TaketheFifth 85the 2000s produced significant shifts in the economy. Rising oil
prices, for example, historically throttled the economy, sponsoring
the recessions of 1973, 1980, and, to a lesser degree, 1990. Yet when
oil prices more than doubled during the late 1990s and early 2000s,
inflation remained quite low and no threat of recession loomed. Part
of the reason was a shift to natural gas and greater use by major oil
consumers (such as airlines) of hedging contracts that reduced their
exposure to such price increases.
But a major part of the reason is econographic shifts from oil-
consuming manufacturing operations to oil-independent service
businesses, including those run on the Internet. Manufacturing op-
erations as a percentage of the economy shran kfrom 22% in 1977
to 17% twenty years later. The share of gross domestic product (GDP)
allocated to oil purchases fell from 8.5% in 1981 to about 3% in the
late 1990s. The Internet is surely part of this shift, as it enables the
conduct of sales and distribution businesses at far lower cost than
traditional means.^17
Even so, oil prices above some level will still trigger such mac-
roeconomic problems. Indeed, the plunge in the Dow by nearly 4%
in March 2000 was led by a 30% drop in the stoc kprice of Procter
& Gamble. That company issued a warning that its quarterly earn-
ings were going to be way lower than those in the same quarter of
the prior year and much lower than analysts expected. The company
cited as one cause of that disappointment the rising cost of oil,
which it uses in many of its products.
Another part of the shift is surely the increasing value attached
to intellectual as opposed to physical capital. Businesses producing
and selling software or on-line services can grow more quickly and
at lower cost than can those producing and selling automobiles or
oil. Far less investment in factories, plants, and equipment is re-
quired.
There is no reason to believe, however, that those companies as
a whole can grow any faster than the economy overall is growing. In
the end, the old-fashioned companies (the so-called old economy
companies) are the major customers (and beneficiaries) of the tech
upstarts (the so-called new economy companies), so how much fas-
ter can the latter group grow than the former? Some companies
might, but not forever or just because they have in the past (indeed,
the bigger you get, the harder it is to grow). Even if outsized growth
is possible, it cannot be guaranteed.
Even with these shifts, the new economy does not change the