New economy is a term often used in the media to describe the changes that have taken place in the world of business since the widespread adoption of Internet technology. It has been applied to a wide range of situations and issues, most notably the rise and fall of high-tech and Internet startup companies. During the 1990s, as the United States experienced a long economic expansion and the stock market soared, many people started to think that basic economic principles no longer applied in the age of the Internet.
The basic idea behind the new economy was that computer and Internet technology had fundamentally changed the typical way of doing business. Analysts and investors alike focused on technology adoption and stock price valuation rather than revenues and long-term business plans when evaluating companies. As a result, high-tech startup firms staged public stock offerings before they had turned a profit and still attracted huge numbers of eager investors. Employees gave up the stability of traditional firms to work long hours at dot-coms in hopes of achieving a windfall in stock options. The workplace at high-flying tech companies evolved to include rooms full of toys and games to encourage employee creativity.
According to an article in Business Week, people made several assumptions about the new economy that ultimately proved to be false. First, they assumed that information technology was so important to business productivity that companies would always buy new systems and software, even in bad times. This belief caused big computer firms to give inflated earnings estimates which, when they were not met, contributed to the fall of the tech-heavy Nasdaq in 2000. Another popular assumption was that economic growth had become so stable that investors would no longer require a risk premium for stocks over bonds. Some analysts predicted that stock market averages would continue to increase indefinitely. In actuality, however, the high-tech driven expansion increased the risk and volatility of the stock market.
Another assumption concerning the new economy was that companies would no longer lay off workers during downtimes because high-tech labor is so scarce. As a result, many people were lulled into believing that they had greater job security than they actually did. Employees gave up the stability of employment at traditional companies for the big signing bonuses and stock options offered at dot-coms. "It used to be that when you went to a startup, you were an individual with a very high risk tolerance and probably had an ideal you were trying to achieve, " technology company president Christine Heckart told Paul Prince in Tele.com. "But a lot of people with very low risk tolerance left very good, secure jobs at the height of the frenzy to get rich quick in the world of startup-dom. And all of a sudden, before their dreams were achieved, the bubble burst."
When the Internet boom went bust and the U.S. economy slowed significantly in the early 2000s, many companies began laying off workers. As a result, employees began looking for jobs with more conservative companies once again. "Many [job seekers] are bent on finding a company with a future they can believe in, a dependable path to profitability, and a stable working environment where they won't be required to work around the clock for little more than stock options that may never pan out, " Prince wrote. "Internet companies and technology startups in general must find a way to prove their stability and financial viability while giving employees some of what they gained in the new-economy environment. That includes room for creativity, as well as a sense of passion and ownership."
Some experts now claim that there is no such thing as a new economy. Others say that the new economy is actually the old economy, but with technological breakthroughs integrated into existing businesses. But some experts continue to insist that the Internet has fundamentally changed the rules of doing business, despite the stock market downturn. In an article for Computerworld, Don Tapscott argues that the Internet provides a new infrastructure that lowers transaction costs and encourages collaboration among firms. He says that it creates a new platform for strategic thinking that consists of suppliers, distributors, and customers, all using the Internet as their base of communications. "Some claim that there isn't a New Economy. E-business and the Internet are a bust, and it's time to go back to tried-and-true principles that have guided commerce and investing for decades, if not centuries, " he wrote . "But heeding such advice would be a stunning mistake. There is a New Economy, with the Internet at its heart. Spurn this notion, and your company's failure is assured."