Is it a New Economy already?

“New economies” emerge following major technological innovations, which typically redefine the rules of the game and how people live and work. The term “new economy” has been in use as a metaphor for transformational change in societies for a long time, but it acquired almost a new meaning in the dot-com era of the late 1990s and early 2000s when the digital economy was the new economy. Well, with a (hopeful) end of COVID-19 in sight, are we in the throes of a new economy? Do words and phrases like Crypto, NFT, technological disruption, and WFH foreshadow the arrival of a new “new economy”?

The world has seen many new economies since the first Industrial Revolution of the late 18th century that ushered in disruptive change in most industries of the time and led to rising prosperity in Britain. These changes then spread to Europe, North America, and eventually to much of the rest of the world.

Venture capitalist and economist William Janeway has charted the evolution of new economies over the last 250 years. In Britain, a period of extensive canal building began in the 1760s to improve the transportation of coal to the northwest of the country. Canals, combined with turnpikes and related infrastructure in the early 1770s, formed the backbone of the first Industrial Revolution. As the Industrial Revolution progressed, and the tempo of industrial activity picked up in Britain, more efficient transportation for people and freight was needed, which led to developments in railway technologies. During the 1830s and 1840s, Britain experienced what came to be known as the two “Railway Manias” that led to huge investments in railways, despite the economic depression of the 1930s, and high financial gains for investors. The canal-turnpike-railroad transportation networks enabled the new economy of the latter 19th century in Britain.

In the United States, canals and turnpikes were being constructed in a big way in the early 1800s, leading to the use of steam power for river transportation. The railroad boom in the U.S. began in the late 1840s, culminating with the construction of over 30,000 miles of railroad tracks by the early 1860s. The 1880s saw a second wave of American railroad construction, with an additional 75,000 miles of track. According to business historian Alfred Chandler of the Harvard Business School, the growth of railroads (and, concurrently, of steamships and telegraph) enabled a transportation and communication revolution in the United States. For instance, the Post Office benefited greatly from “faster, cheaper, and more certain” communications and even dropped postage rates in 1851 from 5 cents for 300 miles to 3 cents for 3,000 miles.[1]

In addition to the direct macroeconomic effects of the transportation and communication networks, they also made mass production and mass marketing in America possible in the decades that followed. More specifically, the networks encouraged the rise of wholesalers and middlemen, the movement of people from East to West, the development of new management and organization practices such as the multi-divisional organizational structure and accounting practices, and the emergence of nationally branded goods. With the second great wave of American railway construction, “a new economy in the country had definitely arrived.”

Innovations in technology, and especially in transportation and communication networks, have typically been behind the emergence of new economies. These have ranged from canals, turnpikes, and railroads in the 1700s and 1800s, to the information superhighway (no, former Vice President Al Gore did not create the information superhighway; he just coined the term) in the 1990s and to the social networks more recently. Networks create network externalities (“network effects”), which essentially means that the value of a network (to its owners and users) rises exponentially as the number of users increases. Technology and networks have been the key building blocks of new economies ever since the first Industrial Revolution.

The end point of a new economy typically merges with the beginning of another new economy, though both continue to coexist and coevolve. And so it was with the dawn of the second Industrial Revolution in the early 20th century with Henry Ford’s moving assembly line that launched the era of mass production and continuing rise of prosperity in America. This transformational change in manufacturing technologies and processes indeed changed how people lived and worked in the decades that followed.

In May 1983, the Time magazine carried a cover story on “The New Economy” with the subheading, “Technology has set off a scramble for jobs, profits and global markets.” It highlighted the transformational change that was occurring in the business and economic environment of the time – a shift from heavy industry to a technology- and service-based economy. Even in manufacturing, according to the cover story, growth was coming from “high-tech fields such as semiconductors and computers.” Some 25,346 businesses had gone bankrupt during 1982, but 566,942 new companies had been launched the same year. According to Pierre du Pont IV, the Governor of Delaware at the time,

The transformation of our jobs, the movement of our people, the improvements in our skills over the first 80 years of this century have been stunning. But it is entirely likely that those changes will be matched and exceeded during the final 20 years of this century.

The final two decades of the 20th century did indeed prove the Governor right.

Since the 1980s, the term “new economy” has found increasing usage in both professional and scholarly publications. The term became very popular in the dot-com era of the late 1990s and early 2000s. Some of the monikers given to the economy of that era were: the digital economy, the information economy, the e-conomy, or simply the new economy. This new economy, like the earlier ones, was born out of technological innovations (e.g., the internet), had its own players (e.g., the dot-coms), playing fields (e.g., the World Wide Web), rules of the game (e.g., “information rules”), and business models (e.g., bricks-and-clicks).

In the 2010s and 2020s, old rules of competition no longer work for an increasing number of products and services. With new technologies (e.g., AI and 3D printing), new players (digital startups), new products (Internet of Things devices), new playing fields (digital markets), new challenges (digital disruption), new rules of the game (network effects), and new market dynamics (winner-take-all or winner-take-most)—competition is now an entirely new ballgame.

So, is it a new economy already? You decide.

Note: This is an updated version of an article from my MBA textbook, Global Strategy: Competing in the Connected Economy (New York and Abingdon, U.K.: Routledge, 2016).

[1] Alfred D. Chandler, “The Organization of Manufacturing and Transportation.” In Economic Change in the Civil War Era, edited by David T. Gilchrist and W. David Lewis, pp. 137-151. (Greenville, DE: Eleutherian Mills-Hagley Foundation, 1965).