The air is so full of data, both true and untrue, that it is increasingly hard to separate fact from fiction. Despite this exceptional difficulty, if we are to survive and prosper in the next millennium it is crucial to do so. Although each generation regards this dilemma as a new problem, it is as old as recorded history. In one of his most famous allegories, Plato told us the story of the cave where people were chained up and could only look in one direction, they could see only the shadows on the wall and could never look out at the real world beyond the cave's entrance to see what was happening. When they were finally unchained and could look out into the sunlight they did not believe what they saw. In some ways we are all in a similar situation today. We see the shadows of an industrial society to which we are accustomed, while just beyond our vision there is developing a new economy, the information/network economy which is as different from the industrial economy as was the industrial economy from the agricultural which preceded it. All of us understandably like the familiar--the shadows on the wall of our cave seem comfortable and real--change is unsettling.

Over the years generations of economists have honed rules for a familiar industrial economy and are understandably loath to acknowledge that fundamental change has occurred. Indeed very few academics have joined the voices of non-economists who see a totally new economy emerging with new rules. Kevin Kelly, who is not an economist, has been an early and highly articulate proponent of new rules for a new economy.[1]  The ability of business leaders to divine whether or not such basic changes have actually taken place in our economy may make the difference between the quick and the dead.

Perhaps the science fiction writer William Gibson said it best when he wrote that "The future is already here. It is just unevenly divided." It is not only unevenly divided among various parts of the world, but also between those who believe that there really is a new economy responding to new rules, and those who do not. Is it only the same old economy with a few new twists, or are we witness to a paradigm shift? To some measurable extent business strategies will have to be shaped by the answer to that question.

Examples abound of once very successful companies who failed to change their ways in the light of new circumstances, or changed them too late to save themselves. Steel was by any measure the basic industry of the Industrial Age, but the huge companies were slow to appreciate the threat of the mini mills whose new technology allowed them to produce steel at about 20% lower cost per ton than that of the big integrated mills. Although the big steel companies invested billions of dollars in new technology, not one of them introduced mini mill technology into its own product mix. This story of too little too late is repeated over and over in industry after industry. Indeed there is only one company which was in the original Dow Jones Average that still enjoys that position. In some cases not only did the company disappear, but also the industry it served. Today it is hard to know who is in the financial service business as many companies' plans encompass your core business. Competition comes from across the world and across the entire business spectrum.

The introduction of what Clayton Christensen has aptly named "destructive technology" has been and is often the catalyst for change. Often new rather simple technology first captures the low end least profitable part of a market that is ignored by established companies trying to project their margins. Having once established a market position, the technology usually continues to improve and products and services it produces become more upscale until they threaten the existence of established firms. All of this progression in technology from maverick to mainstream is made more complicated and dangerous to your health by the fact that today everything is moving more quickly than ever before in history. It is becoming in Charles Fine's words "a world of temporary advantage."[2]  As transparency replaces secrecy and data becomes both cheap and ubiquitous, it becomes harder and harder to leverage proprietary information.

The old Industrial Age in which we all grew up is in fact morphing into a new information/networking economy. Nowhere is this more evident than in the financial service business which is built on information. One of the impediments to understanding what is happening is that we have very little time to get used to a new situation, since the velocity of change is unprecedented and increasing every day. The period between events and between novel and obsolete gets shorter and shorter. It took 40 years for radio to get 50 million listeners here, it took 13 years for television to gain a like number, and it took only 4 years for the World Wide Web to get 50 million domestic users, and its use is growing 100% a year. Moore's law that the speed and number of transistors double every 18 months is now more than matched by George Gilder's belief that total bandwidth of the world's communication systems will triple every 12 months. As bandwidth grows its cost will move toward zero. The velocity of such change has no historical precedent and makes analysis even more hazardous than usual. John Von Neuman, one of the great computer pioneers, expressed the belief that technology increases the rate of change not so much by shortening the time line but by broadening the areas affected - political, economic and social. Actually it does both.

One of the big problems in sorting out the truth in economics is trying to find the words to describe a new situation. Novel situations call forth novel words. As the Agricultural Age was fading and the Industrial Society was being formed, a whole new vocabulary had to be invented to describe what was happening. Instead of seeds and crops and growing seasons, the world became familiar with terms like steam pressure, revolutions per minute, and assembly lines. As the Industrial Age fades, the development of the computer required the invention of new words like bits, bytes, CD Rom, and floppy disks to describe its workings. As digital science flourished and moved into the mainstream more and more things from music to literature were reproduced digitally. A "zero" and a "1" if properly arranged can now capture any product of the human mind. This process gives us an unreal sense of precision. While we now have the ability to rent a car at a distant airport equipped with a Global Posting System that will guide us unerringly to a hotel we have never seen, we still cannot put anywhere near the same of measure of reliance on any of our common economic measures.

