The Entrepreneurial Future

...In "Silicon V a l l e y " - - already the home of hundreds of new companies--more than a hundred new firms emerged in 1979 alone, and the pace of new business formations continued to accelerate into the eighties...

...These firms require about half as much capital formation per worker as heavy industries like autos and steel...

...its achievements were almost entirely based on the state of the art ten years before...

...In such systems, it is very difficult to define where AT&T's regula'ted telecommunications monopoly ends and data processing activity begins...

...At the very pinnacle of productivity, they had lost all room to maneuver...

...As Warren Brookes has pointed out, their essential resource is ideas and men...

...Governments very rarely launch innovations...

...Yet the needed hundreds, and thousands, of smaller firms did indeed emerge and rise up...

...Government laboratories have for many years been the most sterile part of the American scientific establishment, often more obstructive than creative of new technology...

...But it largely missed out on the most important development in its field...

...Driven by the imperatives of modern science and the growing scarcity and pollution of natural resources, capitalism is seen to be entering a new, "mature" phase...

...Not only did it challenge the dominance of Xerox in the copying business and compete resourcefully against a series of state monopolies in nations around the world, but IBM has moved rapidly into the field of satellite networks and is now embroiled in a fierce rivalry with American Telephone and Telegraph in the realm of long-distance communications...

...In conjunction with other advances it is already transforming the world of work and forging at last the longp r e d i c t e d age of computers, just as the steam engine and the railroads inaugurated the industrial age...

...It creates radical new capabilities applicable in all industries, including its own, making possible a vast diffusion of applied knowledge and technical logic...

...But if one is to traffic as an expert on technology and the economy, one must come to terms with the silicon chip...

...Galbraith is also right that this sector of business, bestriding world markets and increasingly facing the subsidized competition of government firms abroad, is extraordinarily efficient and should not be broken up by the sweeping enforcement of antitrust laws against bigness itself...

...Its applications will transpire in a complex interplay with other new or now undiscovered technologies, in ways that remain unfathomable...

...All these creative activities embody the same girl and genius of capitalism that was exhibited by the murals in primitive tribes...

...Even the space program failed to invent any new technology...

...But by 1962 there were already scores of companies making semiconductor products and hundreds of patents had been awarded...

...and it faces a continuing siege of trenchant competition from firms as small as Cray Research, which dominates the field of high-potency scientific computers, as large as Exxon, which has entered the fray in business machines through its subsidiary, Vydec, and as dynamic as Wang Labs and Digital Equipment, which already lead IBM in several areas of office apparatus and are advancing into others from their headquarters near Boston's Route 128...

...There is substantial-evidence, moreover, that the microcomputer industry is not a special case, an exception to the essential modern rule of bigness and bureaucracy...

...economy moved into the 1980s--with portents and predictions of (loom abounding in the world of the dominant firms and government bureaucracies--the smaller companies and their followers were issuing a defiant claim that the future can be mastered...

...The futuristic thesis of The New Industm'al State is actually founded on Ford Motor Company's nearly last gasp with a gas-guzzling car, the Mustang, at a time when automotive markets wet'e about to turn swiftly toward smaller and more efficient vehicles...

...But the theory springs from an error so simple and familiar that any schoolboy should be able to avoid it...

...It is small and high-technology businesses, not firms like Chrysler, that generate most of the employment in America...

...just as IBM lagged behind other companies in adopting most major innovations in business machines, from copiers to word processors...

...The entire history of econonaic progress a t t e s t s to the fact that productivity simultaneously frees and empowers individuals and multiplies jobs and professions...

...The Value Line Composite Index of some 1,675 stocks returned to its highs of the early 1970s, rising some 140 percent since 1974 and decidedly exceeding the rate of inflation...

...It effects a simultaneous animation and miniaturization of machines, making them cheaper, more portable, tlexible, adaptable, powerful...

...If they had been right in their theory of the bureaucratization of invention and enterprise, the computer revolution presumably would have been launched by the leading computer company, imperial IBM, or at least by one of the leading computer companies, probably in teague with government...

