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(Chico, Joshua Marie J.)

Has the Information Age Created a New Economy?

Yes: The Information Age Has Created a New Economy

The U.S. economy today displays several exceptional features. The first is its strong rate of
productivity growth. Since 1995 the trend rate of productivity growth has been more than double
that of the 1973–95 period. A second is its unusually low levels of both inflation and
unemployment. In the past, low levels of unemployment have usually meant sharply rising
inflation. Yet despite an unemployment rate that has been close to (and at times below) 4 percent
for 2 years, core inflation has remained in the 2 to 3 percent range. A third is the disappearance
of Federal budget deficits. Federal fiscal policy often becomes more expansionary as a period of
economic growth is sustained, yet in the past 8 years the structural budget balance has moved
steadily from a massive deficit to a large surplus. A fourth is the strength of the U.S. economy’s
performance relative to other industrial economies. As a world technological leader, the United
States might have been expected to grow more slowly than countries that can benefit from
imitating the leader’s technological advances. Yet over the second half of the 1990s, the United
States continued to enjoy both the highest income per capita and the fastest income growth of the
major industrial nations. These developments reveal profound changes in economic trends that
justify the term “New Economy.” Three interrelated factors lie behind these extraordinary
economic gains: technological innovation, organizational changes in businesses, and public
policy. Information technology has long been important to the economy. But in the early 1990s a
number of simultaneous advances in information technology—computer hardware, software, and
telecommunications—allowed these new technologies to be combined in ways that sharply
increased their economic potential. In part to realize this potential, entrepreneurs instituted
widespread changes in business organizations, reconfiguring their existing businesses and
starting new ones. These changes included new production methods and human resource
management practices, new types of relationships with suppliers and customers, new business
strategies (with some firms expanding the scope of their enterprises through mergers and
acquisitions, and others streamlining them to best utilize core competencies), and new forms of
finance and compensation. Public policy was the third driving force. This Administration
embraced policies and strategies based on fiscal discipline, investing in people and technologies,
opening new markets at home and abroad, and developing an institutional framework that
supported continued global integration. Together these created an environment in which the new
technologies and organizational changes could flourish. The interactions among these three
factors have created a virtuous cycle in which developments in one area reinforce and stimulate
developments in another. The result is an economic system in which the whole is greater than the
sum of its parts. New technologies have created opportunities for organizational innovations, and
these innovations in turn have engendered demand for these technologies and others still newer.
The increased growth prompted by the new technologies helped the Federal Government restrain
its spending growth and boosted its revenue; the resulting smaller budget deficits (and later
surpluses) have helped keep interest rates down, encouraging further investment in new
technologies. Economic policies directed toward promoting competition have prodded firms to
adopt the new technologies, spurring other firms to innovate or be left behind. Policies aimed at
opening foreign markets have increased earnings in the U.S. technology sector, leading to yet
more innovation, including innovation in information technologies, which have lowered barriers
to trade and investment still further. These market-opening policies have also allowed U.S.
producers to become more productive, by expanding the variety of key inputs available to them.

Economic performance in the last 8 years has been so strong and so qualitatively different from
that of the previous two decades that it may seem obvious that a New Economy has emerged.
When productivity growth and GDP growth both accelerate sharply, when unemployment and
inflation fall to their lowest levels in 30 years, when poverty starts to fall again after years of
worsening, and when incomes accelerate across the board, clearly a significant change has
occurred. In addition the economic transformations described in this [viewpoint] point to a truly
New Economy. Information technology has become a pervasive part of economic life, changing
the way nearly all Americans work—from farmers using the Internet to check a satellite report
on soil moisture, to software designers using the latest technology to create a new learning
program. Computers have been facilitating change in business systems for some time, but the
explosive growth in the production and use of information technology that has taken place in
recent years has gone much further. The American economy has been profoundly altered.
(Council of Economic Advisor)

No: The Information Age Has Not Created New Economy

The Internet is clearly a marvelous technological advance, allowing hundreds of millions of

people from all over the globe to exchange information almost instantly. But the claims that it is
creating a new economy based on information and communication are pure hype. Long before
the Internet we were benefiting from an amazing network of global communication and
information in the old free-market economy. There is nothing new about an “information
economy.” Market economies have always been information economies. The Internet can
improve the information transmitted through markets, but that information has always been the
reason for the amazing success of free-market economies. Let’s admire the Internet for the
marginal improvements it makes to our market economy. But while admiring the shine let’s not
ignore the shoe. The Market Network Every day each of us simultaneously exchanges messages
with millions upon millions of people through the market network. The information we transmit
is picked up quickly by those who can best use it, informs them on the appropriate action to take,
and provides them the means and motivation to take that action. The result is a pattern of global
cooperation that finds each of us serving the interests of millions of others by using our time and
talents to provide what they value most, while benefiting from their reciprocal consideration.
This market network has been enriching the lives of those people lucky enough to live in free
economies long before the advent of the Internet. Communication in the market network takes
place through prices based on private property and voluntary exchange. Private property is
essential for people to engage in voluntary exchange, and when exchange is voluntary it typically
takes place at a price that reflects the highest value of what is being exchanged (people generally
sell to those willing to pay the most). So market prices communicate the value others place on
the things we own, and motivate us to relinquish those things to others when they are worth more
to them than to us. Similarly, market prices for goods and services also reflect the costs of
making them available. People will not consistently sell a product at a price less than the value
sacrificed to make it available. So market prices communicate how much value is given up
elsewhere in the economy to provide products, and motivates us to buy products only when the
additional unit is worth more to us than the sacrifice our purchases impose on others. Firms are
constantly listening to the market messages of consumers that are sent in the form of profits and
losses. Consumers inform firms with profits when those firms are using resources to produce
more value than those resources are producing in other activities, and they respond by expanding
their production. On the other hand, consumers inform other firms with losses that they are not
providing enough value to cover their cost, and those firms respond by producing less. I’m not
arguing that market prices are the best form of communication for all occasions. How do you say
“I Love You” with a market price? Very clumsily but market prices are far and away the most
persuasive way to communicate your desire for chocolates and roses, which will increase the
impact of—and payoff from—saying “I Love You.” An Improvement, Not a Transformation Of
course, the Internet has made it easier to order those chocolates and roses, but it’s the incentives
provided by market prices that insure the cooperation of the literally thousands of people who
have to coordinate their efforts to get them to you when and where you need them. Let’s give the
Internet credit. It is making important changes in our lives and the way we do business. Certainly
the Internet is improving market communication in important ways. But without the market
network we would all be impoverished by our inability to communicate and cooperate with the
millions of people we depend on every day, no matter how much access we had to the Internet.


Torr, James D. (ed.). 2003. "The Information Age". Farmington Hills, MI: Greenhaven Press. Retrieved
March 7, 2018 from