The New Economy Business Model and the Crisis of U.S. Capitalism

Driven by industrial innovation, in the last half of the 20th century the population of the United States attained, on average, a very high standard of living. Yet, in the first decade of the 21st century, large numbers of Americans are economically insecure. In this paper, I summarize the findings of my research into the ways in which over the past three decades the transformation of the dominant business model that prevails in the information and communication technology industries has contributed to the rise of economic insecurity in the United States. I describe how the Old Economy business model (OEBM) that was in place in the immediate post-World War II decades gave way to the New Economy business model (NEBM) that is now ubiquitous in U.S. high-tech industry. Under OEBM, an employee could hold the realistic expectation of a career with one company. Under NEBM, career employment depends much more on interfirm labor mobility, which in and of itself makes continuous employment less certain. Nevertheless, in the ICT industries, NEBM has been an engine of economic growth so that a strong demand for high-tech labor can potentially offset a lack of employment security with one company. Since the early 199'0s, however, this demand for high-tech labor has tended to be a demand for qualified lower-wage labor, which has meant that ICT companies have favored the employment of younger workers over older workers and of workers in developing nations over workers in the United States. At the same time, acting as both a motive for employing lower-wage labor and as a rationale for laying off experienced workers has been the adherence of U.S. corporate executives to the ideology that their companies should be run to “maximize shareholder value." The most important manifestation of the influence of this ideology on corporate resource allocation is the extent to which U.S. companies repurchase their own stock to support their stock prices. I conclude this essay by arguing that neither the ideology of maximizing shareholder value nor the practice of stock repurchases has any economic merit. Indeed both must bear the blame for contributing to the rise of economic insecurity in the United States.Comments on this paper can be found at: "http://ssrn.com/abstract=2209401" http://ssrn.com/abstract=2209401