If you uttered the phrase "New Economy" at a cocktail party in 1999, you would see heads nodding in solemn approval. Utter that phrase today, and you would hear snickers. Joel Mokyr still believes the New Economy is alive and well -- it's just not exactly what people thought it was. Mokyr, a professor in economic history at Northwestern University and author of "
The Gifts of Athena: Historical Origins of the Knowledge Economy," argues that a new, knowledge-driven economy is emerging with the Internet. Despite the collapse of technology stocks over the past three years, Mokyr believes that the Internet revolution remains with us and will continue to reshape all aspects of our economy and society. While that may be comforting for weary tech investors, take heed: Mokyr also sincerely believes that "technological innovation is great for human society, but it's also a most wasteful enterprise." With the badly beaten tech stocks rising out of the ashes of the bear market the past few months, investors would be well-served reading Mokyr's thoughts before deciding a great new investing age is upon us. Our weekly 10 Questions usually highlights a mutual fund manager, but we wanted to get a broader perspective on the question: Is the recent rebound in technology and telecom stocks viable? (For the record, the visionary Peter Bernstein recommended Mokyr for insights on that question.) Want to ponder the fate of the Googles, Amazons, Microsofts and Dells of the world? Read on. 1. Most people think the notion of a "New Economy" was bunk. Why do you disagree? With the Internet revolution, I sincerely believe that the New Economy that people talked about is still with us. The notion that it slowed down because the Nasdaq lost two-thirds of its value doesn't mean diddly to me. That's just a measure of how companies can capitalize on the technology, and what investors believe about the companies. The markets were filled with silly notions about the financial prospects of some of this technology. The Blue Mountain Arts paradox was the greatest example: This company never actually sold anything! They simply gave everything away. Another company Excite@Home bought them for about $800 million. But the Internet is still with us; it's deeper and broader and wider every day. People are shopping, as well as acquiring more information.
2. How do you define the "New Economy"? The New Economy is about information. The Internet has reduced the cost of access to knowledge. Twenty years ago, if you lived in Wyoming, you had to drive all the way to the big university library to get the information you needed. Now, everyone in the world with a PC and Internet access has essentially the same access to information as an academic like me. The Internet is not just convenient shopping; it's convenient access to knowledge. When my average student wants to know something, the first thing they say is, 'I'll Google it.' Today, anybody with access to a fast computer has the same access as we do. 3. But haven't market forces disrupted the "New Economy"? It's very hard to imagine that this knowledge economy has stopped dead in its tracks. It expands very rapidly -- unfortunately, no one makes any money from it. Consider Google's 18th Century equivalent: The Great Encyclopedia, by Diderot and d'Alembert. The Encyclopedia was a landmark in expanding access to knowledge and information to the populace, but nobody made much money from it. The publisher tried his damnedest to make money, but he failed. Google is now struggling to make money, but it will not make a lot of money. Its impact on society will be vastly larger. While the market will try to do so, the impact shouldn't be judged based on the money that can be made. However, this shouldn't discount the amazing successes that did occur in the markets over the past 20 years. In the 1980s and 1990s, giant companies were created out of nothing: Dell ( DELL), Microsoft ( MSFT), Cisco ( CSCO).
4. If the Internet will revolutionize our society, why won't it be profitable? The knowledge industry wasn't established to make money. Some things make money that don't change history, and some things that change history don't make money. The Nasdaq bubble was a result of people being confused. A lot of the money was really redundant, people investing in 10 companies attempting to do the same thing. Plus, companies were trying to do things that shouldn't have been done at all. Technological innovation is great for human society, but it's also a most wasteful enterprise. Whenever you have lots of people running in a race for innovation, only one gets to the finish line first. That's the nature of creative destruction. It's never going to be very efficient. Thomas Edison said that because of his failed experiments, "I know 5,000 things that don't work." Another reason profits are often elusive: It's very hard to keep out competitors and it's driving prices down. Look at email. People keep forgetting the amazing thing about email is that it's free. Every email replaces a 37-cent stamp. Not only faster, but it's free! The fact that it's free ought to raise a question: Who's paying for it? Obviously, the fact that it's free shows that not a lot of money can be made from it, even though it's revolutionary. The economics of this are unusual. The marginal cost is so low. It's almost unthinkable. Nobody owns cyberspace, and as long as nobody does, profits will be tough to come by.
