Did Greed Kill Capitalism?
Jack R. Williams
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Copyright © 2012, Jack R. Williams
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ISBN: 978-1-60414-527-4
CHAPTER 1
Industrial and Information Revolutions
Command and Free Market Rivalry Technology’s Challenge to Free Markets
CHAPTER 2
Principles of the Technology Economic Model
CHAPTER 3
CHAPTER 4
Economic Thinkers Seek Coherence
CHAPTER 5
CHAPTER 6
Technology and Strife are the Economic Engines
CHAPTER 7
The Free Market and Ecosystems Analogy
Cyberspace and Neuro-structure Affinity
CHAPTER 8
War, Technology and Free Markets
CHAPTER 9
Industrial Onset, Take-off and Maturity
Traditional, Command and Market Economies
CHAPTER 10
Technology and Industrial Maturity
Industrial Enabling Conditions
Chemicals and Chemical Industry
Electricity, Electronics and Innovation
Electricity, Power Generation, Distribution and Signaling
CHAPTER 11
CHAPTER 12
Automobiles and Mass Production
Women’s Emigration from the Home
CHAPTER 13
Cable Telegraphy (1838) and Telephony (1875)
Radio and Electronics Application
CHAPTER 14
WWII, Strife and Electronics Technology
CHAPTER 15
Large Computer sand PC Development
Large General Purpose Computers
CHAPTER 16
Market Versus State Economy: The Grand Soviet Experiment
CHAPTER 17
CHAPTER 18
Information and Physical Resources
CHAPTER 19
CHAPTER 20
Virtual Materialism and Wealth
CHAPTER 21
CHAPTER 22
This is a story of economic good and evil where each vies for supremacy. Technology is the good that drives our capitalist economy toward wealth. It has done this through the Industrial Revolution since 1760 to its maturity today and through the current Information Revolution since 1980. Innovation and invention push technology forward. Competition, strife and war, in turn, drive these. Thus, there is always an economic impetus driving us toward wealth. The Information Revolution is a mighty economic benefit.
However, there is economic evil represented by debt as with Eve’s apple tree. We took a bite in early history. We then controlled our appetite reasonably well until about 1980, then our world became full of debt addicts. We consume beyond our economic means. Debt is a promise that equates the two, what we demand and what we can pay for. The snake slithered in with minor promises at first, but it has transitioned into what appears as the four horses of the apocalypse representing conquest, war, famine and death. Debt appears beyond our control, portending disaster.
The current and future generations depend on our maximizing the good and minimizing the evil.
The Gross Domestic Product (GDP) quantizes economic activity plus the debt change. The GDP less the debt change grossly defines our standard of living; that is, the real per-capita disposable income. A debt increase causes us to live well in the short run but is probably not sustainable in the long run.
This book will develop the Information Revolution history as a continuum through electronics, radio, radar and a thousand embedded electronic devices in every machine today. A single chip today has billions of electronic triodes executing the on-off commands of digital computation and memory. These functions all continue through computers, communications network devices and thousands of other applications constituting what we will call the Information Revolution. These spawn new businesses, redefine old ones and bring enormous wealth to our culture.
Unfortunately, all is not well since debt has fractured our social organizations and lives. We will define debt as an offset to the technology advances. We postulate an economic means consisting of income and wealth. These represent what we can pay for. Our demand or consumption is far greater than the means so debt must balance the two. We want food stamps, free medical services, free education, retirement funds, wars, increasing government services with immunity from terror and on and on it goes. We cannot pay for them so we float more treasury bonds, defined as borrowing. The Information Revolution and its wealth production through the capitalist free market system is a supremely powerful generator of wealth. Yet, it occurs now in a universe smothered by debt. We must cover the two to put ourselves in the capitalist picture. Although somewhat confusing, this must be done to capture a satisfying picture of our economy.
In the end, capitalism is not dead but it has tubes and contraptions all over it in a life support condition. We offer hope of rehabilitating the patient to a thriving condition.
Describing the economy requires extreme simplifications and a great deal of humility. The economy’s breadth is daunting and its many paths are parallel to each other simultaneously. When we snap the chalk line in time, we must be judicious since the period chosen risks everything.
Is the period chosen characteristic or is it an anomaly?
The period from 1950 to 1980 was a normal period of economic stability and orderly activity. In contrast, the 1980 to 2010 period is economically anomalous.
The great news of this period was the onset of Personal Computers (PCs) in 1980. That and technology has ushered us into the Information Revolution that continues to change the world.
However, it is an economic world so we have to look at computers in this environment. Debt in particular has also changed everything in our environment. Therefore, we must study both debt and technology simultaneously. Deregulation has been the mantra since 1980. After 1980, we were favorable to the high interest rates paid by the Savings and Loan Associations but this culminated in a debacle. We bet on the computer-driven dotcom bubble but that gave us a debacle of its own. Real estate looked like the ultimate investment but that turned out to be the biggest debacle of them all. As to the chalk line, why did we make this choice?
The normal period required deposit banks such as Bank of America to be local and not to cross state lines under the Glass-Stegall Act, passed during the great depression. Financial institutions or the Goldman-Sachs of the world could not be bank holding companies. Banks were highly regulated. Industrial stock options were reasonably limited. The relative pay to several top managers of corporations was about constant, limited to about 75 times the average worker pay. Government bureaucrats and captains of corporations operated a relatively limited revolving door. There were a limited number of financial derivatives and ‘inventions’ such as CDSs, CMOs, derivatives, etc.
The anomalous period today sees the opposite of many of these pre-1980 regulations. Chapter 3 shows that a major change occurred in every aspect of the economy. Of course, banking and debt are at the heart of these changes. The U.S. total debt had been relatively constant from 1900 to 1980 in percentage of GDP. The Gross Domestic Product (GDP) defines the total goods and services produced by the U.S. in a year so defines our ability to handle debt. The total debt quadrupled in the 30 years after 1980. This swept out a hockey-stick growth curve. Most curves of economic well-being experienced a similar 1980 inflection point.
