Sustainable Prosperity in the New Economy?: Business Organization and High-Tech Unemployment in the United States (review)

Innovation, as Joseph Schumpeter reminded us, occurs through a process of creative destruction. The outstanding question for Schumpeter was whether intellectuals would dismantle the engines of innovation to ease the pain of the mass of industrial citizens and workers who endure the brunt of creative destruction. In the United States, mainstream intellectuals retained faith in "market forces" and experimented with modest regulatory reforms to preserve innovation while, where possible, mitigating its destructive effects. This stance has indeed fostered innovation, demonstrated most clearly by the rise of the "new economy" built on advances in information and communication technologies (ICTs) in Silicon Valley and elsewhere. However, Americans are increasingly unable to reconcile innovation and equity—witness the simultaneous rise of the stock market and the unemployment rate as the American economy "recovers" from recession.

William Lazonick's excellent book reflects on this state of affairs and presents ideas that, he hopes, can generate more equitable and stable growth in the American economy—"sustainable prosperity" in his appealing title phrase. For Lazonick, persistent inequity and instability suggest that the American economy is on an unsustainable trajectory. A major problem, he argues, is a corporate governance ideology that drives companies to maximize shareholder value at the expense of investing in their chief drivers of innovation—their labor force. The problem is simultaneously moral and economic: moral to the extent that American workers increasingly face uncertain employment and retirement prospects and economic because new economy firms allocate resources toward stock prices, thus undermining their capacity to remain innovative.

Sustainable Prosperity begins with an account of the changing conditions that high-tech labor endured in the transition from the "old economy" to the "new economy." The old economy business model, visible in high-tech firms such as IBM, HP, and Lucent from the 1950s to the 1990s, relied on a labor force that was dominated by "organization men." White, middle-class professional men could expect to work up the corporate hierarchy over decades of employment and eventually retire with a substantial pension and low-cost medical coverage.

Beginning in Silicon Valley in the 1960s, firms experimenting with the new economy business model drove innovation in ICTs and transformed the infrastructure of the global economy. By the 1980s and 1990s, new economy firms such as Intel, Microsoft, Sun Microsystems, Cisco, and Oracle had abandoned old economy commitments to "provide their employees with stable employment, skill formation, and rewarding careers" (p. 3). Instead, advocates of the new economy business model used stock options to attract and retain employees, looked abroad for high-skilled low-wage labor, and embraced interfirm labor mobility. Old economy firms, struggling to adjust to the new economy business model, followed suit: the "HP way" and the expectation of lifelong employment at IBM faded away. Many workers in the late 1990s got rich from their stock options, but Lazonick sees subsequent volatility in the stock market and increasing unemployment as reasons to lament the passing of employment and pension stability in the old economy business model.

Lazonick's account of the shift from the old economy to the new economy fits well with histories of globalization, technological change, and business organization by scholars such as Manuel Castells, Louis Galambos, and Richard Langlois. But Lazonick does not pursue opportunities to synthesize his narrative with theirs; instead, he maintains a sharp focus on the neglected aspects of high-tech labor. For example, many authors have noted the shift away from proprietary technologies developed inside firms (such as IBM) and toward "open systems" based on strategic alliances and industry standards. Lazonick notices what the others do not: open systems increase the value of employees with experience in other firms and decrease the value of employees who developed sophisticated capabilities around proprietary technology. As...