Introduction

The book focuses on the recent pattern of growth in advanced economies, especially the USA, centered on ICTs (Information and Communication Technologies). This pattern emerged during the expansion of the US economy in the 1990s, and to a large extent explains that expansion. The book analyzes and interprets the expansion and its economic consequences for the ICTs in a unique way. Indeed its discussion puts together topics and approaches mostly kept separate in the literature (except for the linkages provided by productivity growth). The Coming of Age of Information Technologies, considers in particular the theoretical perspective of demand-led growth, which it considers as a major determinant of the path of Transformational Growth. Hitherto, growth, macro performance and the development of technology have largely been treated as separate topics, different chapters in the textbook of economic analysis, so to speak. The focus here on structural analysis, and in particular on the structural dynamics of market creation, aims to make up for the general lack of attention to this close, although complex, set of relationships, hopefully shedding light on long-term development patterns – and also on the latest phase of severe crisis in the US economy. The division of the book into three parts reflects an overall strategy for confronting these interconnected questions, and reveals its main tasks and aspirations. Part I presents the fundamentals of the theoretical approach and articulates its relationship to the more general framework of demand-led growth. The purpose is to show the theoretical development afforded by that framework, but also how effective demand and structural transformation can guide the analysis of a growth episode driven by investment and innovation in a pivotal Hi-Tech sector. It is exactly the interaction between investment and changes in the sphere of consumption that brings forward an explanation of the boom and later collapse of “the New Economy” that will add to and modify those one finds in the literature. The “fabulous decade”, as it has been called, is the topic of several books. In perhaps the best-known, Nobel Laureate Joseph Stiglitz (The Roaring Nineties, 2003) attributes a decisive importance to new technologies, but focuses on an increasingly misdirected macroeconomic policy as the key to the end of the

boom. The “fabulous decade” is indeed very important, not so much for the formidable macro performance stressed in the literature nor for the often rhetorical references to the rise of a New Economy, but rather for its emphasis on structural dynamics, where these are seen to be set in motion by ICTs increased pervasiveness and sophistication culminating with the Internet. Part II focuses on that. The fundamental difference from other interpretations centers on the structural dynamics associated with the ICTs frontier as the main novelty to be investigated and the key to the dynamic instability of the 1990s, as well as to the various long-term consequences. In particular, by focusing on structural dynamics a better story about investment can be told, in contrast to the conventional argument centered on the interest rate. Building on the idea that an essential condition for growth is transformation, with the evolution of consumption being a fundamental aspect of this, the interpretation put forward here suggests that the promise of an Internet scenario of development sustained an episode of growth, which then collapsed as the limits of the transformation of consumption patterns were reached. To a large extent the promise failed to materialize because the perceived potential did not translate into a solid process of market creation. Thus, we have an instance of “potential market” failure. The end of the boom suggests that there are obstacles that these technologies may encounter on the way to becoming the long-term engine of growth they have been claimed as. Indeed, the ultimate question it raises is the long-term viability of ICT-driven development, indeed of technology-driven growth in general. This projects the end of the 1990s expansion into the long-run question of the path of Transformational Growth after the slowdown of the 1970s, which is elaborated in Part III. In this light the boom and bust of the New Economy are part of the way a well-established, long-term trend of development reached a new level of maturity in the 1990s. The specific characteristics of that phase led to the uncertainties of the early 2000s, culminating in the debt-liquidity crisis and then the recession. Thus, while ICTs were fundamental to the expansion, the subsequent collapse indicates the issues facing a pattern of growth centered on them. This is a question of particular importance to the US economy, whose leadership in Hi-Tech is often taken as an example for the other advanced market economies. It might be useful to clarify here how the theoretical framework developed in the book relates to the debate on non-mainstream approaches to growth. The Keynesian analysis of effective demand is notoriously concerned with the short run, where the focus is on the level of investment and output, and composition has no role to play. But this is precisely the starting point for demandled growth. It must show that demand matters also in the long run. But simple Keynesian theory has little to say about supply. On the other hand, the return to classical theory as a basis for understanding production and distribution, based on the work of Sraffa, while far more realistic than the neo-classical approach, has left open a number of questions, in particular that of the level and composition of output. In fact, one can argue that the classical system is “open” to an