In 1980, President Reagan and his men swept into office intent on deregulation and privatization. This intent continues relentlessly to this day. Financial institutions became bank holding companies with confused regulatory requirements. Congress incrementally diluted and finally repealed the Glass-Stegall act in 1999. Through this, many local banks became a Wild West show. The Information Revolution was onset by the PC in 1980. This led to the dotcom bubble that inspired or coerced millions to become rich overnight. The stock market brought in billions of investment dollars, but of course, the investors were disappointed as most of them later saw their money disappear in the midst of flying pigs. We will pursue all these paths simultaneously.
It was as if a virtual ‘Greed Debacle’ began in 1980. A virtual greed cabal seemed to be operating, consisting of bankers, financiers, leaders of government-sponsored enterprises (GSEs), captains of corporations, lobbyists, revolving door government leaders and others.
This Greed Debacle led to the Savings and Loan bubble costing taxpayers billions, the dotcom bubble costing hundreds of billions, the mortgage bubble costing trillions by halving real estate values and other outrages. Government supposedly solved the problem by giving money to the banks, financiers, corporations and insurance companies. Congress got the money from the general tax fund. They raided the fund to the tune of more than 3 trillion dollars. This was a problem and now appears to have been ineffective. The debt continues to rise dramatically and who is to tell who is solvent?
In fact, debt since 1980 is driving both the U.S. and the world. This debt and very high, manipulated leverage gave us the illusion of great wealth. This caused us all to live way beyond our means. This illusion was from a debt culture. It was a mirage. A high standard of living appeared. However, this cannot continue. This especially encourages more private and government expenditures and debt policies.
Yet, it is our task to bring cohesiveness to as many of these economic paths as we can. We will follow these and particularly the young Information Revolution as it parallels the mature Industrial Revolution and the many other paths. At the heart of this, we will try to simplify the multiple paths for both the normal period and the Greed Debacle period.
We are describing the American free market economy here. This is just another term, with many qualifications, for capitalism. Economics appears as an all-inclusive term but we find this is not so. Politics trumps economics. Lawmakers can pass a law at the snap of a finger that changes everything in economics. The metaphor of Adam Smith’s invisible hand is useful. However, lawmakers manipulate the market and distort the hand’s purposes.
Since the Great Depression, the left has pushed us into what some players call a welfare state. Radical liberals and the unions have left us with tremendous debt and obligations as they push left. In the last 30 years, radical conservatives and a greed cabal have burdened the economy and left the first plus another tremendous debt. Why does the free market not correct this? The invisible hand slows to nearly a stop when pushed to the liberal left of this free market spectrum. It also slows similarly when pushed to the conservative right. The invisible hand is most effective and efficient when a balance is experienced.
The free market does not allocate profit but is most effective in generating profit. Thus, radical liberals or a greed cabal can push decisively to one end of the spectrum or the other. The country is so corrupt now and the economy is so unbalanced now that no one is sure that America still has a capitalist system. However, this is critical for our future.
The world’s great rivalry of the past two centuries has been the command as opposed to the capitalist free market system. Autocratic government is almost synonymous with command economies, whether we call them monarchies, totalitarianism, communism or similarly. These autocracies and ‘ism regimes’ with planned economies are the antithesis of liberty or democracy. Free market economies, on the other hand, are usually associated with democracies.
We recognize with Joseph Schumpeter that technology is the ‘destruction of the old and creation of the new’. This destruction-creation appears chaotic and apparently destabilizes the world and the economic social order. Yet, free markets are adaptive and exploit technology change to generate the greatest wealth of any system of markets or government. Technology drives wealth production toward free markets and in so doing toward democracy. These fundamentals of life are intricately connected and each drives the other.
Innovations and inventions favor the economic system that is best adaptive to change. Democracy and a free market system provide that adaptive mechanism.
Technology change appears destabilizing. However, in a free market democratic system, it paradoxically stabilizes itself eventually. It meanwhile destroys autocratic regimes that depend on central planning or hide-bound fixations imposed from the top. Innovation and invention propel free markets upward that account for the growth in wealth we have experienced for the last two centuries. Autocracies squeeze the market and dictate to their populations. In the end, technology drives a free market that in turn favors democracy.
Electronics and personal computers from 1980 changed America and the world. Those and technology in general have ushered us into the Information Revolution. Joseph Schumpeter’s destruction and creation now besets us. We know this produces great wealth but it is unclear whether it can offset the massive losses of the debt system.
The following pages are arguments in support of the subtle connection between technology, wealth, free markets and democracy.
We characterize the random time-dependent economic data and try picking a stable period that is representative. We analyze this period and believe it does represent the dictates of history. Looking at the total debt from 1800 through 1980, we find it relatively stable and constant at about 150% of GDP except for the enormous debt incurred in the great depression around 1932 as is seen in Fig. 3-1. However, we also find a more recent period is of greater interest. This is the 1950 to 1980 real national debt or one corrected for inflation as about 2 trillion dollars for the 30-year period.
In 1980, these and other curves in Chapter 3 show a massive change starting in 1980 and continuing through 2010.
The greed cabal was the créme-de-la-créme of the country that prospered by effectively stealing and in the end, far from their intentions, stole capitalism. The theft occurred through stock options, outrageous CEO pay sponsored by conflict of interest board members, deregulation and privatization, quid-pro-quo lobbying and massive raids on the general tax fund. The scale of the thefts is unimaginable. These policies so warped capitalism that it is hardly recognizable today.
