The New Economy,
the Nation-State, and
the Role of Government
Joseph Stiglitz
Key Questions
• Is there a new economy?
• How does the new economy impact the way
the economy works?
• How does the new economy impact the
nation-state and role of government?
Is there a new economy?
• Short answer: Yes
• Market changes in costs of communication and
computers have interacted with other forces (lower
transportation costs, reductions in artificial crossboundary barriers, and a variety of technologies)
• Leading to
– globalization
– innovation revolution
– marked changes in business practices and structure of the
economy
Globalization
• Closer integration of world’s economies and
societies through trade, capital flows,
movement of people, diffusion of ideas
Innovation revolution
– Industrial revolution changed what goods were
produced and how goods were produced
– also led to a change in where goods were
produced—move from rural to urban
– New revolution is leading to a change in how
ideas are produced and the importance of the
production of ideas (the weightless economy)
– together with globalization can have profound
effects on where goods are produced—no
longer place-based
Changing structure of the economy
The new economy—and old economic laws
There have been major changes in the way the economy
operates
- Manufacturing declining, services increasing (change as
dramatic as the difference between agriculture and
industry)
- Much of what we consume today belongs to the
weightless economy
- Knowledge and information, which are at the heart of the
new economy, are fundamentally different from
conventional commodities
- But economic laws—scarcity—still hold sway
Changing structure of the new economy
The new economy affects nature
of competitive processes
• Competition is now global
• Increased pace of innovation
– “mechanized” innovation
– Lower fixed cost of innovation
– More rapid dissemination of new ideas due to new
technolo
• Much of innovation is occurring in small firms
• Enhanced potential for small firms to grow rapidly
• But network economies associated with new
economy can lead to global market power, stifling
innovation
Profound implications for U.S.
macro-economy
• Increased pace of productivity and growth
– question used to be: when would huge investments in
new technologies start to be reflected in macro-data?
– answer is: Now
• Reduced magnitude of cyclical fluctuations
– less importance of old cyclical industries
– less importance of, and better control of, inventories
U.S. Increasing Productivity
Average change
in productivity
1996-99
1993-96
1973-93
1960-73
0
0.5
1
1.5
2
2.5
3
3.5
Source: Economic Report of the President 2000
Change in productivity (output per hour of all person in the business sector)
(Percent change from preceding period; quarterly data at seasonally adjusted annual rates)
4
Implications for macro-policy
• Increased productivity and globalization has
enabled lower inflation and lower unemployment
• But at the same time there are new forces of
instability
– cross border capital flows
– exchange rate instability
• These forces may hamper national governments’
ability to control their own economic destiny
– worry about exchange rate hampers use of monetary
policy
– cross border capital flows may hamper effectiveness of
monetary policy
Key Questions:
• What is the role for collective action at either the local,
national, regional, or global level?
• What public activities can or should take place at each level?
• Will the nation state’s role diminish?
• Caught between devolution and globalization
• Devolution—political demand to put power closer to people
• Globalization puts constraints on what countries can do
– monetary policy
– taxation
• limitations on taxation of mobile factors, mobile production
– example: U.S. internet taxation debate
• With implications for inequality
• Difficult to control flow of ideas
The role of the nation state
• Globalization and devolution has forced
reexamination of what national governments should
do
• Local governments should be responsible for local
public goods (police protection)
• National governments should be responsible for
national public goods (national defense)
• Declining role of these national public goods?
– especially given combined forces of
regionalization/globalization
– common market
But – nation states remain locus
of legal authority
• In absence of adequate system of global
governance, nation state will have to take
central role in defining the “rules of the
game”, from competition policy, to bank
regulations, to providing for a safety net for
losers
Countries have responded
differently to the new economy
• Different countries have participated in new
economy transformations to different extent
• Differences in government policies, actions
have played key role
– Creating the internet
– Interconnection fees (telecommunication
policies, regulations)
– Broader market regulations—labor, capital, and
product markets
Eastern Divide
Per 1,000 population, 2000
China
India
Telephone main lines
110
30
Mobile-phone subscribers
54
3
Personal computers
10
5
Internet users
16
4
Source: Pyramid Research IMD, Nua Internet Surveys (the Economist)
Making the most of the new
economy
• Ability to harness new technology based upon:
– Competitive and innovative financial markets
– Presence of less bureaucratic organizations that are
willing to take risks
– Competitive markets that spur innovation
– High skilled labor willing to take risks
– Adaptable education systems
– Role of government in fostering new technologies
– Role of venture capital firms – providing not just
capital, but managerial and marketing assistance
Creating the new economy
Through better labor markets
• labor markets
–
–
–
–
–
willingness to take risks
safety nets
macro-policies (full employment)
“flexible labor markets”
with portability of pensions, other benefits
• education—
–
–
–
–
adaptable education systems
life-long learning, technology focus
broad access of high-technology learning
limiting extent of digital divide
Creating the new economy
Though better capital markets
• Capital markets
– Under-regulated capital markets can lead to speculative
frenzies, weakening the ability of capital markets to raise
funds in the long run
– auditor rules?
