The New Economy Creed: A Case of Thought Contagion

Abstract

This paper looks at recent market-related events and the contention, gradually gaining credence in business circles, that we have entered an age of a New Economy. According to the New Economy view, the present upswing in the stock market will, at least in the U.S., last over the long run. This is an important issue on which hinge many important public and private decisions. Yet only special interest groups investigate it.

We attempt to take a dispassionate look at the New Economy thesis, so as to provide an explanation for some of the strange phenomena associated with this decade's fixation on the stock market and financial rationality. We analyse the paradox of the belief in a one-way swing of the economic pendulum in terms of market fundamentals as well as investor sentiment, or potential irrationality. Our analysis confirms the early insights of Keynes and more recent views of Black. We conclude by formulating a few caveats for the true believers of this emerging "New Economy creed" as well as for its cynical detractors.