The aim of a financial system is to take money on the front end, add value, and output goods and profit on the back end. The difference in this and a Ponzi scheme is the Ponzi scheme does not intend to add value while the intent of a financial system is to add some value. Bernie Madoff thought big, bilking $50 billion in a Ponzi scheme. Meanwhile, the greed cabal also thought big with similar scales.
We see the 1950 to 1980 period as the normal capitalist environment. The 1980 to 2010 period appears as an anomalous Greed Debacle.
This division appears necessary since the anomalous period seems chaotic and unsustainable. The grim reaper of political systems is debt, pure and simple. We cannot know or go beyond a certain debt. In the last 30 years, our National Debt has gone up by a factor of six in real dollars. Thus, we are living on debt and our standard of living is far better than allowed by our incomes. A day of reckoning surely awaits us, and the entire world.
We will develop our theory or description of capitalism without emphasizing the apparent doom of the anomalous Greed Debacle debt period. We hope that will not be too confusing as several paths are being simultaneously pursued in economic activity.
PART 1
Technology, Wealth and Free Markets
CHAPTER 1
Technology Economic Model
The neo-classical school is the mainstream economic theory today. Governments and universities almost universally accept it. This inherited the classical school of Adam Smith, David Ricardo, Thomas Malthus, Karl Marx and others. These classicists had a central notion that the price of an object was inherent based on the labor necessary to produce it, be the object a physical thing, a share of stock or an hour of labor.
We define here different economic classification periods. Some are conventional and some are new that partially overlap the old in time. All periods with 2011 endings are from the present day and later.
1. Industrial Revolution Era; 1760-2011.
2. Information Revolution Era; 1980-2011.
3. Classical Economic Period; 1760-1900; a la Adam Smith and David Ricardo.
4. Neo-Classical Economic Period; 1900-2011. Conventional capitalism school after Veblin and Samuelson.
5. Technical Economic Model Period; 1950-1980; Redefined Capitalism School. Stable economic period.
6. Anomalous Greed Period; 1980-2011. Chaotic deregulation economic period. Greed and Wall Street rule.
The term neo-classical theory was first used by Thorstein Veblin, economist and author of the very popular book about conspicuous consumption in his ‘Theory of the Leisure Class’, 1899 [130]. Veblin recognized the ascendancy of technology and formalized economic activity in the increasingly unique 20th century as in his ‘The Engineers and the Price System’ published in 1921. The neo-classical school recognized that price depended on both labor and consumer preferences. The theory assumed the relationship between the object and the consumer set the price. This evolved into ‘supply and demand’ theories. Optimization of profit subject to relevant constraints became the mantra for this development.
Metatheory, or the theory of theories, resulted in neo-classical economics. This is a set of rules for constructing economic theories, all based on the same enumerated postulates or assumptions. Economists also wanted their field to become ‘scientific’ so the rush was on to express their work mathematically. This led to almost impenetrable models that showered the economic theorists with Nobel Prizes represented best by Paul Samuelson of MIT. The neo-classical rules are:
(1) Consumers have rational preferences associated with price
(2) Individuals maximize utility
(3) Consumers act independently based on full relevant information.
(4) One assumes equilibrium or stability in the market. In this, product dynamics cause variations from equilibrium.
We hold that consumers seldom act independently but flock together on a minute-to-minute basis based on world events, news, speeches, etc., as seen in stock market and TV business channel trading. This is especially true following a shocking event. Furthermore, free and relevant information is only an elusive ideal. These criteria dilute the metatheory rules or negate them altogether. Price dependency also complicates the mathematics and makes cause and effect difficult to assess.
Neo-classical theory does not recognize technology as a prime economic mover although it does grant it as a distant modifier of economic fortunes. The neo-classic theory is associated primarily with William Jevons, Jeremy Bentham, John Stuart Mill, Alfred Marshall, Paul Samuelson, John Maynard Keynes who represented fiscal policies to control the economy, Milton Freidman who advocated monetary policies for this purpose and many others.
In spite of the universal advocacy of neo-classicists, there are still doubts. Some have described neo-classical economics as a religion with equations.
We herein reject most of the neo-classical metatheory rules and theories.
We alternatively assert the primacy of technology in economic affairs and dependant price variables. Equilibrium is not expected. We also assert the presence of a vibrant military market.
Economic theory results from statistical concepts and observations. The assumption of equilibrium leads to tractable mathematics and simplifies theories. However, we seldom see simple theories and smooth arithmetic expositing economic reality. Economic activity depends on recent technology. Most industries have only existed for 10-20 years or much less. This obviates the slow process of seeking equilibrium.
Further, there are principally three markets, the military, capital, and consumer, which respond to different stimuli as opposed to neo-classical theory that does not make such a distinction. We assert that the military market through technology advancements particularly drives the market economy under many, many circumstances. This is especially true in times of stress (which is often) when the exploitation of technology accelerates.
We therefore support trend fluctuation in prices with random unpredictable trend periods (and specifically reject the basis of economic drive being equilibrium). We see price and leverage dependence usually (rather than price independence). We see technology as the driver of the economy (instead of technology depreciation). We advocate military market primacy for significant periods (rather than the military market debasement). We intuitively know there is something wrong with our past theories and models since we cannot project them into the future to define our observations and they do not describe what we see. For some periods, we can find almost any presumed behavior in the noise of economic statistics. This may confuse us but it certainly does not empower us.
Heterodox economics refer to schools of economic thought outside the mainstream. A number of schools form an umbrella term including Post-Keynesian, Socialist, Marxian and Austrian among others. Several economists have proposed creative movements since about 1980. These include behavioral economics, complexity economics, evolutionary economics and many others.
