all countries will benefit and prosper from this increased competition, reduction of prices and increased employment said to result from the new economy. Consumers will be the final beneficiaries.

Similarly, in a visit to Australia recently, the head of the American Enterprise Institute, argued that the new economy, by improving the efficiency of free markets, is responsible for the present prosperity of the West. Indeed, if we believe such claims, the problems of poverty have essentially been solved and ‘the truly serious, overarching policy problems have become cultural and ethical’. Technology and wealth now pose a challenge to ‘live in a world where wealth and freedom have amplified man’s capacities for vice along with his capacities for virtue’.

Is this reality or hype or just plain nonsense? Much of my previous comments and writings on this topic have aimed to de-mystify some of the rhetoric and ideology that passes for serious economic analysis; but that’s another story, and for those interested, I’ve brought some copies of those publications [see reference list at end of paper]. Today, I want to focus on the potential negative impact of the new economy (however we may define it).

In brief, my argument is that although the pace of change is fast in this so-called new economy era, at times it appears to be a case of the words and the underlying ideology that is changing faster than the substantive issues behind them. It is interesting to note, however, that since, ‘the dotcoms turned into dot compost’, as one AFR journalist put it, the media’s fascination with the topic seems to have dissipated.

It almost seems a bit passe’ to be talking about the ‘new economy’! The term ‘new economy’ has almost disappeared from the financial press, and previous supporters are now all too quick to distance themselves from it.

For instance, the business journalist Alan Kohler, a once new economy convert, recently proclaimed:

‘it may be time to face the truth about the new economy: there isn’t one … the idea of a new economy, or an ‘information economy’ was manufactured by stockmarket promoters and sales people to rationalise very high prices for some stocks, but now that the telecommunications and internet investment mania is in the process of ending, perhaps we can dispense with the idea’.

But some new economy proponents still cling to the hope that ‘the dotcoms will rise again’. They now claim to be awaiting the coming of the ‘second internet’ revolution. Others seek comfort in the thought that ‘the new economy isn’t dead. It’s just dead boring’. At least for the moment. The debate seems to have entered a kind of ‘let’s wait and see’ phase.

But does that mean we should abandon the whole notion of a new economy when discussing its potential pitfalls, especially issues concerning inequality and education?

The answer is both yes and no. In brief, YES, because the use of terms like ‘new economy’ may conceal more than they reveal. Also some of the changes attributed to the ‘new economy’ have been in process for several decades and are not new at all. As the chief economist of Deutsche Bank in New York stated a few months ago:

‘the new economy is driven by a new paradigm, but the new paradigm is actually a very old one. It’s called competition’.

NO, because some of the current trends in inequality that we are experiencing are in part related to changes in the economy, some of which are related to the introduction of new technologies that are often associated with the new economy label (e.g. the internet).

But in order to clarify its impact on the nature and type of inequality, we need to be clear about how we are using the term ‘new economy’.

Our research has identified two clear usages of the ‘new economy’ term, and although I think they are starting to breakdown, they can assist in clarifying the nature of the impact on inequality.

The first definition

At the level of popular usage the term ‘new economy’ is often used to refer to ‘companies which are involved in the internet and communications technology’. It is also a term used to contrast with so-called ‘old-economy’ companies or industries, such as mining, traditional manufacturing and transport.

Key indicators of the ‘new economy’ in this sense of the term include: the extent of internet and ICT access and usage in society. The debate about whether Australia is or is not a new economy has mainly focused on these kinds of indicators.

In terms of individuals’ internet usage Australia ranks in the top five countries.

If we see the new economy in terms of Internet access and usage, then the issue for inequality becomes whether the rate of access is equally distributed across the population. To date we know it is not, although it is narrowing according to the latest ABS figures.