...the traders in England and Holland, who elaborated a world market...

...But the potentialities of invention and enterprise are now greater than ever before in human history...

...This fabulous breakthrough is of little interest to most American liberals, however, except as an occasion for dolorous and surely false reflections on the computer's threat to individuality or for equally unfounded alarms about automation as a cause of unemployment...

...Barry Commoner, who cannot imagine anything good without the hand of government, has theorized that this industry was made possible in 1962 by large government purchases of integrated circuits (advanced transistors...

...In any economy, only a relatively small number of large companies ever arrive at this final phase, looming over the national and world economies...

...A further danger is that the great publicity that always attends a battle of the titans will lead a new generation to accept the prevailing illusion that huge corporations form the cutting edge of most new technologies...

...The 1978 cut in capital-gains taxes, engineered by the late Congressman William Steiger of Wisconsin, has prompted a new surge in venture capital...

...10 THE AMERICAN SPECTATOR DECEMBER 1980 Meanwhile, between 1969 and 1976 smaller firms created 7.4 million new jobs, nearly four times as many as the government...

...All this is not to deny that companies Ilk6 IBM play an absolutely vital role in both the national and world economies...

...One can only point to the manifest powers and potentialities of a new development...

...The very process of rationalization and bureaucracy by which a company becomes the most productive in an industry tends to render it less flexible and inventive...

...Klein shows that this pattern of leadership lag applied, in varying degrees, to all 50 of the key twentieth-century breakthroughs he studied...

...equities, rose in tandem with the Dow between 1974 and 1977 and then kept going up, even in real terms, while the Dow plunged...

...In 1962 the government somewhat accelerated semiconductor advances by buying a militarily useful product created by the private sector...

...In this phase, so it is said, innovation and growth can be elicited only by large bureaucracies: corporations and government bodies, in various licentious but fruitful combinations, which leave no room for the individual inventors and investors of the past...

...As the 1980s began, with the bailout of Chrysler and the imposition of new taxes on .energy, the politicians were suggesting that they could not trust anything they could not predict and control...

...The failure of the Left is quite underTHE AMERICAN SPECTATOR DECEMBER 1980 9 standable, though, for this development casts the gravest doubt on their predictions for the economy...

...But whether they can fulfill their promise to relieve our current problems in time depends largely on politics--on whether the dominant powers will allow the future to prevail, whether the politicians can comprehend the value of free men and free wealth...

...Communications satellites aside, there is qo evidence that technological development has fundamentally changed to favor large firms...

...These were the boffins, the callow geniuses of the semiconductor and microprocessor revolution, turning the world's most common matter, the substance of sand, into an incomparable resource o; mind: A silicon chip the size of a fly, with computing powers thousands of times greater than a million monks adding and subtracting for millenn i a - a n infinitesimal marvel that extends the reach of the human brain incomparably further than oil, steel, and machines had multiplied man's muscle in the industrial age...

...Finally, THE AMERICAN SPECTATOR DECEMBER 1980 7 they reach a stage of routinized mass production...

...Just as none of the carriage makers and buggy whip producers could create a salable automobile and the gaslight and candle businesses neglected the promise of electricity...

...Instead of meeting the new requirements by developing new and better engines, the U.S...

...Even when a breakthrough is made at a large corporation (such as the transistor or photovoltaic solar cells invented at Bell Labs), the new item is usually launched commercially by smaller businesses, often starred by breakaway teams of engineers and managers from the parent firm...

...They pay little attention to the revolutionary developments in microbiology, the breakthroughs in the production of glass products, the innovations in copying, printing, and photography...

...Like these key technologies, the microprocessor does not operate within the confines of the existing industrial structure, but makes possible a new one...

...The crucial aspects of big companies are not quantitative but qualitative: the nature of the product and the mode of manufacture and marketing...

...it takes hundreds of small stocks to counteract a downward plunge by Exxon or IBM...

...The big opportunity for a new breakthrough that arose in 1974 was not the Mustang, but the possibility of finding new ways to satisfy environmental standards...