When we recognize technology as the primacy of economic development, several of our opinions and models change. We have developed many theories about how technologies progress and how it is financed. Who are the inventors, what motivates them? Can we define metrics for observing the developments? We know that technology flourishes in time of war or strife. That is, it responds with great sensitivity to the military market. We develop this notion here. Furthermore, technology follows a linear development. Innovations and inventions are therefore somewhat predictable. We call this economic progression ‘punctuated innovation’. This parallels Darwinian evolution as will be developed.
In this, the Industrial Revolution based on developments from the steam engine, iron, coal and transport brought us an industrial maturity through the 20th century. Meanwhile the Information Revolution has become dominant based on electricity, electronics and computers. Although it is not obvious, the invention of electronic amplification by Lee de Forest in 1906 led to the present electronic chip with billions of amplifiers or switching bits deposited on it photographically. Again, punctuated innovation drives us forward.
We are critical of neo-economics. We introduce here another heterodox economic methodology or way of looking at how the world works. Technology and the military market are the centerpieces of this. Thus, we are introducing the Technology Economic Model as the coherent description of flourishing capitalism. We give the 14 principles of this theory in Chapter 2. Perhaps Pareto’s 80-20 rule applies in that 80% may be known and obvious whereas 20% may be new and put an entirely different light on things.
Mature Industrial Revolution
We here make several economic classifications that cannot be obviously placed in classical economic partitions. Adam Smith and David Ricardo developed the classical school. This is the most generally used conventional classification. Next is the neo-classical school of Paul Samuelson, John Maynard Keynes and Milton Friedman from 1900 to the present. Many have defined various heterodox schools. These were out of the mainstream but with ambitions of primacy.
Our classifications shown earlier are different. Ours are the Industrial Revolution Era (initially capitalized here for clarity) and the Information Revolution Era.
We accept the Industrial Revolution as composed of the Classical Period from 1760 to 1900 and the Neo-classical Period from 1900-present. We define the current Neo-classical episode for the years 1980-2011. We define this as an episode since we believe it is a temporary financial excursion and expect a correction in time. That is, it is a period demarcated mostly by debt.
We assert the Technology Economic Model based on the primacy of technology and the military market in economic affairs and this applies to both Classical and Neo-classical Periods. We define this model here in Chapter 1. We state the various principles of this theory in Chapter 2.
The free market system took a great turn in about 1980. We define this 1980-2011 term of 30-years as the Anomalous Greed Period. The U.S. congress, banks and financial institutions (Wall Street) strayed into dangerous debt territory there. Extreme leverage and enormous debt allowed the whole world to live beyond its means and enjoy an illusory standard of living. We give a few numbers here to illustrate the enormity of our debt.
This American National Debt in 2011 is $14.5T (trillion); the Total Debt is $55T including personal debt, mortgage debt, money supply and others, the Obligations Debt is $228T including social security liabilities, Medicare and other unfunded liabilities, while Credit Derivatives Debt is over $600T. Since the GDP is $14.77T, the relative debt-to-GDP ratios for the national, total, obligations and derivative debts are 0.98, 3.66, 15.4 and 40.6 respectively.
Meanwhile, our interest on the $55T Total Debt that we must pay in 2010 is $3.6T. The yearly deficit in 2010 is $1.65T. Since the GDP is the total goods and services produced by the whole U.S. in a year, we now owe the equivalent $55T Total Debt or all we now produce for 3.66 years. If this $1.65T deficit each year were a 30-year bank loan financed at 5% interest, it would amount to $64B (billion) per year premium on interest and principle for the first year. This would require an additional new loan in real dollars in each of 30 years. The sliding debt after 30 years would require a premium of $1.92T per year. Further, we would still owe trillions of dollars. All we have done is delayed the debt for 30 years. The compound interest imperative has us in its darkening maw. What options do we have?
Industrial and Information Revolutions
The Industrial Revolution reached various countries at different times. It manifested itself generally by the industrial take-off period from about 1760 in England, 1830 in America, 1840 in France, 1860 in Germany, 1890 in Russia, and well into the 20th century for many slower developing nations. The advanced nations found their economic maturity and onset of the Information Revolution in about 1980. These countries each faced the dilemma of what political and economic organization best suited them. Those countries with liberal political aspirations found the free market economy; that is, capitalism, was consistent with their goals. Meanwhile states with authoritarian leanings found command economies with state planning more amenable to their thinking.
The 19th century was the modern period of state formation. This resulted in free economies or in command economies. Many characterize the 20th century as warfare between these two ideologies, particularly as represented early on by the totalitarian Axis powers of WWI and WWII versus the democratic Allied powers except for the Soviets. Afterwards, the U.S. competed with the totalitarian Soviet Russia in the Cold War. Lately, totalitarian Islamic radicals have held attention through the first decade of the 21st century. History implies this terrorist struggle if sustained will take on an economic dimension subsuming the religious aspect. Whether this or a larger struggle emerges, free versus command economies will define the 21st century.
The Industrial Revolution favored those nations willing to change to adapt to a changing world. They were willing or eager to adopt new ways of doing things, to invent and exploit technology change. The changes were in better animal breeding, or as reorienting land, buildings, and demographics to favor technology change and new markets or marketing methods. Many claim that the greatest ‘invention’ of the Industrial Revolution was the formation of public stock companies composed of stockholder investors who represent ownership by the public. The public or strangers could hold these stocks to concentrate capital for the expansion of the market and enrichment of investors. The economic exploitation of technology in the wide description above favored the United Kingdom first and later the U.S. and similar democracies that defined the free market system.
Now we are in the Information Revolution that has followed the maturing of the Industrial Revolution. The Industrial Revolution favored England and America with their democratic commitments as the leaders. The more reactionary nations followed. The Information Revolution similarly favors nations committed to change, to the free market system, to the technological process of ‘destruction of the old and creation of the new’. Totalitarian nations with command economies generally lagged in the Industrial Revolution. They probably will fall further behind in the Information Revolution.