For instance:

• In November 2000, 56% of households had access to a computer at home, while 37% or 1 in 3 households had home internet access. Only two years prior it was only 1 in every 8 households that had home internet access.
• We also know that the key factors related to whether a household has internet access are the individuals’ or households’ level of income and an individuals’ educational attainment. For instance, while almost 60% of households earning above $50,000 had home internet access, only 21% of households with incomes below $50,000 were connected. Another study found that income earners in the top bracket are 3.5 times more likely to have an internet connection at home than those in the lowest bracket. A key reason why households with computers (especially those with incomes below $44,000) do not have internet access is because the costs of connection are too high.
• Apart from the role of socioeconomic factors in Internet home access and usage, other variables such as age, sex, occupation, the presence of children under 18 at home and geographical location are also important. The last factor, the urban/rural divide has received much press, but the latest figures suggest that the gap between city and country in terms of internet access is decreasing. 40% of all metropolitan households had internet access compared to 32% of all households in non-metropolitan areas.
• However the gap is widening on the basis of income, employment status, age and whether you are an indigenous Australian.
• The rate of internet usage among employed adults is more than double the rate among the unemployed; although those in low paid jobs are less likely to use a computer or access the internet at work.

It is these kinds of factors that have led to the well known ‘digitial divide’ thesis. Because the internet is becoming more important to issues surrounding education, cultural activities, services, employment and so on, there is a risk that it will further compound and entrench poverty and marginalisation among those already disadvantaged. So the disadvantaged in the ‘new economy’ are the same as those who were disadvantaged in the ‘old economy’.

The new economy and the Internet have not so much created a new social divide, but just exacerbated all the old familiar ones.

How should we respond to the digital divide in a policy sense?

I am being devil’s advocate, here, but should we worry about it? Is it not just a transitory phenomenon that will sort itself out in the medium to long-term? Like all new technologies, there will be some disparity of access, often due to cost initially, but as the costs of the technology become cheaper, it will be less of a problem.

Evidence from the US suggests that this may indeed be the case. Internet access among some disadvantaged groups (e.g. blacks, hispanics, asians, low paid and aged) that previously had low connection rates is now rising steadily.

In Australia, the ABS projects that by the end of 2001, that is, this year, every second household in Australia will have home internet access.

Now an interesting question, which we can return to in the discussion, is whether the decreasing digital divide gap is occurring as a result of the internet following the path of other types of technology introductions in the past (e.g. TV), or as a result of concerted policy and program efforts by government, business and community organisations? In other words, who, if anyone is responsible for this narrowing trend?

I’m not trying to discount the importance or value of policies or programs aimed at reducing the Digital Divide, but merely posing the Question of how much can they contribute to bridging the gap, and could their efforts be better placed somewhere else?

For instance:

• There has been an explosion of programs aimed at bridging the digital divide, many at local level;
• A range of other NGO and state and federal government programs. Many of these have been summarised in a report commissioned by the Foundation for Young Australians (e.g. 65 IT projects aimed at bridging the Digital Divide – interestingly, the majority of these were in regional areas).
• But there is a risk of fragmentation.

But let me move onto the the second definition

At a more specialised level the ‘new economy’ term is used to refer not only to companies making or using information technology but to the broader implications of such technology and ‘know-how’ for the economic and social structures of society. The term ‘new economy’ in this context is often used interchangeably with the ‘knowledge economy’, the ‘information economy’, the ‘information age’, and the ‘network society’. The increasing internationalisation of the economy also forms part of this discourse as it is argued that the technology behind the ‘dotcoms’ of the ‘new economy’ has facilitated globalisation.

A key point here is also that the assets of corporations are increasingly knowledge based and intangible rather than tangible. Firms still make profits through possessing a distinctive capability that others do not. What has changed is where the source of this capability comes from. They no longer involve large scale and market dominance, plants, equipment and natural resources, but rely on the knowledge base of employees, brands, patents and so on.

This use of the term particularly emphasises the need for workers to acquire a range of skills and be able to continuously adapt these skills in the face of changing technology. The focus is also on the importance of education and public infrastructure in providing workers with the skills they will need in the new economy.

If we see ‘new economy’ in this broader sense, the main relationship or implications for inequality relate to the social exclusion that may arise as a result of the changes that the new economy has brought to the labour market. But not necessarily in the way most people would assume or associate with when they here the ‘new economy’ term.

The evidence from the US, and more recently from Australia, suggests that society is in danger of being split along entrenched social groups primarily as a result of the industry and occupational patterns that the new economy is producing.

A situation is emerging where a third of the workforce (e.g. the mix of technical and financial experts employed in new economy industries) will do well from the dynamism produced by the new economy, while the other two-thirds (less qualified and trained, employed primarily in the services sector) will find it increasingly difficult to enjoy a decent standard of living.