...And for all the Mustang's sales success, it hardly foreshadows the future of the economy...

...The prophets of" socialism are making static observations of dynamic phenomena At ar:y rime in the history of a reasonabh' mature economy, the largest businesses will tend to bc the most ef'ficicnt...

...The question, as the eighties began, was whether these possibilities would be fulfilled in the United States and assure U.S...

...Indeed, the microcomputer may have exceeded previous breakthroughs in the number of small companies that contributed to it and the intensity of competition that continues among them in exploiting its new applications...

...leadership in the world economy or move to other countries in Europe and Asia...

...Most of the attention of press and public was focused on the continuing saga of a declining average of Dow Jones Industrials--thirty huge companies, led by General Motors and AT&T, whose equity value has collectively plummeted in real terms since the late 1960s and rose a nominal 4 percent in 1979...

...just as new companies arose to dominate each of the new phases of aircraft 8 THE AMERICAN SPECTATOR DECEMBER 1980 and air-engine development...

...That's how they became large...

...Many economists welcome this development as both inevitable and good, subjecting the immense productivity of the t e c h n o s t r u c t u r e to social control and making possible the emergence of a less wasteful and anarchic system...

...The prophets of a transition to socialism almost always seek the future by peering resolutely at the obsolescent...

...During 1979 the Wilshire Index rose 20 percent, to 1,056, higher than it was in 1973 when the Dow reached its all-time high...

...There is no way to fathom the full potential of this technology, now in its Promethean infancy...

...Rcading the industrial analysis of the [.eft, in fact, one might believe that miners, migrant workers, and assembly line laborers in textiles and steel were the exemplary figures in the future economy of capitalism...

...This essay is adapted from Wealth and Poverty, to be published in January by Basic Books...

...IBM is indeed the world's most resourceful and creative big company...

...There is no evidence that the large companies are squeezing out small entrepreneurs...

...Government tax policies have done their best to deter innovation and promote mergers, creating a capital blight in which smaller companies that were attempting to expand suffered most throughout the 1970s...

...At the same time, IBM's old-line rivals in selling large mainframes'Control Data, Burroughs, NCR, Sperry Rand, and Honeywell --show few signs of fading away, and they have been joined by new ventures, however embattled, like Amdahl and tin)' Cambex...

...Even unincorporated businesses have experienced greater gains in asset value during this period than have the leviathans...

...In analyzing t h e nature of modern technological progress, for example, they tend to neglect the most dynamic industries...

...Many of these industries need a favorable regulatory climate, managed by men who are capable of comprehending the promise and complexity of modern science...

...Many of them are now experiencing a new lease on life in the international realm...

...Reports to the contrary chiefly reflect the growing foreign assets of these'companies as they struggle with subsidized national corporations in the ever more competitive world arena...

...debatable, television, for example, the chip does not simply improve an existing capability or create a self-limiting industry...

...rate and making vast investments in microelectronics and other research and development...

...To fight inflation, they offered products with declining real costs...

...The fabled entrepreneurs, cranky financiers, and small-scale inventors of early capitalism are regarded as a dying breed, unimportant in the new world economy, the new industrial state...

...The microbiologists are creating new organisms that may produce insulin, interferon, and hormones, clean up oil spills, and manufacture alcohol or other energy products, among many other possibilities...

...The microprocessor shares an explosive logic with certain crucial technologies of the past, those transforming inventions-the printing press, the clipper ship, the steam engine, the electric generator, the railroad, the automobile, and the telep h o n e - t h a t transfigure an economy and extend the dimensions of the world...

...In general, big companies have attained, in the jargon, a position near the top of their Kuznets curves: a place on the slowly rising upward slopes that follow the steep ascent of creative development in the slanted " s " ( ~ ) of business evolution...

...To protect the environment, they produced items that neither pollute nor employ scarce material resources...

...Needless to say, material gains do not assure moral, spiritual, or aesthetic values or otherwise relieve the deeper predicaments of man...

...Anyone who predicts the technological future is sure soon to seem fooli~sh...

...The Left is also misled in the assumption that the largest companies'are increasing their dominance of the economy...