Nature favors those who make good decisions and good decisions are cumulative in a culture. The evolutionary vector in biology, as well as culture and economics, points upward and forward. The Information Revolution in free market economies is resonant with life’s evolutionary progression. It moves humanity forward in the struggle for wealth amid scarce resources. However, life is a struggle nonetheless. We cannot all share equally in the progression since many cultures favor dictatorships, religious backwardness, and economic straightjackets. Similarly, many cultures and species are destined to extinction. The evolutionary vector rewards resonance with the democratic imperative and denies such rewards for unresponsiveness.
Neither Germany’s Nazism, Italy’s Fascism, nor Japan’s militarism were exportable ideologies. Most considered these as all-consuming authoritarian political movements; they were still primarily about political systems built around command economies. In fact, many of these lasted only a decade or so before they were defeated in 1945 and relegated to the ash heap of history.
The Soviets, on the other hand, visualized their communism with Marxist underpinnings as having universal appeal and being exportable. They promoted communism as a messianic ideology that dictated the generation and distribution of wealth. It advertised itself as a universal economic system that lifted all men from the depths of unjust poverty to riches by demanding according to ability and distributing according to need. Only the Soviet system among totalitarians presented itself as a universal ideology and a world system for this purpose. It managed to inculcate itself into the world’s philosophies that probably accounts for so many of the world’s left-wing liberals, press, and academics joining or fellow traveling with the movement as a crusade. This communist quest for intellectual coherence and longevity justifies lengthy inquiries. Neither communism as a representative command economy nor capitalism as the alternate presents simple and coherent systems. Indeed, the national issues are far more complex than the two titles suggest. The complexities suggest placing the two in juxtaposition to define the profound rivalry and the depth of meaning for the Soviet fall and command economy loss in 1991.
A command economy is by its nature in control of money so it can set whatever value it chooses. That is what the central planners and administrators think. Yet, it must compete on the world market since even a police state, as was the Soviet Union, must have economic intercourse with its neighbors. Only with police or military backing did the Soviet money have value. In 1991, their money collapsed; their economy collapsed; their state collapsed. The free market system was profoundly victorious.
We as western societies in the last 2 centuries have gone through a period from poverty and ignorance to high cultural attainment and great wealth. We now stand on a threshold of enormous change. It behooves us to analyze the period and project it into the future. What will this century bring? Clearly, there are those who want religious wars and send suicide brigades to bring them about as well as using hijacked aircraft as missiles to bring down financial skyscrapers. Whatever we say about these terrorists, history indicates the grand struggle will continue of totalitarian versus free societies and economies. We have only history to illuminate the future.
Command and Free Market Rivalry
WWI found the U.S., France, the U. K. and their dominions as free market bastions with Germany, Russia, and numerous others as totalitarian states. The outcome of the war in 1918 and the Versailles Peace Conference were indecisive as to viable economic entities and restructuring the world into stable areas and states. Woodrow Wilson championed ‘self determination’ for peoples who had never been a nation. This would grant sovereignty, which is a license for warring against neighbor states, state killings and other outrages, to clans, tribes, and other groups that might have only a few people. This exhausted the conferees and was a Wilsonian conundrum that lasts to this day. It is a paradox. We want to support the victims of outrages but, at the same time, we want to support the concept of state sovereignty. This is a dilemma.
The forces again paired off 20 years later in WWII with Germany, Italy, and Japan representing the Axis totalitarians. The Soviet Union was also totalitarian and by the Stalin-Hitler treaty negotiated by Molotov and Von Ribbentrop on 23 August 1939 sided with their Axis political brothers. Secret protocols in this treaty declared a partnership with Germany in partitioning Poland. The Pact and the subsequent joint invasion of Poland by Germany and the Soviets was the definitive act, the smoking gun, that started the war. Germany and the Nazis argued they were capitalists since they had privately owned industries. Von Mises exposed this argument as ridiculous since capitalism required far more than private companies under state control. Clearly, the three Axis powers had command economies. Yet, defying all logic, the Soviets with a command economy settled as a member of the Allies but only after Adolph Hitler invaded their country in an attack that surprised the Soviets. Stalin always considered this as a betrayal by his partner, Adolph Hitler.
China was also in its First Civil War and Warlord period from 1911 to WWII. Chiang settled in the allied camp during WWII. In spite of Chiang’s best efforts, China finally settled into Mao’s totalitarian communism in 1949 because of the Maoist revolution and Second Civil War. After atrocious upheavals, by the end of the century China was politically totalitarian but equivocating economically between a command and a market economy. This continues well into the 21st century and no one knows what the outcome of this enormously important paradox will be. It will be a surprise if the planned economy under a Communist regime can be sustained in the long run. Authoritarian government can seldom meet the requirements of free markets as will be defined. China’s present ‘planned free market’ under a communist government is a dichotomy and will have enormous importance for the future world.
The Soviets fought in WWII in the Allied camp but were geographically isolated totalitarians. The defeat of the Axis is viewed as a defeat of totalitarianism rather than an economic defeat. Yet, the Allied victory was clearly a major defeat of command economies by the West’s free market nations. The Soviets, paradoxically, were major victors in WWII even under its totalitarian system with a command economy.
Churchill wooed the Soviets into the allied camp of the West but not into the fight against Japan. One expects the Allies’ offer of Lend-Lease war material, help by the vastly superior Allied navy and the proffered synchronized war strategy between the Soviets and the West contributed greatly to Stalin’s decision and effectiveness during the war. By the time of his entry, Germany had invaded Russia. Stalin saw this as Nazi treachery by his partner in dividing Poland and Eastern Europe. He withheld his support from the allies against Japan while he plotted with the Chinese Communists for their takeover of China and his occupation of parts of Japan when he entered the war against Japan. He declared war against Japan only a few days before the final Japanese collapse and diverted the Japanese armaments in Manchuria to Mao.
