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The Myth of the New Economy

By Bob Woods
Feb 6, 2003 4:00 AM PT

Despite all the bluster and hype spewing from the mouths of entrepreneurs and venture capitalists in the late 1990s, they could not create what they so desperately desired -- a New Economy.

In their vision, a legion of Internet-only retailers was supposed to replace the brick-and-mortar stores that had helped power the "old" U.S. economy for decades. And speaking of old and new, the old concepts of expansion and contraction supposedly had been replaced by constant growth.

But none of that happened. Many e-tailers fell by the wayside. Current economic conditions reflect the very definition of the word "contraction." What is more, for all the hype that surrounded the term "New Economy," many people could not even describe what they meant by it.

"'New Economy' is just a buzzword," Mukul Krishna, senior industry analyst at Frost & Sullivan, told the E-Commerce Times. "When you try to make decisions based on buzzwords, it's not [saying] much about your future prospects."

The Myth of the New Economy

There's a Bridge in Brooklyn I Could Sell Ya...

Buzzword or not, many people got sucked into the New Economy way of thinking during the dot-com boom because it was such a radically new concept, GartnerG2 research director David Schehr told the E-Commerce Times. While such thinking was "probably shortsighted," he said, the prevailing belief was that the Internet would change all the rules of buying and selling.

But the New Economy hype was fueled, not surprisingly, by those who had a vested interest in pumping it up. "How much of it was a much smaller group of people who talked to each other and themselves about this, and how much of it was the press being told by these people that this was the way it is going to be?" Schehr said.

At the same time, not many people were asking consumers if they were going to make a mad dash to the Internet to buy items like dog food, plants and furniture. As a result, many pure-play e-tailers selling such items ended up on the dot-com scrap heap. Demand simply did not materialize.

"Look at all of the business-to-business exchanges that people were touting as the end of business as we know it," Schehr added. "It didn't happen."

A May/December Combination

But even though the New Economy was a bust, many of the concepts touted during the hype years have become part of the overall economy in a process that Frost & Sullivan's Krishna calls "evolutionary, not revolutionary."

For example, it was not really revolutionary to create Web sites as a complementary channel to real-world stores and catalog operations. "You want to provide convenience to your customers," Krishna said. "So you go online so customers can do the shopping from the ease of their own computers. That's a new way of doing it, but it doesn't represent a 'New Economy.'"

Likewise, many businesses have used technology developed during the tech boom to move their processes into the digital realm. This helps increase efficiency, but it is far from a wholesale reinvention of the business cycle.

Back to the Future

Both Krishna and Schehr likened the e-commerce-fueled boom to other periods in history, including the rise of the railroad and the electrification of the factory, when new, hot ideas were expected to change businesses' and consumers' behavior. However, instead of radically transforming the landscapes of business and life in general, those periods gradually altered their respective worlds.

Likewise, even though the dot-com bubble has burst and the much-hyped New Economy seems to have failed as a driver of revolutionary change, it will have positive ripple effects through the economy for years to come. "Based on historical trends, it may take another five or 20 years before it permeates through everything and becomes as integral a part of business and day-to-day living as people were thinking [it would] five years ago," Schehr said.

The idea of incremental change is not a sexy concept that high-flying entrepreneurs and venture capitalists can hype at every turn. But most experts likely would agree that low but stable growth rates are better for the economy than the wild highs and lows seen in recent years.

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