SYNOPSIS: Describes the defining features and new problems of the New Economy

Last week George W. Bush accused Al Gore of "analog thinking in a digital age." It's a terrific line; my compliments to whoever wrote it. It's also a bit unfair.

True, Mr. Gore didn't invent the Internet — but then, he never said he had. What he did say was, "During my service in the United States Congress, I took the initiative in creating the Internet." That was a deeply unfortunate sentence — but what makes it so unfortunate is that now it is impossible for Mr. Gore to get the credit he actually deserves. Declan McCullagh, the Wired writer who first played up Mr. Gore's remark, puts it this way: the vice president "was one of the first politicians to realize that those bearded, bespectacled researchers were busy crafting something that could, just maybe, become pretty important."

For what it's worth, tech-sector C.E.O.'s seem to be divided about evenly between Messrs. Gore and Bush. That is a sharp contrast with C.E.O.'s at large, who overwhelmingly favor Mr. Bush — a preference cynics might attribute to the large personal gains that people with seven- or eight-figure incomes would receive from that tax cut.

Still, Mr. Bush is right: Mr. Gore doesn't know how to manage the new economy. But then neither does Mr. Bush. And neither does anyone else.

The big difference between the new economy and the old is the changed nature of investment. In the past, businesses primarily invested in the tangible means of production, things like buildings and machines. The value of a company was at least somewhat related to the value of its physical capital; to grow bigger, a business had to build new factories roughly in proportion to the increase in its sales. But now businesses increasingly invest in intangibles. And once you've designed a chip, or written the code for a new operating system, no further investment is

needed to ship the product to yet another customer. One consequence of the changed nature of investment is a strong tendency for markets to develop into temporary monopolies. Why monopolies? Because when the required size of investment doesn't depend on how much you sell, a bigger market share is definitely better. Why temporary? Because sooner or later, and usually sooner, new technology makes your old investment worthless.

The inevitability of monopolies in a knowledge economy — indeed, the hope of achieving such monopolies becomes the main driver of investment — creates new puzzles for antitrust policy. The Microsoft case poses real dilemmas, and it is surely only the first of many.

Meanwhile, the intangibility of a company's most important assets makes it extremely hard to figure out what that company is really worth. That may partly explain the nauseating volatility of stock prices, though it's still hard to believe that enough real news arrives on any given day to justify these 7 percent or 8 percent swings in the Nasdaq.

Michael Mandel, the economics editor at Business Week, argues in his new book "The Coming Internet Depression" that this financial instability is more than speculative froth. He warns of a sort of New Age- economic tailspin in which declining confidence crimps technology investments, which depresses productivity growth, which makes such investments even less profitable, and so on. In principle, he could be right; something like that scenario has been batted around for years by academic economists. (The possibility arises naturally in "endogenous growth theory." Aren't you sorry you asked?)

If Mr. Mandel is right in practice — which I doubt, but who knows? — the next president could face novel economic challenges that defy conventional solutions.

But while I have the horrifying suspicion that Mr. Gore has heard of endogenous growth theory, and would actually enjoy talking about it, this is not what Mr. Bush had in mind. In context, it's pretty clear he meant that Mr. Gore is an old-economy fuddy-duddy because he insists that you can't spend the same money twice — that you can't divert Social Security taxes into individual accounts for young workers and use that same money to pay benefits to their parents.

Well, it's a new economy, but it's not that new. The rules of arithmetic are the same, whether you use a slide rule or a supercomputer.

Originally published in The New York Times, 10.22.00