The Digital Economy: what is new and what is not?

There are many signs indicating that something new has happened in the United States economy during the last decade. While the surge in labor and total factor productivity growth rates in the latter half of the 1990s was impressive and widely interpreted as a sign of a ‘New Economy,’ it remains to be seen whether it was a fleeting phenomenon or the beginning of a new trend. But there are other indicators that are less cyclical in nature and that appear more likely to persist. In this paper, I argue that the observed changes are at least consistent with the view that digitization of information, combined with the Internet, represents a form of general-purpose technology that is giving rise to a vast new array of possible combinations that we may refer to as the New Economy. The level of connectivity between actors and ideas is increasing dramatically. We have only begun to see the impact, and only part of it is measurable. Interpreted in this way, the New or Digital Economy is about dynamics, not static efficiency. It is more about new activities and products than about higher productivity. What is really new in the New Economy is the proliferation of the use of the Internet, a new level and form of connectivity among multiple heterogeneous ideas and actors, giving rise to a vast new range of combinations. There are some measurable effects on productivity and efficiency, but the more important long-run effects are beyond measurement. © 2004 Elsevier B.V. All rights reserved. JEL classification: L10; O3; O4