Puzzles Of The 'New Economy'

It was an interesting week for the "new economy." On Monday, federal Judge Thomas Penfield Jackson declared that Microsoft had violated the antitrust laws by engaging in predatory tactics that discouraged technological competition. On Wednesday, the White House staged a conference that credited the New Economy's technological advances for raising living standards and, possibly, weakening the business cycle. For much of the week, stocks fluctuated erratically. There are connections and contradictions here that beg to be explored.

Among the invited panelists at the White House conference was Microsoft chairman Bill Gates. Presumably, he was not included because he is a corporate thug which is--by inference--how Judge Jackson depicted him. What are we to think of Gates? A larger contradiction looms. If Microsoft is such an anticompetitive monster, how has the New Economy become (at least by reputation) so competitive that it raises efficiency and lowers inflation?

In a new report from the Federal Reserve Bank of Dallas, W. Michael Cox and Richard Alm document the computer convulsion. Between 1990 and 1999, here's what happened:

Because Microsoft's operating systems (mainly Windows and its offspring) control roughly 90 percent of personal computers, it's hard to separate the company from this larger transformation. Microsoft's central contribution was (and is) standardization. This meant that applications programs--from spreadsheets to photo processing--didn't have to be written for multitudes of operating systems. Software markets expanded, so writing programs became more profitable. Computer networks could be more easily constructed. People who learned computer skills at one company wouldn't lose them by moving elsewhere.

Just how much the computer explosion depended on standardization is hard to say. But the value must be sizable. Otherwise, "Wintel" (Windows and Intel chips) computers would not have become so dominant. Even Judge Jackson doesn't argue that Microsoft illegally acquired its virtual monopoly of PC operating systems.

The real question posed by the Microsoft case is whether antitrust laws can cope with technological competition. When Congress passed the Sherman Antitrust Act--the law under which Microsoft was convicted--in 1890, the evils of monopoly power seemed obvious. A monopolist might restrict supply and prop up prices. Competitors might conspire to do the same thing. Competition meant price competition; the antitrust laws aimed to preserve it.

But today's most significant competition doesn't involve identical products sparring over price. It involves rival technologies struggling for superiority. Cable TV competes against satellite TV. Wireless communication competes with land lines. The Linux operating system is beginning to challenge Windows. For most technologies, standards are vital. Without them, mass markets are impossible. Sometimes standards arise by voluntary agreements among firms; sometimes they result from the triumph of one or a few firms. The check on this dominance--if there is a check--is the threat of a new technology.

Judge Jackson's "findings of fact" (issued in November) and "conclusions of law" (issued last week) total almost 75,000 words. Nowhere are these issues explicitly discussed. Nor does Jackson find that Microsoft's market power raised software prices to consumers. In a recent book, economists Stanley Leibowitz of the University of Texas at Dallas and Stephen Margolis of North Carolina State University present powerful evidence that Microsoft lowered prices. (The book--"Winners, Losers & Microsoft"--examines the nature of technological competition.)

What Jackson found is that Microsoft used strong-arm tactics to promote its Explorer Internet browser over rival Netscape. True. Personal-computer manufacturers--dependent on Microsoft for software--were forced to favor Explorer over Netscape. But Jackson doesn't find that today's Explorer is inferior to Netscape or that the Internet's growth suffered. As yet, it isn't clear that Microsoft has monopolized the browser market. By one survey, Netscape--now owned by America Online--still has 29 percent of the market. It just announced a new version. Microsoft has also lagged in providing software to wireless devices to connect with the Internet.

Jackson's decision seems divorced from any common-sense concept of the public interest. By and large, Americans are mystified. In one poll last week, 67 percent of respondents thought Microsoft had been "good" for consumers; only 8 percent thought it had been "bad." Just whether--or how--the antitrust laws might be refashioned to fit technological competition was a fit subject for last week's White House conference. Of course, the topic wasn't included, because the conference wasn't intended to explore anything controversial about the New Economy. The conference was a media event.

It is hard to be shocked. On the other hand, the celebratory tone itself contains a message. What is the New Economy? It mainly seems to be a state of mind: a conviction that, through the marvels of technology, the economy has entered permanent bliss. There is all promise and no peril. This superconfidence has itself altered the economy's behavior, causing a stock-market boom and a consumer spending spree. The future seems to be so bright that people have less reason to be fearful or perhaps even prudent. The stock market's rebound last week reflected this confidence.

But here also lies vulnerability. If anything shakes the superconfidence, what went up--stocks, retail sales--could go down. Then the New Economy might look like the Old.