...Most critics of capitalism now accept the crucial role of e n t r e p r e n e u r s in the earlier stages of the system...

...They are efficient now only because they were dynamically inefficient and competitively aggressive during their earlier phases...

...The emergence of laser science, new diagnostic devices, and antiviral pharmacology plays no significant part in their theories...

...7] THE AMERICAN SPECTATOR DECEMBER 1980 1...

...The auto companies had devoted themselves for so long to running the perfect industrial system for building and marketing a specific kind of automobile, based on internal combustion, that they were incapable of adapting to change...

...During the past decade, businesses on Fortune's list of the one thousand largest companies have experienced virtually no job growth at all and have undergone a 26 percent decline in the real value of their equity...

...They benefit from economies of scale and spccializati,m...

...Most European countries were also exceeding the United States in both savings and research and development...

...This company contrived the microprocessor just three years after it was formed with a staff of twelve, including the directors, Robert Noyce and Gordon Moore, and the inventor, E.H...

...Hoff...

...Such entrepreneurs are fighting America's only serious war against poverty...

...Invariably they dominate their fields, which tend to be old markets for relatively routine products...

...The largest index of all, published by the Wilshire Associates of Santa Monica, and covering nearly the entire universe of U.S...

...Japan, once far behind in the microcomputer field, was saving at a pace almost six times the U.S...

...Their great efficiency derives from many years of making the same thing and incrementally improving it and perfecting the means of producing and selling it...

...It may be that this decision was inevitable...

...To conserve energy, they offered products that use scant fuel either in manufacture or operation, but which yield great energy savings and efficiencies for the entire economy...

...Galbraith, Schumpeter, and theirmany followers among world economists have mistakenly believed that the technostructure would inevitably expand its sway over the economy and be assimilated by government in a socialist future...

...That is like supposing that the crucial fact about professional football teams is huge stadiums filled with people yelling and drinking beer...

...It springs from human creativity and thus inevitably consists of surprise...

...A study for the Commerce Department showed that "young high-technology companies" have been growing in employment at a rate of 40 percent annually, about 13 times faster than "mature firms...

...As Forbes magazine has observed, "[M]ore than the Anti-Trust Division of the Justice Department, it is IBM that breaks up existing: monopolies...

...not only a result of technical progress, with multifarious industrial and commercial uses, but also a uniquely fertile source of further progress in every field, from astrophysics to medicine, if not perhaps in economics...

...In these " t e l e t e x t " systems of "distributed processing," computer terminals can be installed either in the familiar telephone, enlarged in power and versatility though not necessarily in size, or in the ubiquitous television set, amplified by printing and data processing equipment...

...The number of annual small business starts has increased from 93,000 to 450,000 since 1950, without any long-run rise in the proportion of failures...

...just as Kodak failed to pioneer the instant camera and the slide rule people at Keuffel and Esser succumbed without response to the handheld calculator...

...Such a prediction has been made by some eminent pundit every five years or so ever since the Industrial Revolution...

...Large firms were needed in certain applications of old technology, too, particularly in transport and communications...

...Both new technologies are still chiefly in the hands of scores of young scientists and entrepreneurs, pioneering in the classic way of capitalism, as Schumpeter celebrated it in his earlier works and even nostalgically described it in retrospective pages of Capitalism, Socialism, and Democracy...

...If small is beautiful, that mandate is fulfilled not chiefly in windmills and solar cells, but in Calif o r n i a ' s vale of cubistic new factories across the bay from San Francisco--Santa Clara's Silicon Valley where worlds indeed unfi~ld in grains of sand...

...Eord's laborious adjustments in its plant are relevant only as an essay on the sclerosis and stagnation of huge corporations...

...The chief danger in the confrontation between the two giants is not that either will establish a monopoly in office communications, but that the Federal Communications Commission will succeed in extending its regulatory mortmain to IBM and hence to the tempestuously competitive field of business "informatics...

...These firms have found such efficient ways to make their product that few competitors can arise...

