Commentary: You've Got The New Economy All Wrong, Mr. Gerstner

Turnabout is fair play. During the soaring years of the Internet IPO boom, it was fashionable among the digerati to dismiss large companies such as IBM as dinosaurs, ill suited for the Internet Age. So in the wake of the dot-com meltdown, it's only natural that IBM CEO Louis V. Gerstner Jr. would indulge in a few shots of his own. "The startups were fireflies before the storm," he told attendees at IBM's analyst meeting on Nov. 8. In his words, the new companies are now "dot-toast."

Fair enough. But Gerstner went further, taking to task the whole notion of the New Economy. "Despite the hype of the media, there is no New Economy," he said. "The Internet is not about the creation of new industries and new institutions." The real story, he says, is the way established institutions and companies can use the new technology to transform themselves in pursuit of competitive advantage. Observed Gerstner: "The wars haven't changed, it's just that somebody has invented gunpowder."

REBUILDING. But Gerstner misses the point about the New Economy. For one, the spread of new technology to existing companies, rather than being antithetical to the New Economy as Gerstner seems to believe, is central to it. A key characteristic of the New Economy, as BUSINESS WEEK has used the term, is an accelerated rate of productivity growth--and that wouldn't be possible unless companies large and small across the country were using information technology to cut costs, increase output, and generally rebuild the way they are doing business. So in fact, IBM's customers--many of them the established companies Gerstner refers to--epitomize the New Economy.

And Gerstner glosses over another key factor. The New Economy is not just about technological innovation--it's about financial innovation as well. In particular, the easy availability of venture capital and IPO financing--something no other country has--greatly accelerated the speed at which new technology leapt from the drawing board into the marketplace. Indeed, the Internet revolution would have proceeded far more slowly if it had been led by IBM and AT&T rather than Amazon, Cisco, and Netscape, all venture-funded.

Certainly, too many outrageous claims were made by dot-com proponents. And there's no doubt that the New Economy can still have recessions, just as the Old Economy did.

But just as the widespread use of gunpowder weapons in the 15th century fundamentally altered the nature of warfare and the balance of power, the combination of financial and technological innovation has dramatically altered the competitive landscape. The past decade has brought an astonishing number of new players on the scene. And Gerstner fails to note that one reason large companies jumped so quickly into e-business is that they were scared of losing business to nimbler competitors.

There is no doubt that Gerstner is right in one sense: IBM and its large customers, rather than becoming extinct, are crucial to future economic growth. But that's no reason to rewrite history. The New Economy is reality, not hype.

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