The 75-year conflict between totalitarian regimes with command economies and the U.S. with its allies representing market economies characterize the 20th century. The Soviets, after the defeat of the Axis powers, evolved the world into bipolar camps. These consisted of the Soviets on the one hand and the U.S. leading the free world on the other. This bipolar world defined the Cold War from about 1945 to 1991. This restarted the global contest between the command economy and the market economy. This Soviet versus Free World contest lasted roughly from the time of Lenin in 1917 until the Soviet fall in 1991. This contest defined global power for most of the 20th century. It was inevitable that the Soviets would square off against the free Western nations after the war. Even the few who foresaw the defeat of the Soviet Union did not see it collapsing without major bloodshed. It just collapsed with hardly a whimper. Our modern experience does not contain coherent movements with a more decisive impact of man’s activity during this protracted period. This was the definitive struggle of the 20th century.
Technology’s Challenge to Free Markets
What kind of revolution are we foreseeing?
In the early decades of the new millennium, we find totalitarian states and their command economies are in decline where democracies and their free market systems are in ascendancy. Democracies with constitutions guaranteeing individual rights spawn a free market system and vice versa as opposed to centralized state control that spawns command economies and shackles most all aspects of life. This was and is a fundamental competition between two opposing social concepts. Yet, strife similarly occurs between democratic states and with states in transition. Strife is the unavoidable environment of life. Terrorists now beset us. In this, the destructive and lethal technologies they command or can hijack can bring great destruction. The conflict is not only between state and state but also between state and stateless groups or sometimes individuals as with Osama Bin Laden. Strife exists both external to the state and internally. Technology represents strife by fighting the old and championing the new. It often causes the downfall of those in power and replaces them with upstarts.
Technology is fundamentally about strife. It unsettles stable social order. It facilitates wars. It becomes the arbiter of wars and their outcomes. Even so, adaptive societies are generally stable and technology is the engine driving them to wealth. That social order best producing and adapting to technology change best survives and best flourishes. It is a paradox that technology drives us to wealth and order; meanwhile, it is a continuous disruption by varying degrees. Technology presents us with the challenge of ‘punctuated innovation’ where innovations and inventions occur in what appears as random or as infrequent points on the time line. We adapt or fall by the wayside.
Our experience indicates constitutional democracy and free market systems profit best from technological change and they, in turn, best encourage such change. Further, technology best produces the wealth of an adapting, orderly society.
Overlaid now on our present technology and culture is a vast sea change. This Information Revolution appears chaotic but that obscures what is really the orderly progression of a free market. Technology is the engine that drives the market and in turn drives our culture. This destruction and creation are the processes of a free economy whereby we advance in technology and wealth; but the processes are painful.
In 1980, typewriters were the basic business machines in every office of the world. Armies of secretaries operated millions of typewriters turning out an unending stream of papers and forms. By 1990, there was hardly a typewriter left in the world! They were museum pieces. Gone were the typewriters and gone were the armies of secretaries that operated them. In 10 years, a personal computer was in the hands of anyone in the world who wanted one. Computers had brains compared to typewriters. An Information Revolution had occurred.
It was soon possible to place all the functions and devices previously requiring rooms-full of equipment, scores of operators and attendants, and millions of dollars worth of investment into a little desktop box costing a few hundred dollars or so. Even further, the hand-held cell phone is beginning to incorporate the functions of computers and has power beyond them as ‘cloud computing’ accelerates. The huge reduction of labor by computers reminds us of that achieved by technology’s conversion from wagon to canal transportation as described by Adam Smith in his allusion to the new industrial age at the onset of the Industrial Revolution. Truly, there is a strong parallel between his 1760s Industrial Revolution and the computer sea change or Information Revolution of our own time.
These and other forced emigrations of workers from their workplace by computers and networks in the last three decades represent no less of a revolution than agricultural workers being driven from the land or enticed off it at the onset of the Industrial Revolution.
The personal computer represents an Information Revolution that reached the take-off stage about 1980 when IBM designed and marketed the personal computer. At the forefront of this change were Apple Computer and Microsoft with Intel chips. IBM’s endorsement also validated this new upstart market. In toto, computers and technological change are a paroxysm of Schumpeter’s destruction of the old and creation of the new, the life juices of the free market system.
We are increasingly a technetronic culture. Electronics technologies, and especially networked computers communicating across national and international webs, shape our culture. These form a sort of international information superhighway or infostrada if we take the Latin for the great way or great information super highway. We are experiencing an exponential rate of change in this that shakes our confidence in ourselves and in the future. Yet, this sea change is only true to the dictates of a free market economy driven by technology. This information technology is the heir to the Industrial Revolution that brought wealth and education to vast numbers of people and caused positive cultural changes by any reckoning. Therefore, the changes are healthy as well as painful.
These are astounding new information-based intellectual properties within a host of innovative changes. What will be called the virtual re-industrialization process resulted. That process was occurring through the 1990s and it continues into the early part of this century. This work examines the ramifications of these information systems. It examines the resulting economic migration from the real to the virtual, from the mundane to the exotic, and from the commonplace to the recondite as this virtual re-industrialization sequence grows and accelerates. We examine the trends and the changes that have taken place or are likely to occur as the sequence continues.