The new global economy in which we are forced to operate can perhaps best be described as a great complex adaptive system. All such systems are non linear and tend to resemble biological rather than the mechanical systems of the past. That means that in many instances they respond to different rules. Some writers like Michael Rothschild have gone so far as to state and argue "that a parallel relationship exists between an ecosystem based on genetic information and an economy derived from mechanical information."[3]  The comparison is apt since the abundance of information that flies around the world today at near the speed of light acts on the global marketplace much as genetic information acts on the ecosystem. It is fair to say that no economy has ever behaved in a totally predictable manner, otherwise the pundits would not be so wrong so often. The new economy that is now developing is even more unpredictable than the old industrial one because since it is like an ecosystem it responds to seemingly trivial events, often weeks after the event. It is for this reason that the talking heads on TV who explain why the market went up twenty points or down 200 points add nothing to our economic thinking, but much to the art of creative writing. While this view of a new economy has not gained wide acceptance among mainline economists, it nevertheless makes a great deal of sense. The natural world runs itself, not always to the taste of some environmentalists, as many species die and disappear as new ones are formed. Similarly, with no central planning a global capital market has emerged--the eurodollar market which represents the greatest floating pool of capital in the history of the world. It is a totally new phenomenon with profound implications both for nation states and for business. Since there is a limited amount of capital in the world and an unlimited number of projects looking for finance, capital goes where it is wanted and it stays where it is well treated. It flees restrictive laws and regulations. This new, so-called stateless capital operates relentlessly always seeking the best blend of safety and return and is thus often criticized by those who long for a more orderly and predictable process. Indeed this market has become a giant voting machine, casting its ballots against bad economic policies and in favor of good ones. It's what I call the Information Standard and is far quicker and more Draconian than the old gold standard. Bad economic policies appear almost instantly on the computer screens around the world and capital flows out. Governments responsible for these policies naturally want to isolate themselves from the consequences of their own actions and cry for regulation. The proceedings at the recent Davos meeting underscored this fact as many complained about the speed and effect of capital flows.

This shift to an information-based global economy has had a profound effect on the way nations behave. When natural resources were the dominate factor of production, the conquest and control of territory seemed a reliable way to enhance national power. As recently as World War II nations fought and men died for the control of the iron and steel in the Ruhr Basin, because ownership seemed to confer power. Today there is almost no natural commodity from gold to oil that is worth as much in real terms as it was ten years ago. One new rule for the new economy, when reduced to a kind of shorthand, is that matter matters less. Today and tomorrow belongs to those who can utilize information and at the same time create a process of constant learning. That will be critical for survival. It will be a good time for the small and the agile, and a bad time for the bureaucratic and the ponderous. This is true because innovation, not the refining of the known, is now the driving force of wealth creation. The tendency of established firms when confronted by a new and innovative product is to attempt to improve their own existing product, rather than adapt to the new. In the banking business we saw it in the way ATMs were greeted by many in the financial community. Large ads ran explaining that "our tellers" are smiling, friendly people, not cold machines. But convenience won out and the number of tellers goes down each month. When the transistor was invented, established makers of vacuum tubes spent millions of dollars to refine their tubes rather than embracing the new technology. Abandoning one's old highly successful product or service to escape obsolescence and embracing the new is one of a leaders most difficult, but most essential tasks. In the new economy these decisions will come faster and faster - and there is no letup in sight. While market leaders sail along with business as usual, some new company comes up with an innovation that should have come out of the big company research. Often the failure to see opportunity is more a marketing failure than a technological one. The banks should have invented the credit card, but they did not. Kodak with its massive R and D program should have invented the instant camera, but they did not. The roster of companies that turned down the Xerox process is as long as those retailers who scoffed at the potential of the Internet to capture sales. People now are beginning to recognize that one of the great merchants of our time Sam Walton took 12 years and 78 stores to generate $150 million of sales for Wal-Mart, while Amazon.com did it with a website and a warehouse in three years. Even the people in Redmond were slow to understand the power of the Net. More than 320 million web pages have been created in the first 5 years of the web's existence, and each day 1.5 million pages of all types are added. In short, the opportunities are limitless.

