'The thing that makes the new British economy go is owner-occupied housing. We have found a way not only to get rich from our own houses, but perhaps even to live off them entirely in the future.' - The Guardian, 26 July 1985
Fifteen years on and that theory lies in tatters. And in 2015, an enterprising researcher will no doubt search through newspaper archives to find out what fanciful notions we attached to the term 'new economy' embodied in the year of the millennium.
And confusion is likely to overcome the mind of the archive searcher because the term defies any definition. It is used interchangeably to describe anything from increasing use of computing and internet technology to the growth of the information, knowledge and networked society, and to the emergence of a sustained growth yet low inflation economy in the US. Indeed some multinationals, mindful of the contamination of the 'globalisation' brand, now refer exclusively to the new economy instead. After all, certain groups may profess to be anti-globalisation, but how could anyone possibly be 'anti-new economy'?
Amid this semantic muddle, a very real debate is emerging among economists and others about the cause, extent and novelty of what is termed the 'new economy', and whether talk of a British new economy is premature. Indeed, before the party gets off the ground outside the US, Business Week, the publication that lays claim to coining the concept, murmurs that it may soon be over.
The first point is to separate cause from effect. Is it the successful economy that is new, or is it the industries that underpin it?
The new economy has been described in terms of inputs - the new industries producing intangible, 'weightless' products such as IT, biotech, software and telecommunications; the application of new technology to improve productivity across the economy; and globalisation, the simple, costless diffusion of these techniques around the world. But it has also been described in terms of the perceived result of these trends - the creation in the US of an economy handling sustained growth in output and productivity without the spectre of inflation. In turn, this effect has been explained by phenomena other than technology, basically cheaper inputs. It's all down to the labour market, says Jack Triplett, of the Brookings Institution, while according to Andrew Oswald, of Warwick University, the new economy boom was a story of unfeasibly cheap energy, and the recent end of that trend spells doom.
Supporters of such theses claim the role of technology in the ongoing US boom is overstated. The return on investment in this area is almost entirely contained within the IT producing sector, they say, and after accounting for cyclical factors, there is virtually no change in productivity in the other 88 per cent of the US economy. Put another way, the productivity growth in the US is fantastic, but given the sums of money invested, this should not be surprising.
'It's mainly to do with the production of computers rather than their use,' says Ben Broadbent, an economist who has analysed the new economy extensively for Goldman Sachs. 'Hitherto, it's all been in electronics hardware production, where productivity has grown by up to 30 per cent a year. Subsequently views as to the future growth caused by B2B [business to business e-commerce], the internet and weightless products are mostly conjectural, but we're optimistic.' Goldman Sachs estimates that B2B will add 5 per cent to UK gross domestic product over the next decade.
Economic growth can be considered a succession of 'new economies'. Capital investment is reallocated to dynamic sectors and sub-sectors at the expense of older sectors and they in turn produce fast growth. This economic darwinism is what causes trend growth - it just so happens that at the moment the favoured sectors are information, communications and technology (ICT). A genuinely new economy would reflect a broader shift, where use rather than production in new industries causes a stepchange in productivity across all sectors.
Externalities, those returns on investments that can't be measured in simple economic terms, are crucial in this context. The key example is network externalities. Their intangible effect on an economy is captured by Metcalfe's Law. This says that the value of a network is proportional to the square of the number of users, because of the number of potential connections between network users. Such arguments have emboldened investors in these areas.
Others argue that the effect of instant internet networks compared with those that require a contacts book and a telephone is negligible. For example, that B2B is nothing more than a small technical advancement on existing supply chain management systems. Such analysis is the realm of conjecture and counter-conjecture.
'A lot of the benefits of the ICT revolution are not going to be measured by the conventional economic statistics,' says Garry Young of the National Institute for Economic and Social Research - for example, the ability to receive the latest football results on a mobile phone. Despite this productivity, figures will prove the acid test of any new economic revolution. But these are notoriously flaky and, since the shift from manufacturing to services in the 1980s, productivity has been increasingly tricky to track. There is little to suggest an effect of the new economy in overall UK and European productivity figures. Until this year UK figures for labour productivity growth were actually falling.
The irony is that if the sceptics are right, the new economy boom in the US is very much a tale of manufacturing, albeit of the hi-tech sort. There is a danger that in trying to mimic that boom by focusing on weightless intangibles we may throw the baby out with the bathwater.
As for monetary policy, there are doves on the Monetary Policy Committee who believe we are on the cusp of a leap in productivity which increases the capacity of the economy to expand without raising inflation. 'Some say that it allows you to have lower interest rates because the economy does not reach its speed limits as quickly,' says Young.
But there is a more general problem, says US economist Robert Shiller in the context of overvalued stock markets. If we overstate the returns to the new economy then there is a danger that at the macro level, society allocates too many resources to the dotcom dodos of the future, and not enough to other priorities. The £100 million spent funding Boo.com, was £100m lost investment in, for example, genomics or photonics, two areas in which the UK could lead the world. Even the new economy has an opportunity cost.