Computers elicit new realities. They look into our bodies in various medical imaging modalities via CAT-Scan, Magnetic Resonance Imaging (MRI), or Ultrasonics. We picture the interior of solid steel or any material and find microscopic faults, impurities, or stresses. We design and style three-dimensional forms and automobiles in computers, rotate them in space while evaluating their form and light shadowing, project them to room size on display walls, modify and finish them. We can enter the program into laser machines and tool the form in a short while by exposing a liquid gel, which takes solid form when exposed to the laser’s light; the liquid compound quickly sets to become an exact model in solid plastic of the complex, abstract form in the computer. A computer abstraction with a digital packet of notional information replaces clay and wooden modeling. Computers can transport us through simulations and virtual reality to other planets, imagined places, or new cultures of our intellect alone. We play games, visualize the unseeable in life-and-death diagnostics, entertain ourselves, and generate shared cultures. We substitute glass fibers for copper, graphite and fibers for steel, weave new fabrics that are impervious to water, chemicals, even bullets, and have astonishing characteristics. We invent numerous other materials substitutions. We aspire to play God through the DNA code and even generate life. We substitute the ethereal for the real and commonplace. This trend is rapidly accelerating and we are the richer because of it through games, new materials and products, revolutionary television and displays, computers, webbed information systems, extended sensing and measuring modalities, and the list continues and grows daily.
These machines empower the individual. This can be good or bad. They, unfortunately, made it possible for the bombing of the U.S.S. Cole and other terrorist activity. A few individuals in bombing the basement of the World Trade Center in 1993 accomplished cataclysmic results. They confessed that they planned to knock down the first building that would fall against the second building, toppling both of them. A few individuals completed their plan by hijacking four airliners in 2001, flew two of them as missiles into the World Trade Center in Manhattan and brought both towers and other buildings down. A few individuals stole the advanced technology of intercontinental airliners and used them for phenomenally destructive purposes. Can there be any doubt that they were empowered by computers, the web, and the tools brought forth by new technology? The destructive power of the individual escalates exponentially until it rivals that of the state. This danger will undoubtedly continue to grow.
Computers enable network search engines. These look across huge databases and pull up numerous references responding to any search question. This usually requires far less than a second. Millions of sales items, music, manufactured parts or commercial products are then found, evaluated, priced and ordered in seconds. Delivery is instant if it is data. Alternatively, delivery to your door is overnight if it is a tangible thing. These search engines such as Google or Bing are instantly accessible. This internet connection is through wire, cable, fiber or electromagnetic links including satellites. Digital computer technology is the implementation in all these networks.
Cell phones now cover the world. Smart phones are replacing those. These push greater computation down toward the phones and upward toward central nodes. These cell tower networks thus enable both static and wireless mobile communications. The number of towers grows expansively day-by-day. We therefore have digital voice or data interchange across the world while we sit at a desk in our home or office, in a plane, or in a moving automobile.
However, make no mistake; the Information Revolution is fundamentally a communications phenomenon that is empowered by computers. Networks speak to communications where computer technology provides the chips, switching and computation to make it a reality. Communications thereby follows its electronics continuum and 150-year history that projects us into the future. Although we speak of a computer as the executer of the function, an array of analog electronics and functions accompany almost any application. We continue to use the word digital computer but we mean the electronic function that includes computer, electronics and usually communications technology.
All human activities or products have a packet of data associated with them, either explicitly or implicitly in our memory. Our special skills and knowledge, constituting the human resource, expand as we learn to do certain functions or learn how to construct various materials or structures. Even a pianist has a skill from an information packet. He plays this out in his nervous system. We can therefore exchange the real and the virtual worlds. It is through these and similar means that we can refer to cyberspace in either real or virtual abstractions. In this sense, cyberspace is a multidimensional world encompassing all man’s activities. It is a new land.
Discs can distribute databases. Or, they can be downloaded by request in Cyberspace. It facilitates a major library in each home. It makes the world’s technical databases or accumulated knowledge immediately available on disk or web. Cyberspace facilitates the location and servicing of micro-markets across the world and then facilitates micro-producers to serve them. There is similar service for global corporations. The internet and its communications networks make this possible.
As implied, cyberspace necessarily redefines our concepts of production, consumption, distribution, the market paradigm itself, and the organizational make-up of our lives. The internet, cell phones and associated social networks accommodate political unrest, demonstrations, revolts and revolutions. These networks accelerate the rush toward the discord promised by Schumpeter. Our culture is consequently undergoing major changes.
Workers leave the manufacturing of goods and enter the services sector. The number of manufacturing workers continues a proportional decline at 7.1% of the U.S. population or 14.1% of the U.S. workforce in 2000 and 10% by 2007. Their trend is toward agriculture’s decline to 1.2% of the U.S. population or 2.3 % of the U.S. workforce in 2000. Agricultural workers are achieving great productive output but with a smaller portion of the economic pie. Manufacturing and other workers scramble to find a new place, yet many will be disappointed. The new culture requires special skills and education. Upper-end workers will prosper, but many low-end and mid-level workers are in trouble.
Just as the Industrial Revolution caused a prolonged diaspora of agricultural workers into manufacturing activity, the Information Revolution moves a new diaspora of manufacturing workers into service industries. These migrations are ineluctable. They are inherent in the revolutionary cosmos.
This work looks for the cohesion of all these changes into a single comprehensive framework. We know that such a framework may not exist but we accept that it does and search for it. This dichotomy conjures up the ‘hedgehog and fox metaphor’ [135] of Greek mythology where ‘the fox knows many things, but the hedgehog knows one big thing’ [Archilochus 7th-century BCE].