Knowledge applied to work to create wealth is now the predominate paradigm in our new world. In a sense this is nothing new. Joseph Schumpeter gave us the rule of creative destruction years ago and sang the song of the dynamic entrepreneur. This concept in and of itself formed a complete reversal of the earlier economics of the Cameralist in the late 18th century Germany who postulated that there were three ways to create wealth: by increasing the population, by mining, and by controlling foreign commerce. Today this old dogma seems almost quaint and it is even hard to believe it was once the conventional wisdom. As economies change, however, conventional wisdom often lags far behind reality. The shadows of yesterday seem more valid than the reality of tomorrow.

In this new economy the distinction between product and service is blurred almost to the vanishing point. Examples abound. By any conventional definition Lojack is a product that you can touch and feel, but when your car is stolen it is the service that becomes critical in finding it. In a similar fashion, a credit card is a product, but is wholly dependent on the service behind it. Not long ago if a corporate officer suggested that the way to make money was to give your product away, his or her chance of promotion would have been remote. In the new economy this tactic has created a whole new group of millionaires. Today the papers are full of ads for free, or almost free, expensive cell phones supplied by companies who confidently expect to make money by supplying the service that makes the phones work. Banks and brokerage houses inundate the market with free software to induce people to open an on-line account, and we can count the day lost when an American Online CD update is not in the mail. Netscape gave away its source code and Sun gave away its Java language. In the new economy, it has become almost a cliche to say that in many instances the way to make money is to give away your product in order to establish a standard or supply the service on the back end. In today's world open systems win. It is fair to say that this phenomenon is a function of the network economy and did not exist in the Industrial Age.

The new information/network economy clearly responds in some other different ways than the industrial economy. Today the new rule of increasing returns developed by Brian Arthur, as opposed to the law of diminishing returns, may seem as out of sync with conventional wisdom as did Schumpeter's dictums to the Cameralists' thinking. It used to be thought that scarcity created value and so that the more that was produced of a given item, the less value it would have in the marketplace. Just the reverse is now true in a network economy: one fax machine is worth nothing. Two fax machines are worth something, but 1000 machines connected together create real value, and that value goes up as more and more machines are added to the network. The same rule applies to credit cards and every day more and more examples present themselves. Some mathematicians have proven, at least to their own satisfaction, that the sum of a network increases as the square of the number of members.

So in this sense more creates more instead of the old rule that value is created by scarcity. But while the new rule does in fact apply to the network economy, the old rule of scarcity also still works in some instances: witness the $9 baseball that Mark McGwire hit over the fence in St. Louis for home run number 70. There is only one such ball - the ultimate measure of scarcity - and it is now worth a fortune. So sometimes the old rules and the new can and do co-exist because they are based on human nature.

One of the old rules that has become even more important in the new economy, albeit with a new twist, is the importance of people. Every company newspaper for years has intoned that people are our most valued asset, but it turns out that in the new economy the care and feeding of innovative talent will make the crucial difference between the quick and the dead. Huge sales volumes are being leveraged from innovative ideas. James Daly has postulated that "companies will be a collection of smart people who come together for brief periods, then disperse, a model that Hollywood has turned into an art."[4]  Whether companies move this far or not, it is true that big business must design and implement structures that allow them to be quick and nimble. Interconnecting people produce the same kind of leverage as interconnecting desktop computers. Larry Keely put it succinctly when he said: "No one is as smart as everyone. The existence of innovative people organized in a way to exploit and leverage their talents cannot be discerned by studying the balance sheet. The accounts of the Industrial Age are seemingly incapable of measuring the factors of production that will make or break a company in the new economy. We were told to write off software, for example, and to capitalize hardware. It turns out that the Y2K problem is caused by software that in some cases is 20 years old and still running big mainframes. Accountants were unable to visualize an asset like software that they could not feel and touch, so we wrote it off while the hardware we capitalized has in many cases had to be replaced. The accounting profession is just beginning to issue some new rules to cover this situation. The same is true of intellectual capital. In a sense what is now called "good will" and is to be written off, represents intellectual capital which is the whole future of the business and thus is its greatest asset. The market knows this, that is why Microsoft with trivial fixed assets has a market cap exceeding that of the big three auto makers combined. There is thus a clear disconnect between what is traditionally measured and what is important. And since what gets done is what we can measure, the opportunity to make huge mistakes is omnipresent.