...Modern corporations do have some sway over t h e i r own demands, are at least partly capable of fixing prices, and to some degree do give rise to countervailing powers and compleGeorge Gilder is the author o f Sexual Suicide and Visible Man, among other works...

...Yet the United States was taxing and harassing successful businesses more than any other capitalist, country, regulating them as if they were dangerous conspirators against the public interest, and requiring new firms to offer impossible proof that their products cannot be abused...

...Thus they predict that the planning sector will eventually dominate the entire economy and merge with government in a socialist state...

...These analysts see that the large torporations of "the planning sector" tend to be more efficient and productive than the small ones of "the market sector...

...Successful firms typically start slowly as they make t h e i r initial investments in a new product, then enter a period of very rapid growth as markets are developed and productive methods are perfected...

...George Gilder THE ENTREPRENEURIAL FUTURE From Silicon Valley to tiny Cambex...

...But the industry was already irrepressibly on its way, in the same multifarious and highly competitive form that attended the early stages of the automobile industry before its thousands of machine shops were consolidated and the big three emerged to administer its less dynamic phases...

...To increase productivity, they presented devices that vastly magnify the efficiency of men and machines...

...and as even Texas Instruments finally became relatively rigid and uncreative in their microprocessor field, Ford and General Motors, whatever their marketing ability, could not be expected to jeopardize their established plant and .equipment by radical changes in technology until other companies had proved them out...

...Unlike nuclear energy or jet propulsion or...

...In their view, however, the nations of the West are now undergoing a vast and irreversible historic change...

...Burton Klein's brilliant book, Dynamic Economics, maintains that new developments almost never emerge from the leading companies in an industry...

...Indeed, it was a motorcycle company, Honda, that first created a car that could meet emission standards without a catalytic converter...

...As a result, the Japanese were moving toward the lead in microprocessor memories and Europe was making rapid gains in pharmacology and nuclear power, while the United States squandered resources on failing auto companies and worried about windfall profits in the increasingly capital-hungry oil industry, a supreme national asset in an era of energy shortages...

...venturers of the Industrial Revolution, who reshaped the possibilities of mankind...

...big three, under the shortsighted prodding of the Environmental Protection Agency, adopted the catalytic converter, which reduces some pollutants without requiring significant change in the engine itself...

...It is possible to disparage this development and to deride its enthusiasts, to point to the inevitable problems and to fantasize chimerical threats of "dehumanizing" machines and Frankensteinian robots...

...Recent decades have seen a boom in entrepreneurship in America, with new businesses accounting for the vast majority of new jobs during that period...

...Galbraith is right, for example, on the existence of a large commercial technos t r u c t u r e , somewhat divorced from the direct control of its owners...

...Lasers are already useful in many ways, from new-fangled light shows, to construction measurement, and conceivably fusion energy...

...Such companies have become highly rigid and specialized, and in static terms, greatly productive...

...But meanwhile the smaller stocks, though scarcely running wild, rallied steadily since the crash of 1974...

...On the heels of the microprocessor are coming two other new technologies, in lasers and microbiology...

...Instead the revolution was started by a second-rank camera firm, Fairchild, was developed by scores of new businesses led by strikingly unwithered and untsureaucrauzed entrepreneurs, and achieved its crucial breakthrough in 1971 at a tiny firm, Intel...

...Some of the most creative industries, from semiconductor products to communications satellites, generate huge needs foi" capital, and no major capitalist country was creating savings so slowly and wasting them so wantonly as the United States...

...These new firms will inevitably triumph in the tong run...

...Perhaps the best reason for confidence in the future of the microprocessor is that it is, in a sense, a "breeder reactor," creating its own fuel of knowledge...

...An exclusive preoccupation with statistical productivity--simple coefficients between inputs and outputs--can lead to a rigid, and in the long run, unproductive economy...

...It is not only a product but also a producer of science...

...Financed more and more by their own cash flow and commercial paper, run by professional managers and technicians, largely beyond the control of stockholders or boards of directors, spreading their operations around the globe, modern corporations are seen as great multinational ieviathans that require ever growing governmental power merely to keep them in line...