The real wages for this bottom two-thirds of the workforce have been consistently falling while rising for the top third. The risk is that we are heading towards an ‘enclave’ model of economic development.

The economy that is emerging can be thought of as a three-sector model that comprises the K-sector, the C-sector and the S-sector (Galbraith 1998).

• The K-sector (knowledge or capital) comprises the machine makers, those that build instruments used by others (also comprises computer programmers, professionals and so on). It comprises that top one-third of knowledge workers whose salaries are at the top of the wage scale.
• The C-sector (consumption goods) comprises industries where workers are employed using the machines designed in the K-sector who produce goods consumed by the population.
• The S-sector (services) comprises workers who use little or no capital goods and do not produce machinery or goods.

The evidence suggests that for each sector of this model (based on James K Galbraith), there is a corresponding salary hierarchy. To summarise:

• In the K-sector, firms need workers, and knowledge workers have an advantage. Wages and salaries, especially salaries, in this sector drift upward under competitive pressure and in consequence of expanding trade.
• In the S-sector, workers are vulnerable, insecure, and desperate for their jobs. Wages in this sector tend to drift downward, unless sustained by political and social pressures.
• In the C-sector (manufacturing), wages depend on the balance of power between companies and workers and their unions.

What we are witnessing is a division between the ‘new economy insiders’ and a growing number of ‘new economy outsiders’ in terms of pay and access to skills and training.

The ‘third industrial revolution’ may be ‘shaking the economic foundations of the old economy but it is creating a two-tiered economy’. The main culprit is the increasingly stark wage inequality being generated by sectoral changes in employment. Namely, that workers are leaving manufacturing and mining (high-wage sectors) and entering services (a generally low-wage sector with a wide dispersion of wages).

The new economy is creating ‘good’ jobs for those with the necessary levels of education and skills. But employment growth for the majority is concentrated in the services sector and is increasingly precarious and poorly paid in nature with limited access to the new skills and technology. To date it seems that only a small section of the population is enjoying salary increases at the expense of the majority of the population.

• The irony is that the largest growth of jobs in the MODERN or new ECONOMY in Australia has occurred in the service sector. In brief, the K (or knowledge) and S (or service) sectors have expanded while the C (manufacturing) sector has diminished. Most new jobs are not high-skilled or high-wage positions and provide little upskilling opportunities.
• For instance, between 1985 and 2000 employment in the Australian Retail industry grew by 46 per cent. Over the same period of time, the Accommodation, Cafes, and Restaurants industry grew by 100 per cent and the Property and Business Services industry grew by 134 per cent. Most of this growth has been in low-skilled service oriented work.
• An amazing prediction on the growing service class that emerged recently from the us, is that the biggest job growth in the US over the next 10 years will be in jobs that will require nothing more than 3 months of on the job experience! It is not going to be too dissimilar for Australia.
• And partly as a result of these trends, Australia like other industrialised countries has witnessed a massive increase in wage dispersion between the top and the bottom.
• Many have documented the increasing inequality in terms of pay, conditions and access to skills in the Australian labour market and the evidence is too numerous to go into in detail. But just to give you one snippet of the evidence from Smith Family research, that some of you may have also come across in a recent 4 Corners program on the so-called ‘working poor’:

One third of those now in poverty live in families where the head is employed on a full-time basis, while 10 per cent live in families where the head is employed on a part-time basis. In other words 44 per cent have a connection to the labour market.

For just over another quarter of Australians in poverty the main family source of income is wages and salaries.

So simply having a job is now no longer a guarantee of having sufficient financial resources to fully participate in society.

There is not just a discord between terms that bring to mind silicon valley and the reality of a growing pool of cleaners, janitors, dog walkers and so on. It is also important from a policy perspective, because most of the policy response to the new economy has focused on the digital divide issue, which as I hinted at earlier, may not need much intervention.

Policy responses to this particular dimension of the new economy are more complex and broader in focus, and not just about access to technology.

