dot.com/sustainedgrowth?

WILLIAM BROWN sifts through the remains of an e-commerce party that never was, and warns that the ill-winds of an economic downturn could soon be blowing across the Atlantic.

Maybe it was the end-of-the-century party mood, or a kind of millennium bug which affected economic forecasters, but the 1990s were awash with optimistic economic pronouncements. ‘New economy’, ‘sustained growth’, ‘e-commerce’, ‘dot.com revolution’, ‘new paradigm’: the labelling of the new times in the post-cold war world economy had many manifestations. Not since the heyday of the long post-second world war boom, when ‘we had never had it so good’, has there been such a volume of positive voices claiming that we had entered a new era.

Indeed, there seemed to be some justification: the US economy grew by between three and four per cent per year from 1991 to 2000 and not even the Asian crisis did much to dampen enthusiasm for this economic success. The internet revolution and the globalisation of communications were not only motifs for a new era but were cited as the underlying causes of this new prosperity. New Labour caught the bug too – Gordon Brown’s goal of an end to boom and bust and for sustained economic growth owes much to what has apparently been achieved across the Atlantic. The idea that we are now in a new economic era where we can all be winners is a central tenet of the third way.

But, as the world moves past Y2K, we are slowly waking up to the hang over. In fact, with a closer look, we can see that in many ways this is a party that never was.

e-revolution?

It has become so commonplace to refer to the changes brought by the internet, computerisation and e-commerce, that for many it is a taken-for-granted reality that there’s a ‘new economy’. In the new age we will all shop from our sofas and work will be revolutionised as flexible organisation and networking replace the rigid hierarchies of old. The claimed breakthrough is, we are told, on a par with the first industrial revolution and will lead to similar transformations in our lives. New technologies, it is claimed, are at the forefront of massive leaps in productivity which lie behind the new economics of permanent sustained growth.

It is easy to be dazzled by these changes, but the recent downturns in dot.com shares indicate some need for caution. For a start, the assumption that the e-revolution is based on changes in information technology (IT) alone may hide the important role of more traditional businesses and work practices.

Malcolm Gladwell, writing in The New Yorker magazine, has made this point very clearly. He begins by comparing the rise of the e-economy to the rise, at the turn of the century, of mail order in the United States. Mail order entailed some familiar changes to how business was done in the US – it allowed buyers and sellers who were widely dispersed to do business and incorporated isolated communities into the economy. The change spread across the world, one commentator noting that: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”

As Grahame Thompson has pointed out, if you substitute ‘personal computer’ for ‘telephone’ this all sounds rather familiar. It was written, not in the late 1990s, but in 1919 by one John Maynard Keynes.

But Gladwell is saying more than merely we’ve seen it all before. In a neat comparison, he shows how the mail order revolution was founded not just on the immediate technologies of catalogues and telephones but was dependent on reliable parcel post which in turn was dependent on a reliable road network. Most roads in the US at the turn of the century were dirt tracks prone to mud and ruts, often becoming impassable. But a simple device known as the King Road Drag made it easy to carve a smooth surface on the road with a crown to allow drainage of rain water. This immediately improved the road networks which allowed the advent of parcel post which in turn allowed the spread of mail order commerce.

And so it is with the new e-economy. Behind the immediate (and still emerging) technologies of e-mail and web sites there has to be, for any serious e-business, a delivery system based on warehousing, customer support telecentres, plus roads, trucks and delivery workers. The ‘e’ bit of the thing is important, sure, but hardly the whole story.

And if the dot.com end of the business is leading to somewhat changed work practices, this by no means implies positive change for the majority involved in the supply chain. Indeed, as the internet increases competitive tendencies among businesses, workers in warehouses, telecentres and the like are being subjected to some rather familiar practices, such as long hours, lower wages and harder work.

As The Guardian reported in December, many internet companies are becoming involved in tussles with their workers. Amazon.com in the US has engaged in traditional anti-union activities. One union organiser claimed: “Amazon is a beacon of the new economy with the wages and conditions of an old economy sweatshop.”