external determination of the level of output, i.e., is a system open to effective demand. The question boils down to what determines the level of investment, and it can be said that it depends on the state of long-term expectations, influenced by several factors. In the book the answer to this problem is that of focusing on the composition of investment reflecting the effort to build the market via development of the structure of socially determined needs (Levine, 1981). This leads to the consideration of the consumption-growth relationship, in which change in consumption patterns is the mirror image of the process of market creation (Gualerzi, 2001). In the book the approach is further developed with a set of relationships highlighting the internal structure of the growth mechanism relating to changes in the composition of the growth process to expansion. The underlying question is the search for a “demand-determined” theory of investment, so that growth appears the result of determinations depending on the demand side. The structural dynamics of market creation, is therefore a long-run theory of the level and composition of investment and output. This affords a clarification of the notion of demand-led growth and of its relationship to the problem of accumulation that is the focus of classical theory. An example of demand-led investment theory is of course the accelerator model. Investment is induced by changes of output. But this leaves unchanged the structure of output. Second, it amplifies the effects of autonomous investment, but cannot account for this first mover of income creation. The main idea is that investment must be understood as the determining element of transformation in consumption demand, and this, through changes in composition, determines expansion, i.e., market creation. In other words, investment cannot be sustained unless it changes its composition. This composition reflects two phenomena: the realization of potential market, and a change in the composition of consumption, determined by innovative investment, and validated by consumption innovation. Ultimately, it is the development of needs that provides the basis for the development potential that accounts for market creation. In and of itself this way of thinking discards the traditional approach based on Say’s law, a common element of contemporary growth theory, indeed of all the brands of growth theory in which saving simply is investment, so that a discussion of the investment function cannot arise. At the same time, the focus on the principle of effective demand in the long run has much in common with the classical problem of accumulation. In this respect the approach presented here attempts to clarify that the importance granted to demand (including consumption demand) is not contradictory to the classical notion of growth determined by accumulation and technical change. Indeed, we focus on a different causal determination than that contained in demand-led growth models stressing the role played by income distribution and capacity utilization. These important macro variables can be easily fitted into the theoretical scheme here, but they are not the main focus of the investigation, which concerns the way in which autonomous investment, combined with innovation, determines the transformation of the Consumption Sphere and therefore determines the aggregate rate of growth. Given the central role played by a

changing composition this approach underscores the close relationship to the idea that growth occurs only through structural change and the transformation of the structure of demand (Nell, 1998; Pasinetti, 1981, 1993) In the theory of Transformational Growth (TG), Nell makes reference to a “ ‘normal’ growth of demand”, as a central tendency that is a rate of growth that can be reasonably expected, given the conditions defining the growth scenario. Underneath is the relationship between new markets and current markets, which appears indeterminate. The structural dynamics of market creation address precisely this aspect, focusing on the rise of new markets as a result of investment and innovation. The question remains of the effects on aggregate growth, whether the direction taken by market development is such to ensure market creation to an extent capable of sustaining growth. At the same time it is precisely the focus on effective demand and market creation allows for an analysis of technology and growth quite distinct from that one finds in the literature, suggesting an analogy with the classical focus on the macrodynamics driven by technical change. This theoretical framework has an interesting counterpart in precisely what is missing in the analysis of the 1990s. The main phenomena that have come to characterize the 1990s are the productivity growth “optimism” and the explosive nature of the speculative bubble linked to technology development. Even the widespread acceptance of the notion of a New Economy has left its technological basis and the pattern of transformation centered on that largely uninvestigated. In the 1990s the return to high-growth rates for post-war standards, at least in the last years of the cycle, seemed to give credibility to a notion of unlimited growth. In fact, we would argue that actually revealed an underlying issue: that of the knowledge economy, i.e., growth driven by knowledge-intensive industries and the accumulation of knowledge. The fact is that it was possibly the first expansion in the post-war period where the engine of the expansion could plausibly be asserted to be ideas, knowledge and Hi-Tech, i.e., knowledge-intensive industries, so that a prominent role was played by intangible assets. At the very least it was the first one in which these factors were clearly at the center of an upswing of output and productivity and formed the backbone of investment spending. That poses a problem to the established approaches to the relationship between technology and growth. This only makes it more compelling to investigate the structural dynamics of the transformation and speculate on the next step in the pattern of development of advanced market economies. That is, it is necessary to clearly articulate the implications of the boom and the bust for the path of Transformational Growth (Nell, 1998). The dramatic corrections in the stock market have considerably cooled investor enthusiasm. The downturn that followed raises numerous questions that are more problematic when considering the pattern of economic development in the 2000s. How could we explain the abrupt end of the expansion and the uncertainties on the prospects of growth? In most macroeconomic accounts, the role of technology is said to be

