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Chapter One
The Economic Landscape
Two hundred years ago, at the end of the eighteenth and the beginning of the nineteenth century, the industrial revolution brought eight thousand years of agricultural wealth creation to an end. Agricultural activities, which had been the sole economic activity for 98 percent of the population in the eighteenth century, were the sole source of income for less than 2 percent of the American population by the end of the twentieth century. By providing a source of energy much bigger than either animals or humans could provide, the steam engine opened up opportunities to do things previously impossible. Leonardo da Vinci could imagine all kinds of brilliant mechanical devices, but all of them remained on paper, unbuilt, because he could not imagine an engine to power them. With the advent of the steam engine, much of what he could only imagine quickly became reality.
A hundred years later, at the end of the nineteenth and the beginning of the twentieth century, electrification and the invention of systematic industrial research and development created what economic historians know as the second industrial revolution. Night literally became day. New industries emerged -- the telephone, movies, aluminum -- and old industries were transformed (steam railroads went underground to become subways).
Not left to chance, technological frontiers moved outward much more rapidly than they had in the past. Local economies died and new national economies emerged.
It took Americans and the rest of the world the first half of the twentieth century to learn how to make these national economies work. Antitrust laws had to beinvented to control the monopolistic tendencies of the new national corporations. Companies only too quickly learned that there was more money to be made from combining into monopolies and restricting output than from expanding output. Standard Oil was broken up in 1911. For the first time a national currency was needed. The Federal Reserve Board was established in 1913. A central bank had not been necessary in the first three centuries of the American experience.
It took the searing experiences of the Great Depression to teach Americans that unfettered financial markets can implode and bring whole economies down with them. In response, government regulations were imposed to eliminate the weaknesses (insider trading, phony bookkeeping) that had been revealed in the structure of finance. The Securities and Exchange Commission (SEC) came into existence. The Great Depression proved that banks could not be allowed to default on their depositors if prosperity was to be assured. Depositor's insurance was invented.
World War II taught America that big technological breakthroughs were possible (radar, the atomic bomb) if governments financed basic advances in science. Industrial R&D could be made much more productive. New products could roll out the door faster than Americans ever thought possible.
After World War II Americans assumed that capitalism would spontaneously combust in Europe and Japan. It did not happen. Three years after the war was over, Americans woke up in 1948 to find that Europe and Japan were not recovering. There was a real danger that Europe and Japan might abandon capitalism for communism. It took massive aid, the Marshall Plan, to get capitalism going again. Americans had no choice but to pay attention to the economic health of the rest of the world if they wished to be healthy themselves.
Today a third industrial revolution is under way. Microelectronics, computers, telecommunications, designer materials, robotics, and biotechnology are transforming all facets of life -- what we do and how we do it. Biotechnology is changing the characteristics of life itself Genetic diseases do not have to be accepted. New plants and animals with different characteristics are being bat.
What comes first, the Internet that permits the faster and cheaper flow of information or the new materials such as fiber optics that permit the Internet to exist? What really changes is not the information that we have about what we might wish to buy, but the way we buy the everyday necessities of life -- and what we buy. Physical stores go out of business; electronic stores come into business. In both we buy clothes sewn from Lycra and Kevlar rather than cotton.
Microelectronics make possible the lasers that power the trunk lines of the telecommunications industry, but those same lasers allow eye surgery that will make glasses an unneeded remnant of a past age. In medicine, microsurgery is a revolution all by itself Larger robots are revolutionizing production of almost everything else. Computers on a chip are changing how our car engines and suspensions work. The laser in the CD player in the trunk of the car is changing the nature and quality of the music to which we listen.
In this third industrial revolution, technologies are changing so rapidly that no one knows where future profits will be made. The CEO of the old AT&T decided to split off its research laboratories (Bell Labs) and its hardware manufacturing arm (Western Electric) into a new company called Lucent. As the CEO of the old AT&T he could have made himself CEO of the new AT&T or the new Lucent. He got it wrong. He made himself CEO of the new AT&T. The new Lucent quickly became more profitable and acquired a market capitalization one-third bigger than that of the new AT&T.THe CEO of the old AT&T couldn't even plan his own career -- and he's not dumb.THe same confusion and chaos about where success is to be found exist almost everywhere in our economy.Great profits are being made, but where they are to be made is changing very rapidly.