Now that the share packages, which had previously compensated for low wages, are less appealing, traditional conflicts at work have come to the fore. MSF’s Peter Skyte claimed: “The companies may be virtual but the issues faced by staff are very real.”

Boom or bust?

All this may give us reason to re-examine the US economic boom which many have claimed was based on a massive boost to productivity driven by new technology. If there is more to e-business than IT, then we should be sceptical about these claims: more than the e-bit needs to change to transform the economic fortunes of the whole economy. And when we look a bit closer at the rest of the economy, there is even more reason to put the corks back in the champagne bottles.

In terms of productivity, the US in fact saw modest gains through the 1990s. Furthermore, the majority of these improvements were in manufacturing and nearly all of this was accounted for by computer manufacturing. So it is only in the more traditional manufacturing of the machinery of the e-economy that any breakthrough has been seen.

But computer manufacturing accounts for just 1.2 per cent of total US output, meaning that the rest of the economy has performed very ordinarily. In addition, while compared to other advanced capitalist countries the US seemed to be holding its own in the 1990s, this was as much to do with the even less impressive record of Japan, Germany and others in western Europe.

So what has changed? And what does lie behind the high growth? There are several factors at work here, including a reduction in the amount of government borrowing (the federal deficit) which has allowed lower interest rates and higher private investment. This isolated the US economy from some of the harsher economic winds blowing through Europe in the early 1990s and Asia, Latin America and Russia later on in the decade.

US companies have also seen profits boom which has helped to drive up the stock market. However, these have been based, not on productivity, but on screwing down the wages of labour. As Thompson claims: “The bulk of the US growth record over the first six years of the 1990s was built on the backs of a declining real wage for those employed by business.” Indeed, one assessment claimed that if you discount benefits real hourly wages fell by 12 per cent between 1973 and 1990 and continued to fall until 1996 when some expansion began. This means there has been a long-term process of attacking the improvements in wages and conditions achieved by labour in the period between the second world war and the crisis of the 1970s.

As Stephen S. Roach has argued, this doesn’t represent a real sustainable productivity rise – it is simply “doing the same with less” by reducing the size of the workforce and making workers work longer and harder. It is not “doing more with more” which would require a real breakthrough in productivity. As “downsizing” triumphs over “rebuilding”, and the miracle of the e-revolution meets reality, the limits of the new economy may become increasingly apparent.

Hard times?

Such a scenario will be particularly hard-felt by those who have gained least from the boom. Inequality has reached new heights in the US where, in 1998, 47 per cent of income went to the top 20 per cent of earners, and where black and Hispanic people remain severely disadvantaged.

While unemployment is low, this is in part due to the fact that around two per cent of the US workforce is incarcerated. In the face of such pressures, the feeling of prosperity among the population has been maintained but it has been achieved because household savings have reduced (people are spending today rather than saving for tomorrow); levels of personal debt have increased; investment in the stock market has grown (by small investors who are already getting their fingers burned); and because people have taken on two or even three jobs to maintain their consumption levels.

A severe recession may not happen, of course. This partly depends on the actions of the new US administration and how skillfully it manages more adverse conditions. But harder times in the US economy will dampen the party spirit across the Atlantic too. Blair’s third way politics, based on unbridled faith in continuous growth and a new economy, could be an early casualty.

* Thanks to Grahame Thompson of the Open University for much of this material.

Reading

Robert Brenner ‘The Economics of Global Turbulence’, New Left Review no.229 1998
Malcolm Gladwell ‘Clicks and Mortar’, The New Yorker 6 December 1999
Grahame Thompson ‘The US Economy: From the ‘New Paradigm’ to Downturn and Recession?‘ and ‘Taking Economic Borders Seriously’, two unpublished papers 1999
Stephen S Roach ‘The Hollow Ring of the Productivity Revival’ Harvard Business Review vol. 74, no.6 1996
Seumas Milne ‘Unions Aim to Swallow Amazon’, The Guardian (Online section, page 7) 7 December 2000