The new economy - does it work today?

Abstract

The United States. Japan. Italy. Ireland. The list goes on, but these countries, and more, have experienced a very significant and known phenomenon. It has been termed as the zero lower-bound of interest rates. And yet, some of these companies have, in the past, seen some of the most innovative moves in making industry more efficient, and entering new markets. These innovations have made changes that are seen the world over, having a global impact on prices and industry dynamics. In the late 1990s, Prof. William Sahlman, a professor of Harvard Business School, wrote an article in the Harvard Business Review titled “The New Economy is Stronger than you think”. This article went on to claim that the economy can handle inflationary pressure on its own, as long as governments and the Fed stays out of interfering with the economy. This raises its own questions. The professor claims that the economy is self correcting with respect to inflation, because of a tendency to move towards efficiency, driven by newer enterprises and business models. At the same time, he claims that the biggest risk to this endeavour is a Central Bank increasing interest rates, which is, prima facie, highly counterintuitive. I attempt to break down this argument, and address it in a modern context. This article aims to analyse Professor Sahlman’s logical steps, and examine the jumps in logic. I also attempt to reason what happens in a situation where the interest rates are so low - the zero lower bound as it is termed - that the Central Bank’s motivations change.