5. Do you think funding for innovation will dry up postbubble? The system did get burned. A lot of high capital went down the drain. I believe that whoever comes up with the right idea after broadband will have no problem getting funding. There are still some very successful companies in the computer arena with a great deal of money for investments: Dell's got money, Microsoft's got money. In all fairness to the dot-com boom, overconstruction in strip malls costs twice as much as the Internet. The numbers that were lost on unprofitable shopping malls are stunning. Capitalism is like that -- people get an idea, invest a huge amount and waste much of the initial investments. The railroad boom is a good example. At least half the investors in railroads lost money, but railroads facilitated many great developments across the economy. Likewise, the Internet will enable us to be more mobile and more informed. 6. How is the Internet going to change the broader economy over the next few decades? I think the Net is going to stimulate technological change in ways I can't predict. What I really like is how it changes the organization of the workforce. Over the last 200 years, work became confined in time and space. Factories, retail stores, offices, hospitals -- where people work in a place and time -- emerged in the early 19th century. By 1940, two-thirds of the labor force worked in that kind of setting. What the Internet is doing is breaking the time and space boundaries of work. You work whenever you want to, wherever you want to. "I am my office," as the IBM ( IBM) ad said -- I thought that was rather deep. In the future, I do think everyone is going to be his or her office. I work at home most of the time. Even when I communicate with my students, it's on email. Students send me stories as PDFs. I do leave the home because I like to interact with people. But I would never think of working in a set place from 8:30 a.m. to 5 p.m. It's not just telecommuting, not just working from home. As long as you have a laptop and a good connection, you can work from wherever you want to.
This is going to change our society as much as the factory did. The Internet will be the last nail in the proletarian coffin. There will be no more factories as we know it. Manufacturing will be robotized, with a few workers there to make sure the robots are working. Of course, there will be certain jobs that still require human interaction -- we still need dentists for a root canal. In the information age, my sense is that there still will be firms in a loose sense. But the notion that you have a worker who is affiliated with one firm may well become fuzzier and fuzzier. I don't know exactly what it's going to look like. But it's quite clear that the absence of a physical bond between worker and employer will change the relationship. I think that in 20 years this could be one of the most dramatic consequences. Some future historian will look at the late 20th century and say, "That's when it began to change." 7. So, what is the market impact of this? Can we determine who might benefit from these trends? That's a tough one.
Laughs. I can look into the past and ask, "Who are the people who made the money in the Industrial Revolution?" For every successful cotton inventor, there were 10 who lost their shirts. The guys who made the money were the landlords. So far in this New Economy, the only sector of the economy where we haven't had a crisis is real estate. People want to have nice homes, secure homes. A growing number of people think of the home as a place where they do more of their work. I cannot have a home without a study. Real estate will likely do well. 8. Can you make the argument that in the digital age, the Dells and Microsofts are the "landlords," since they provide the space for the Internet? I think you are getting a little too metaphorical for me. (Laughs.) I think of Dell, Microsoft and the like as the railroads.
9. What about the telecommunications sector? Wouldn't they benefit from the changes you envision? I would like to say telecom is going to benefit, but I can't bring myself to recommend this group. It's such a mess. A lot of this industry is going to use wireless technology, but God alone knows if any money can be made with it. 10. What companies will succeed in the new landscape? Maybe the big companies, like Dell and Microsoft, but I'm not entirely sure. I imagine Microsoft will remain very much central. Innovative companies like Google and Amazon ( AMZN) will ultimately do very well. But for every company that does well, there will be 10 that fall by the wayside. If you are going to invest in the sector, I would suggest maintaining a diversified portfolio because betting on one is a bad way to go.