Finance and The New Economy

The unprecedented rise in the stock market and overall (albeit not universal) prosperity has given rise to widespread usage of the phrase "the New Economy." But just what is the New Economy, and how might it impact corporate finance (and the teaching of same)?

While there is, to my knowledge, no single, universally accepted definition of the phrase, the essence the New Economy is an information- and computer-driven economy in which product-market efficiencies are exploited, competition is heightened because barriers to entry are eliminated, and transactions costs approach zero. (And any company with "dot.com" after its name goes public and makes its founders instantly wealthy.)

The Wall Street Journal of September 16th gives us a fine example of this in the article entitled "Web Sites Made of Steel: Internet Sales Reshape a Smokestack Industry" on pages B1 and B4. I urge you to read (and possibly distribute) this article; the long and short of it is that, in the steel processing where, apparently, inventory overages are bought and reprocessed, tremendous efficiencies are being attained via the use of a website which functions as a central clearinghouse or marketplace, where none existed before. As noted in the article, "In a business that has been notoriously slow to embrace change, the rush into cyberspace has been remarkable. It is also an indication of how the Internet's influence is widening beyond highly visible consumer businesses-Yahoo! Inc., amazon.com, eBay, Inc. and the like, to affect the way the nation's industrial activity is conducted." (emphasis added)

And why is all of this relevant? Several reasons. First, it "explains" (let's be careful here) the continued growth of the economy. Second, it suggests that business (and finance) are continually evolving, and that students had better plan on a program of lifetime learning that doesn't end the day they graduate. Finally, it suggests that "sky-high" share valuations may indeed be rational if we have truly entered a "brave new world" (with apologies to Aldous Huxley). At the very least, this topic should motivate discussion of the way firms will invest and finance businesses in the future.

---

RWJ Teaching Tips Archives

Adopter Resource Page

home