fundamental, but, on the other hand, this claim is not much elaborated, except for suggesting it as the basis for a steep rise of productivity. The alternative view would provide at least the same attention to the effects on the economic structure and the rise of new markets. Such an approach need not imply any technological determinism: the economic consequences of technology depend on investment and more broadly market development. Indeed, the new perspective on the 1990s boom and bust suggested here focuses on the technology-income-creation relationship, with a demand side dominated by innovative investment. Furthermore, to argue that new technologies are at the root of the 1990s expansion and in particular of the boom of the last part of the decade, does not imply that they alone explain the boom; there are many other factors that account for the specific pattern of the cycle and its ending in the burst of the technological bubble. It simply stresses that the development of new technologies has a fundamental role in the structural dynamics underlying the cycle, which is what needs to be studied. The hypothesis of an investment-driven expansion centered on ICTs is therefore investigated with respect to the evolution of consumption patterns and the formation of new markets, i.e., the endogenous generation of demand, stimulated by technology development. The point is that the key to the transformation is not the computer but the network, not the effects on productivity of IT but the market-creation prospects of ICT products and the Internet. The impact of the Internet, a topic in the economics of information technology or industrial economics, is analyzed instead in the broader perspective of a network effect by which the combination of information-processing with telecommunications determines the possibility of increasing returns and qualitative change. Qualitative change takes the form of restructuring of productive processes and entire industries, and the rise of new products and services, thus of a change of composition. The development of networks, and of the Internet in particular, is therefore the fundamental novelty of the 1990s and the key to the transformation exemplified by the New Economy. The technology frenzy and the stock market bubble followed. This perspective suggests a “rational” explanation for the “irrational” euphoria that pushed the surge of the stock market. Why did the stock market boom in the late 1990s? Because it was betting on the expected profit of the Internet business, be it the sales of software, or the growth of the Internet companies, or the transformation of businesses and the development of electronic markets. When it began to be clear that the growth potential was badly overestimated, expectations turned sour, injecting the pessimism that drove the progressive collapse of the stock values and the long phase of uncertainty. The “correction” in the stock market signaled the end of the cycle of expansion, posing even more cogently the question of the kind of structural transformation capable of sustaining economic growth in the long run. That brings us to the question of the long-term perspective on the expansion and the prospects of the pattern of transformation emerging in the 1990s. Unlike the rhetoric of the “New Economy”, ICT have continued to exert a major

