The new economy. Really.

The term "new economy" usually produces snorts of derision these days. But I believe that is wrong-headed.

Part of the problem is confusion over what the new economy really is. When the savants began talking about it in the 1990s, I could decipher three different implications, two of

The second wrong interpretation was that the new economy meant that there would never again be a recession or any economic pain. Wrong again.

The third meaning was more complex but much more accurate. In this view, which I shared, the adoption of new technologies such as the Internet, globalization, the rise of the service sector and the restructuring of businesses at the grassroots level means the U.S. economy performs differently than it did 50 years ago. In that sense, it is "new." Economic indicators, such as capacity utilization, that were invented when steel was still the dominant industry are no longer very meaningful. This explains why economists get so much so wrong. They're using analytical tools from a different era.

Three stories in this issue illustrate my point. The way that Bob Nardelli is applying technology to The Home Depot (page 30) is revolutionizing how that company operates. The increases in productivity are huge. John Chambers of Cisco Systems points to what's happening at Home Depot as evidence that well-run businesses can keep improving their productivity by 5 to 10 percent a year. Chambers is right that major productivity gains are still occurring. Yet most economists are elueless about that.

Then take a look at what J.T. Battenberg is doing at Delphi Automotive (page 38). He's engaged in a life-or-death battle to transform this troubled bastion of the auto parts industry. He is using innovation and globalization, as well as intelligent bargaining with the United Auto Workers, to alter his cost structure. He is changing the rules for how this part of the economy functions. What is the implication of that for the inflationary pressures that so many economists see hiding under their beds?

Lastly, the discussion that FedEx CEO Fred Smith, our 2004 CEO of the Year, and fellow chief executives had at our recent Accenture roundtable was fascinating (page 54). The ability of U.S. executives to see a new technology and figure out how to apply it in the marketplace is extraordinary.

We shouldn't be Pollyanna-ish about this new economy, of course. In some ways, it is more vulnerable to psychological shocks than the older version precisely because it is all linked together in real time. And we know that the gains it generates are not as evenly distributed as we might like. But the sooner we get over the fashion of sneering at the "new economy" and start trying to understand how the economy continues to change, the better off we all will be. I'd be interested in your views. I'm at bholstein@chiefexecutive.net.

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