in a state of flux - - in almost all cases evolving into more efficient regimes. the capital stock - - the plant and equipment that facilitates our production of goods and services - - can be viewed, with only a little exaggeration, as continuously being torn down and rebuilt. our capital stock and the level of skills of our workforce are effectively being upgraded as competition presses business managements to find increasingly innovative and efficient ways to meet the ever - rising demands of consumers for quantity, quality, and variety. supply and demand have been interacting over the generations in a competitive environment to propel standards of living higher. indeed, this is the process that, in fits and starts, has characterized our and other market economies since the beginning of the industrial revolution. earlier, standards of living barely changed from one generation to the next. this is the tautological sense in which every evolving market economy, our own included, is always, in some sense, “ new ”, as we struggle to increase standards of living. in the early part of the 19th century, the united states, as a developing country, borrowed much technology and savings from europe to get a toehold on the growth ladder. but over the past century, america has moved to the cutting edge of technology. there is no question that events are continually altering the shape and nature of our economic processes, especially the extent to which technological breakthroughs have advanced and perhaps, most recently, even accelerated the pace of conceptualization of our gross domestic product. we have dramatically reduced the size of our radios, for example, by substituting transistors for vacuum tubes. thin fiber - optic cable has replaced huge tonnages of copper wire. new architectural, engineering, and materials technologies have enabled the construction of buildings enclosing the same space but with far less physical material than was required, say, 50 or 100 years ago. most recently, mobile phones have been markedly downsized as they have been improved. as a consequence, the physical weight of our gdp is growing only very gradually. the exploitation of new concepts accounts for virtually all of the inflation - adjusted growth in output. the cause of this dramatic shift toward product downsizing during the past half century can only be surmised. perhaps the physical limitations of accumulating goods and moving them in an ever more crowded geographical environment resulted in cost pressures to economize on size and space. similarly, perhaps it was the prospect of increasing costs of processing ever larger quantities of physical resources that shifted

mr. greenspan considers whether there has been a profound and fundamental alteration in the way the economy works in the united states remarks by the chairman of the board of governors of the us federal reserve system, mr. alan greenspan, at the haas annual business faculty research dialogue, university of california, berkeley, california on 4 / 9 / 98. question : is there a new economy? the question posed for this lecture of whether there is a new economy reaches beyond the obvious : our economy, of course, is changing everyday, and in that sense it is always “ new ”. the deeper question is whether there has been a profound and fundamental alteration in the way our economy works that creates discontinuity from the past and promises a significantly higher path of growth than we have experienced in recent decades. the question has arisen because the economic performance of the united states in the past five years has in certain respects been unprecedented. contrary to conventional wisdom and the detailed historic economic modelling on which it is based, it is most unusual for inflation to be falling this far into a business expansion. many of the imbalances observed during the few times in the past that a business expansion has lasted more than seven years are largely absent today. to be sure, labor markets are unusually tight, and we should remain concerned that pressures in these markets could spill over to costs and prices. but, to date, they have not. moreover, it is just not credible that the united states can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress. developments overseas have contributed to holding down prices and aggregate demand in the united states in the face of strong domestic spending. as dislocations abroad mount, feeding back on our financial markets, restraint is likely to intensify. in the spring and early summer, the federal open market committee was concerned that a rise in inflation was the primary threat to the continued expansion of the economy. by the time of the committee ’ s august meeting, the risks had become balanced, and the committee will need to consider carefully the potential ramifications of ongoing developments since that meeting. some of those who advocate a “ new economy ” attribute it generally to technological innovations and breakthroughs in globalization that raise productivity and proffer new capacity on demand and that have, accordingly, removed pricing power from the world ’ s producers on a more lasting basis. there is, clearly, an element of truth in this proposition. in the united states, for example, a technological