influence on the US economy. And yet no new expansive phase has resulted. Thus, the question arises of the long-term viability of ICT-driven development. This is the question of the path of Transformational Growth. If we take the 1970s stagnation as the sign of the slowdown in the process of TG, indicating a break in the growth pattern in the post-war period, then the question arises of the responses articulated in the following decades. A better perspective on the expansion of the 1990s and its long-term implications, can be gained by considering the pattern of growth emerging from the 1980s recovery. The peculiarities of that phase and the differences with the 1990s, do suggest that the acceleration of the pace of the transformation in the last part of the fabulous decade signaled the new level of maturity reached by a long-term trend of development, while clarifying how that was incubated in the previous decade and originated much earlier. The pervasive effects of ICT, indeed, the coming of age of information technologies, pushed the US economy during the 1990s into a new stage of development. But the bust that followed indicates the difficulties encountered by a long-term “Internet scenario” of economic development (Gualerzi, 2001). Here again the strength of the expansion on one hand suggests that something fundamental happened, but also that it was only sustained briefly, and relatively soon fell back. Nor has the outlook for ICT-driven development fundamentally changed in the 2000s. The problem is that while there is evidence of the collapse of the dotcom sector and of the difficulties of the structural transformation associated with the Internet scenario it is not clear what it would take for a new expansive trend centered on ICT to start. What is clear instead is that technology development continued, confirming the central position of ICT in the US economy, but that this was insufficient to reignite significant growth. While the sector is undergoing a large process of consolidation and restructuring other forces have sustained the economy preventing a similar collapse. They were however incapable of maintaining the economy in a sustained growth path. It might be concluded that the 1990s were a sort of peak in a long-term trend of technological and industrial development that, though continuing, has not the same expansionary effects. In the absence of an alternative, that appears one of the main causes of the recession that arrived at the end of the 2000s. In concluding it might be useful to add a few details about the content of each chapter. In the first chapter a brief examination of the various directions of research within demand-led growth makes it possible to identify the peculiar position occupied in this framework by the theory of transformational growth. Its distinctive focus on structural change and the growth of demand contributes to that framework a general theory of long-term transformation. The latter requires a long-run theory of the growth of demand, which is elaborated on in the second chapter with respect to the consumption-growth relationship and the structural dynamics of market creation. Chapter 3 further develops the approach tracing its roots in the question of effective demand in the long run and the role of a changing composition of demand. It presents an heuristic model of the relationship

between new products, changes in consumption composition and market creation centered on innovative investment and market growth. In Chapter 4, the interpretations of the 1990s, starting with the accounts of the “exceptional” performance of the US economy, are critically examined, pointing out the structure of the arguments and the role played by new technologies. More critical views and especially that of Pollin (2003) are examined as well, focusing on their insight into the main factors determining the boom and the bust of the New Economy. It is not an exhaustive examination of theories and interpretations, rather a way to focus on the main question raised by the 1990s expansion. The final appraisal outlines an alternative hypothesis that is developed in the following chapters. The main argument concerns the ICT sector and its impact on the transformation process. In Chapter 5, the debate on ICT and productivity growth is examined and an hypothesis on the “true” meaning of the network effect is introduced. Chapters 6 and 7 analyze the pattern of growth emerging on the 1990s centered on the development of ICTs and Internet, and in particular investment patterns, the technological trajectory, the process of industrial transformation and the emerging trends of evolution of the Consumption Sphere. Chapter 8 introduces the long-run perspective comparing the structural dynamics of the 1990s with that of the 1980s. Both are interpreted with respect to the long-run question of the path of Transformational Growth after the break occurred in the 1970s with the crisis of mass production. Chapter 9 further elaborates on the distinguishing novelty of the 1990s, broadening the perspective to the questions raised by the information economy and elucidating the different functions of investment. The question posed by the end of the expansion is that of the issues facing a pattern of growth centered on ICT. Indeed, behind the boom and the bust, lies the problem of ICT-driven development and its limitations. Chapter 10 examines the limits that converged to determine the flop of the Internet scenario of development and then draws the implications for the path of Transformational Growth. That affords a perspective on the growth scenario of the 2000s with an insight into the relationship between the end of the expansion and the depression of the late 2000s.