The Government statistics on which many rely are just as bad. Not long ago the columns of the press were filled by writers bewailing the fact that the savings rate in the United States had turned negative and we were living on borrowed time. A phone call to the Bureau of Labor Statistics could have elicited the information that they had taken out of the computation of income the individual's capital gains from securities and mutual funds from which the savings rate is calculated, but though an error had not removed the taxes on these gains. This gave the result a double whammy. To a large extent many of the Government numbers are artifacts of a different age. Productivity is but one example. Productivity is designed to measure input and output in the mechanical model. Aside from counting the number of checks processed per minute or the number of inquiries to your answer center, the word has little relevance in a world where intellectual capital is paramount. This measure is analogous to trying to describe how a computer mother board works in terms of pressure per square inch or revolutions per minute.

The current state of the art has no agreed measure of whether a computer programmer who works very rapidly but creates bugs in the software is more or less productive than one who works more slowly, but creates no glitches. When input is measured in labor and output in goods, productivity has real meaning although there is argument on the details. So far as I am aware, no one has come up with a new word to describe a new measure for the new economy. When input is knowledge and not manual labor or money capital, and output is some kind of service, old methods of computing productivity no longer mean what they used to. Bad metrics produce bad decisions.

The new economy has also altered the traditional relationships of employer/employee in some very fundamental ways. The man in the grey flannel has seen his best days. Not many years ago the company always owned the capital invested in the land, the buildings and the factories. Today the knowledge worker owns the means of production which is his or her own skill and knowledge which is totally independent of the company's fixed assets. This gives the work force a mobility that is unprecedented and is reflected in the movement between companies at volumes never before seen. Since all products and services can be duplicated over time, and the progress of technology is moving at flank speed, companies must sponsor lifelong learning as the only way a competitive advantage can be sustained. You have to use talent where you find it. Today software written in India rides the satellite to a building site in Chicago or an accounting firm in New York, or anywhere else in the world. The writer requires no green card, no entrance visa or physical journey to earn his or her money. This phenomenon constitutes a new kind of economic organization and seriously changes the dynamics of how and where people can earn their money. It is possible to have full employment in some remote village even though no businesses are hiring people in that neighborhood, or even in that nation. The new generation coming into the work force is far more comfortable with technology than the current generation--it may be the first time in history that children are authorities on innovation. Indeed some companies have mentoring-up programs where the newly hired are put together with older members of the firm. Most of the experts on personnel policy totally missed this development. Not long ago, books were written about the abundance of leisure time that would soon be available. John Langdon-Davis, a fellow of the Royal Anthropological Institute opined in the 1930's that "By 1960 work will be limited to three hours a day."[5] 

Those of you carrying pagers and cell phones, to say nothing of trying to catch up on your E-mail may wish this prediction had come true. The old newsreels showing the shift changes at some big factory that meant the day's work was over, has now been replaced by flexible hours, telecommuting and work at home. But wherever and under what circumstances you work, life long learning will be the only way to maintain a competitive advantage.

The new information/network economy is in fact a huge shift from the old industrial economy and creates massive opportunities for the agile and the innovative. Like any new thing it also creates perils for those who fail to recognize that the information revolution disperses power from the center to the perimeter, from the old command and control methods of management to decentralization, from the one right way to do things to a process of continuous change and learning. The old economy and its rules were generally framed by the borders of the nation state, while the new economy is intractably global. The old economy had some commodity based currencies, today for the first time in history there are none, and the Information Standard sets the rates. In the old economy there were many scarcities. In the new economy of abundance, the only real scarce resource is attention as the number of choices grow exponentially. In the new economy the Net will assume increasing importance for all business and will cause us to rethink many of the old rules we have become accustomed to.

In all this turmoil, some old rules still apply. Markets go both up and down and human nature remains unchanged. What Adam Smith described as "The natural effort of every individual to better his own condition" motivates the people who drive the new economy just as it did the old. Those who can separate the shadows of yesterday from the reality of today and move rapidly to capitalize on the potential of the new economy will be the winners. And those who are still chasing yesterday will lose.

[1] Kelly, Kevin, New Rules for the New Economy, Viking Penguin, 1998.

[2] See Fine, Charles H., Clock Speed, Perseus Books, 1998.

[3] Rothschild, Michael, Bionomics, Henry Holt, 1990.

[4] Daly, James, Business 2.0, Jan. 99.

[5] Cerf and Navasky, The Experts Speak, Pantheon Books, 1984, p 60.