...Galbraith even presents to our view as his prime example of new technology the launching in 1974 of "what is now called," as he says, " a new automobile...

...Just as Marx focused on industrial conditions that were already passing away at the time he wrote, the contemporary scholars focus on processes of production and organization that are rapidly undergoing change...

...As the U.S...

...As a fully weighted measure, the Wilshire is heavily influenced by the Dow companies...

...The American automotive industry had shaken itself down to three huge and immensely productive companies by the late 1930s, and neither rankings nor products have substantially changed since then...

...Nonetheless, in the late 1970s in America entrepreneurs were bringing the forces of the future to a new prominence on the nation's stock exchanges...

...Washington bureaucrats--well primed to be panicked by good news, from reading the ostrich school of liberal economics-see a giant firm, such as IBM, both as the epitome of innovative technological enterprise and as a dangerous monopoly...

...But only someone viewing the economy as a system of s t a t i s t i c a l quantities could imagine that size is the crucial fact about successful companies...

...Five years later it was the world's leading producer of the devices, with eight thousand employees, from Silicon Valley to Singapore...

...Many successful high-technology companies, moreover, even economize on capital...

...Nonetheless, both the top 50 and the 200 largest manufacturers have failed to enlarge their share of nonfinancial assets or manufacturing shipments since 1937...

...Nearly all of what Galbraith says about the nature of modern technology conflicts with our recent experience of it...

...Galbraith's mistake is to follow Schumpeter--who knew better when he wasa young economist r a t h e r than an aging Cassandra--in predicting the withering away of the entrepreneur...

...But the American companies left that chance to the Japanese and the Europeans...

...While the professor chatted with Bob McNamara and Walter Murphy about the doings at Ford and GM, imagining himself to be right at the futuristic center of things in the "new industrial state," a real industrial revolution was, in fact, massively erupting behind his back...

...it fumbled in its copier confrontation with Xerox, Kodak, Savin, and others...

...In addition, small firms provide more than 80 percent of the jobs for young blacks and other "disadvantaged" citizens...

...mentary services of government...

...It happened in hundreds of smaller companies, led by men whom he had never met or heard of, and some of whom, stepping from university laboratories and scientific libraries into the vanguard of modern industry, had probably never even heard of him...

...This is the essential position, propagated continually by John Kenneth Galbraith and his followers, and t h e r e is enough truth in it to disguise its essential falsity...

...They ignore the surge in informatics and telecommunications and the myriad new energy technologies...

...The root of the peculiar leftist perspective is not difficult to find...

...But from the point of view of overall economic growth and technological innovation, these leviathans are of little importance to the economy...

...To treat these companies as the epitome of a progressive economy and call for the launching of more of them is like urging the creation of a professoriat full of best-selling elder statesmen like John Kenneth Galbraith, rather than looking for hungry young economists of the sort represented by the tall young author of the little-noticed Theory of Price Control in 1952...

...But this technology, cooly considered, bears no such menace at all, while it offers, to nations that pursue its promise, gains quite incalculable, even by the machines themselves...

...Both of them offer great but still largely undecipherable potentialities...

...The theory of the Left applies chiefly to firms at the top of their S-:urves of growth--the time when innovation dwindles and heavily bureaucratized companies seek minor new adaptations, packaging changes, and manufacturing efficiencies in order to wring the last gains of productivity from an essentially static industry that has already long passed its phase of " f a s t history...

...systematic, serf-adjusting, dependable, laborsaving and energy efficient, and it multiplies and redistributes the means of production, possibly reducing the need to travel and restoring the home to its role as an industrial center...

...and the pioneers of American enterprise, who launched the greatest capitalist economy...

...As the world mobbed the markets for gold, these companies raised the banner of human creativity and new technology as the way to triumph over the trials of the day...

...The American Exchange, with its mass of energy stocks, grew 260 percent since its 1974 low and rose 63 percent in 1979 alone...

...Large corporations both consolidate and rationalize the gains of others and act to countervail, as Galbraith himself showed long ago, the powers of other large firms, and even of the government itself...