Working Paper No. 52. Simulating the New Economy

Abstract

The IT, the Internet, or the Computing & Communications (C&C) technology revolution has been central to the economic discussion for several decades. Before the mid-1990s the catchword was the “productivity paradox” coined by Robert Solow, who stated in 1987 that “computers are everywhere visible, except in the productivity statistics”. Then the New Economy and fast productivity growth fueled by C&C technology suddenly became the catchword of the very late 1990s. Its luster however, faded almost as fast as it arrived with the dot.com deaths of the first years of the new millennium. With this paper we demonstrate that the two paradoxes above are perfectly compatible within a consistent micro (firm) based macro theoretical framework of endogenous growth. Within the same model framework also a third paradox can be resolved, namely the fact that the previous major New Industry creation, the Industrial Revolution, only involved a handful of Western nations that had got their institutions in order. If the New Economy is a potential reality, one cannot take for granted that all industrial economies will participate successfully in its introduction. It all depends on the local receiver competence to build industry on the new technology. We, hence, also demonstrate within the same model the existence of the risk of failing altogether to capture the opportunities of a New Economy.

Related content: Simulating the New Economy