– disclosure rules?
– accounting standards?
– U.S. sec committee reexamining valuation issues
• Over-regulated markets can stifle flow of funds
• Goal is achieving right balance: locus of
responsibility remains with the nation state
Creating the new economy
Through synergies between research and
business
• Research, with close interlinkages with
business
– Silicon valley brought all key ingredients
together
• But national government played key role
New divisions of responsibilities between private
and public sectors, new complementarities
• Increased importance of standards
–
–
–
–
–
Conflict between American and European views
Is there a need for global standards?
Should the market be let to determine outcomes?
Market solutions may not be efficient
But government imposed solutions can be wrong and stifle
innovation
• Increased importance of privacy, internet security, and
global piracy
• Increased importance of global competition policy
• Approaches of one country, region have global impact
– Toughest competition standards may set global standard
– Toughest privacy standards may set global standard
Rethinking the role of government:
some basic observations
• Existing rules for evaluating governmental
activities need to be updated to reflect the ongoing
shift toward a digital economy.
• At turn of the century, rethinking led to new
government roles
– Evidenced by
• the creation of the Federal Reserve System
• the Sherman and Clayton Anti-Trust Acts
• the Constitutional amendment allowing a Federal income
tax
The theoretical underpinnings behind private versus
public production shifts as the economy moves
toward a digital one
– The public good nature of production in a digital
economy, along with the presence of network
externalities, may suggest a larger public role than is a
bricks-and-mortar economy
– An information-based economy may also improve the
quality and reduce the cost of obtaining information,
which by itself makes private markets work better than
before
– Government failure may be even more pronounced in
the context of rapidly moving information-laden
markets than in traditional bricks-and-mortar markets.
– The appropriate role of government in the economy is
not a static concept: It must evolve as the economy and
technology do.
Principles for On-Line and
Informational Government Activity
• “Green light” for on-line and informational
government activity
– Principle 1: Providing public data and information is a
proper government role
– Principle 2: Improving the efficiency with which
governmental services are provided is a proper
government role
– Principle 3: The support of basic research is a proper
governmental role
• “Yellow light” for on-line and informational
government activity
– Principle 4: The government should exercise caution in adding
specialized value to public data and information
– Principle 5: The government should only provide public goods, even
if private-sector firms are not providing them, under limited
circumstances
– Principle 6: The government should only provide a service on-line if
private provision with regulation or appropriate taxation would not be
more efficient
– Principle 7: The government should ensure that mechanisms exist to
protect privacy, security, and consumer protection on-line
– Principle 8: The government should promote network externalities
only with great deliberation and care
– Principle 9: The government should be allowed to maintain
proprietary information or exercise rights under patents and/or
copyright only under special conditions (including national security)
• “Red light” for on-line informational
government activity
– Principle 10: The government should exercise
substantial caution in entering markets in which
private-sector firms are active
– Principle 11: The government (including
government corporations) should generally not
aim to maximize new revenues to take actions that
would reduce competition
– Principle 12: The government should only be
allowed to provide goods or services for which
appropriate privacy and conflict-of-interest
protections have been erected.
Summary
• The new economy is real
– Even if it has sometimes been exaggerated
– And even if market values of new economy
stocks are not real
• Changes are already affecting economy,
society, and pace of innovation
• Causing changes in structure of economy
Concomitant changes in other
aspects of society
• Including political life
– Government will continue to have a role
– The nation state will continue to have a role
– But will need to redefine those roles
• Success in the new economy – as well as
inequalities between and within countries –
will depend on how well a country can
manage the process of reshaping those roles