been eliminated just because of the New Economy, but some investors thought so and bid stocks (technology and the rest) up based on that belief. Beyond the cyclical culling of the early crop of New Economy applications and firms, and the unrealistic expectations of a continuous increase in the rate of profitability for many other firms, sustainable and profound technological changes are taking place that will continue to lift productivity among “old economy” firms, create whole new sectors and markets for consumer and business users, and reduce misallocation of resources and man-hours in the world economy.
There is a common thread to what changes behavior across so many levels (individual, firm, government, and market) in the New Economy—networked information. Modern economic theory relies on some “stylized assumptions” to teach how economic transactions are supposed to work. The very first is the assumption of perfect information. Assuming perfect information makes it easier to see how an individual’s action is in his or her economic interest, why firms buy one or another input when the price changes, or how changes in interest rates affect the macroeconomy. While this assumption does not reflect reality, it is more helpful in understanding economic and policy behavior and relationships.
In the New Economy, the use of ICTs at multiple levels of society brings the economy closer to that assumption of perfect information, especially when that technology is networked to connect everyone together in real time. The network and ICTs allow more information to flow, which dramatically changes the bounds of what individuals and firms can do, and vastly increases how efficiently they can do it. Enhancing the efficiency of business-to-business transactions and restructuring firms to take advantage of the increased information available contributes most powerfully to the benefits of the New Economy.
Starting with simple analysis of their operations inside the boundaries of the firm and then radically re-engineering the relationships between and among firms, information is changing the production and use of resources within an economy and between economies. On a real-time basis, national and multinational firms monitor information flow to decide whether to shift production, change product focus, and identify merger or acquisition targets. Suppliers must now accommodate the technology-intensive, more transparent, and faster pace or lose their position on the global value-chain of production. Job functions change as well:
A purchasing manager can now solicit and compare bids from suppliers worldwide without leaving his desk and without spending weeks on the phone, freeing up his time for different and more productive activities. Greater information and quicker response can increase individual volatility, although the volatility of whole markets is less obvious. But, both demand greater resiliency by all participants—individuals, financial intermediaries, firms, and governments. More information must be used wisely in order to reap its full range of benefits, which makes clear why there is a premium on policy reforms that contribute to the effective use of information. - 24-