Let me go through them quickly:

• First, new economy proponents suggest that education is the key policy area that needs to be tackled. The way to avoid a split society of haves and have-nots is through policies that re-skill the bottom two-thirds of workforce to take advantage of the supposed new economy jobs, improve the wages of the service sector and strengthen the system of public education. In short, a combination of public policies that focus on education and infrastructure combined with entrepreneurs who can harness the new intangible assets of firms and knowledge workers will lead to wealth creation, hence a ‘wealth pyramid’. There is some truth and merit in this response and governments of both persuasions seem to be recognising this in their policy platforms.
• Education or the lack of it, was also strongly associated with internet access and usage. ICT needed to play a much bigger role in the school curriculum, so the whole funding policy of schools needed to be examined in this context.

There is an important caveat however:

• The focus on education/training, while important in its own right, may be misplaced as a solution to some of the ills being caused by the new economy.
• Adults have higher levels of educational achievement than ever before (in Australia and elsewhere) and collectively these achievements surpass the actual requirements of the current labour market. Although there has been an aggregate upgrading of technical skills required, collectively there is a surplus supply of relatively highly educated workers for the high skilled jobs available. Employers therefore have raised the bar on entry level requirements.
• This paradox leads to the pervasive conclusion that individuals must intensify their learning in order to compete in the job market. People are increasingly improving their skills and knowledge with the assumption of moving into brighter more meaningful jobs that aren’t there. There is serious underemployment or wasted ability within the eligible workforce. Australia now has the most educationally qualified unemployed pool in its history! We may have a knowledge society but a knowledge economy is still illusory.
• So focusing on education, lifelong learning, and skill formation as policy options, as important as these are in their own right, may not necessarily solve such complex economic and social problems.
• Skill creation cannot be the panacea to unemployment and precarious work. In a bid to avoid these low skilled jobs, individuals will intensify their efforts at skill creation and knowledge acquisition. But higher levels of education and skill won’t in itself make these low skilled jobs, or this future of work, disappear. We can advocate for the pursuit of a ‘learning society’ but the challenge, is to create skills in ‘leading edge’ sectors. Unfortunately, the Knowledge sector represents a small share of the total trade and employs very few people.
• That is why it also important that policies also promote a balanced approach to industry development (e.g. manufacturing industry and its benefits, longer term skill base, earnings based on productivity etc)

I do not want to deny the competitive advantage to be gained from higher education. Nor refute the inherent value in education for education’s sake. The crux of the argument, however, is that education alone is not a solution for the ills of the labour market that are being exacerbated by, for want of a better term, the ‘new economy’.

• In conclusion, we also need a broader debate about what kind of society we want to live in: for e.g. the current wage dispersion trends mean that higher incomes at the top stimulate more tertiary services which in turn spreads low wage employment. Low wages lead not only to poverty and exclusion in terms of access to technology but lower demand for products and services.
• The moral of the story?: it’s in everyone’s interest to stop the continuing growth between the haves and have nots.
• At the very least, not everyone is currently able to enjoy the benefits of the new ICT. Indeed, the Internet is likely to exacerbate all the traditional inequalities that result from financial disadvantage, isolation and poor education. It can be argued that with time and appropriate policies access can be increased. But real participation and improvements in living standards require more than access and address some of the real labour market issues I have discussed. If present trends continue, the new economy will be the preserve of an exclusive minority, the apex of the so-called wealth pyramid. Such a pyramid can only serve to create a polarised society where social solidarity is diminished.

Thank you

As well as work in progress this presentation draws on material and references contained in:

• Gianni Zappalà ‘The economic and social dimensions of the new economy’, Australian Journal of Social Issues, 35(4), 2000, pp.317-331.
• Gianni Zappalà ‘Understanding the New Economy: The economic and social dimensions’ Working Paper No.1, October 2000, Research & Advocacy Team, The Smith Family.
• Gianni Zappalà, Vanessa Green & Ben Parker ‘Social exclusion and disadvantage in the new economy’ Working Paper No.2, December 2000, Research & Advocacy Team, The Smith Family.
• Gianni Zappalà, Vanessa Green & Ben Parker ‘The disadvantaged in the new economy’ in Ron Callus & Russell Lansbury (eds) The Future of Work and Employment Relations in Australia, Sydney: Federation Press, 2001 (forthcoming).
• Gianni Zappalà ‘Hard labour in the new economy’, Australian Financial Review (Review Insert), 5 January, 2001.