The fox sees many things but never collates nor organizes them into a unifying theory or whole. He does not develop a unifying theory or strategy. The hedgehog, on the other hand, is always looking at how one fact relates to another. The fox therefore sees the sun, a warm rock, grass, and other singular observations but never relates these to the sun’s unifying energy, to the underlying structure that ties them together or relates them one to the other. He is fast and cunning but not wise. The hedgehog sees each, looks for the relational law, the unifying whole, and therefore forms a model, a vision or strategy for going forward to his ends. He is slow, methodical, and some would say, wise. The risk for the fox is to miss or fail to comprehend a connection or a law that would lead him to his ends more easily. The risk for the hedgehog is to formulate laws, models and theories where they do not exist or he miss-formulates them; he is simply wrong. Both the scientist and the alchemist are hedgehogs but one is more perceptive than the other in that the scientist succeeds where the alchemist and magician continually fail. We, like the hedgehog, will look for the unifying whole, the grand social and economic vision. Technology is a common denominator of all the work presented here. It is the ‘one big thing’ sought by the hedgehog, the unifying whole, the one equation or model that explains it all. Technology is the one big thing to the hedgehog that explains capitalism through the Technology Economics Model.
Webster’s dictionary defines the word technical as having a practical and useful knowledge, especially of a mechanical and scientific subject. Webster continues by defining technology as a technical method of achieving a practical purpose or a means to provide objects necessary for human sustenance and comfort.
Rosenberg in his Inside the Black Box: Technology, Economics, and History [95] rightfully demarcates technology from science and derivatives of prior science.
As stated by Rosenberg, ‘Technology is a body of knowledge about a certain class of events and activities, embodying techniques, methods, designs that work, and that work in certain ways and with certain consequences, even when one cannot explain exactly why satisfactorily.’
One may accumulate technology in crude and empirical ways and then exploit it. Engineers, designers, and builders produce a cornucopia of processes and products with such knowledge. Science has failed to explain much of this knowledge. Indeed, technology represents a rich repository from which science formulates its agenda. Once science has reduced parts of it to formulas and exactly known paradigms, the technical application becomes an applied science, but the empirical probing and process application continues. Applied science continues to make improvements and innovations.
Inherent in this innovative process is not only the continuous changes to achieve cheaper and better products, but there is also an element of discontinuity, a mathematical singularity. A change occurs which is too abrupt and fundamental to be a part of the economic or technical continuum. The discontinuity represents an ‘invention’ or a new discovery beyond an innovation. Schumpeter in his The Economics of Technology Change [103] recognizes that new products, new inventions, new methods are introduced and suddenly profound societal change might occur.
This is recognized by Rosenberg [95]. He points out that technical progress consists of a steady accretion of innumerable minor improvements and modifications. There are only infrequent major inventions or innovations such as De Forest’s triode vacuum tube that brought the miracle of amplification to the world. These include Edison’s light bulb, or Tesla’s electric dynamo, or others as described by L. Sprague De Camp in his Heroes of American Invention [109]. Similarly, steady innovations may occur over years but in accumulation, they also represent a major invention or change.
Enos [40,41], Karl Marx [76,74], and others thought pedestrian and routine innovative processes on an invention were of far greater importance than the original introduction of the invention. The innovations had much more impact in the cost-reduction and productive effects than the invention itself. Then, the economic benefit that computers provided took as many as 35 years before recognized in many process control applications. A long time was required for other singularities such as both the steam engine and the electric motor, about 50 years after their introduction, although both clearly presaged or represented sea changes if not revolutions. All appeared so slow in their inexorable growth (probably because so many of their applications were in society’s mundane and unglamorous infrastructure) that they were pervasive before their societal sea change was well noted. By the time they and their revolutions were obvious, they were long since pervasive throughout our life and economy. Computers began their growth in WWII; then they grew and grew. Their explosive growth and impact on everyone’s lives only became obvious in about 1980 as personal computers exploded on the scene. Then, their revolutionary impact became obvious to all. Yet, by that time, the revolution had been ongoing in the economic infrastructure of the capital, military, and consumer markets for at least 40 years. Thus, the prolonged processes of innovation and invention are the methods of technology evolution. These are the destructive and creative economic processes of a free market.
The Information Revolution emulates the Industrial Revolution in being a prolonged paroxysmal state of technology invention, innovation, and creativity. Neither revolution was the result of a sudden theory or set of equations encompassing a coherent revelation in science. In fact, digital computation hardly fits the notions of a science at all. It is a continuum of technological innovation. It hardly resembles the highly compact, elegant, and coherent formulation of Einstien’s theory of relativity or Maxwell’s theory of Electro-magnetism. There, a few tensor equations embody the whole universe.
Technology is the essence of modern development. The business and economic literature is extensive on the productive processes, particularly on economic thought and theory, and more recently, in business, entrepreneurial and production activities. The most important trends through this literature define computer technology and its diffusion into the business and economic structure. Technology and the nature of technology change in the literature are still less than focused. Rosenberg recognizes this in his Exploring the Black Box: Technology, Economics, History [95], by Rosenberg and Birdsall in their How the West Grew Rich: The Economic Transformation of the Industrial World [96], and by their references. We will frame the paradigm for wealth creation through industrialization and the free market system.
Free markets however occur no more naturally than free societies. Social man is always ready to impose autocrats and despots through theocracy, chicanery, mistaken beliefs, or force-of-will, and these impose their wills and ways on the political and social structure. Despots impose command economies to serve themselves, their clique, or some higher aspiration. Price-fixing, cartels and other monopolistic activities support the movement to command economies. Such regimes hardly recognize democracy or the will of the people. Despotic regimes are not relics of the past. Until the last decade or two, the Communist despotism imposed a command economy on far more than a billion people and swayed the course of history through most of the last century. The despots who imposed this command economy fought for the minds of the world’s population while raising the Communist banner over a large part of the globe. Soviet Communism is now fallen and discredited while the free market is widely proclaimed the victor. Communist regimes with planned, command economies in China, North Korea, Cuba, and Vietnam still rule over a billion people. Meanwhile, other types of authoritarian and despotic structures with command economies are still widespread in the Middle East, Africa, Central America, and across parts of Asia. In the cold light of day, free market economies are still almost rarities.