Is the free market all we need to build a robust and democratic political economy for the 21st century? Two authors take aim at George Gilder.
It is ironic that just when governments the world over have reached the zenith of their power, the very notion of government as a viable social institution and a force for the public good is under assault.
Ironic but not surprising. Clotted with the bureaucracy and ossification that have piled up over two centuries of the industrial age, government today is among the forces in society most resistant to change. Compared with business, which must constantly adapt and innovate in order to compete successfully, government seems to grow more bloated and ineffective as its leaders claim they are making it leaner and meaner.
Meanwhile, in the private sector, the forces of free-market competition continue to provide society's most powerful spur for change and innovation. In contrast to Washington's dismal performance in recent decades - not to mention the sorry history of the former socialist states which somehow managed throughout their 70-year history to remain wholly incapable of providing so much as a decent kitchen appliance to their citizens - the free market has shown itself to be the most effective force in society for creating new wealth and spreading that wealth relatively broadly among the population.
Governments may pontificate about desirable social goals, but business has a much better track record in turning an innovative technology such as a communications network into a material force that transforms millions of lives for the better.
It is no wonder then, that as we enter the digital era, many in society wonder if government has any positive role to play in our future. Whether the issue is education, the environment, civil rights, health care, or technology research and development, the surest way to get a laugh is to suggest that Washington ought to be involved.
This is especially so when it comes to economics. Commerce, after all, is the engine that drives society. It has become an article of faith in some conservative and libertarian circles that any government intervention in the marketplace is akin to having a blundering, drunken fool behind the wheel of your car.
But despite its many failures, does it necessarily follow that government as an institution no longer has any positive and necessary role to play in economic life - that government is hopelessly obsolete and dangerously destructive of the future of our economy?
And is it prudent to assume that the "wisdom of the marketplace" is all we need to build a robust and democratic 21st-century economy - that the best thing government can do is simply get out of the way and let the market decide everything?
__ The baby and the bath water__
In our view, the answer to both questions is a qualified No. We say "qualified" because while tomorrow's decentralized, networked economy offers great potential for letting the creative forces of the market tackle some of the social tasks previously managed by government, historical experience suggests that society's best interests will probably still require government - even a vastly downsized and reinvented government - to play what The Wealth of Nations author Adam Smith once described as its minimal but indispensable role.
Obviously, questions involving government's future role are complex, if only because these require us not only to assess government's past performance but also to make assumptions about the still-uncertain landscape of 21st-century economic life. As yet, no definitive answers exist, and much more analysis and debate is needed.
But perhaps a good place to start is with the radical libertarian notion that government has essentially no positive role to play in economic life. One of the most articulate proponents of this view is the author George Gilder, whose fascinating and often unique insights into the impact of new digital technologies have gained wide currency in recent years. A fine writer with a gift for distilling complex technical issues into popular language, Gilder's powerful critique of outmoded, big-government, industrial-age thinking has thrust him into the spotlight as a leading voice in Newt Gingrich's inner sanctum of high-tech gurus. Indeed, Gilder has emerged as one of the most important advocates of the rights of business unconstrained by government or society in any way.
In a series of articles over the past two years published in Forbes ASAP and in his forthcoming book, Telecosm, Gilder argues that there is only one way to build a communications infrastructure that is rich in innovative content and services: Washington must abandon its historic role in helping to establish competitive ground rules for the telecom industry and in settling key public policy issues regarding universal access and the like.
"An information superhighway cannot be built under a canopy of federal tariffs, price controls, [public policy] mandates, and allocated markets," warns Gilder.
The only way to realize the true potential of an integrated two-way communications infrastructure, he says, is for government to quit handcuffing business with outmoded "[worries] about how to prevent monopoly and preserve universal service."
Here Gilder has targeted at least three broad areas of economic life in which government has historically been involved. These are public policy (consumer protection and citizens' rights), market regulation (setting prices, allocating markets), and antitrust litigation (mounting legal challenges to monopolies deemed anti-competitive). Let's look at each of these more carefully.
In the public policy field, Gilder correctly stresses the critical importance to both public life and the overall economy of choosing between what he calls the "two essential models" for the information highway. One is the gatekeeping model, represented by the cable TV industry, in which content is controlled by the service provider, who derives monopoly rents for granting access - there is little, if any, peer-to-peer exchange among users. The other is the open or common-carrier model, represented by the telephone companies and the Internet, in which content is freely supplied and accessed by users who are linked together in a vast peer-to-peer network.
The question is, How do we ensure that tomorrow's broadband networks are built and operated along the lines of the open and democratic model?
In Gilder's view, government has no business even being involved in this issue. Indeed, he ridicules government public policy initiatives in this area as nothing more than "quixotic schemes of universal service in three dimensions for the homeless."
__ Supply-and-demand utopianism__
Instead, Gilder argues, the laws of supply and demand will automatically lead to a diverse and open information highway modeled along the lines of today's switched two-way telephone networks. "The key condition for the success of the open model and the eclipse of the gatekeeping cable TV model," he says, "is real bandwidth abundance." And with such abundance (which Gilder insists can be created only by allowing cable TV and phone companies to merge into a single-wire conduit), "the most open networks will dominate, and the proprietary networks will wither."
The first problem with this aspect of Gilder's view concerns the difference between today and tomorrow. While an age of unlimited and virtually free bandwidth lies many years off in the future, interactive networks are being built in the real world of today, where bandwidth is still a scarce commodity and those who control it wish to gain as much leverage from that fact as possible. To ignore today's concerns about ensuring an open and democratic information highway simply on the assumption that all will be taken care of tomorrow is irresponsible, akin to disarming today in hopes of future world peace.
But a more serious flaw in Gilder's analysis is that he confuses free-market tendencies with market realities. It is certainly true that the eventual abundance of multimedia bandwidth will tend to diminish the economic incentive for an info highway run along gatekeeping lines. After all, it will be much harder to monopolize supply - in this case, of bandwidth - when there's more than enough of that supply to meet demand. But it is equally true that in the real world of capitalist competition, the law of supply and demand has never by itself prevented businesses from monopolizing supply, rigging markets, gouging prices, or otherwise skunking the consumer whenever they can.
But Gilder's faith in the ability of supply-and-demand economics to automatically create more democratic and socially desirable realities is limitless. Consider the following passage he wrote nearly two years ago: "Over the next decade, computer networks will expand their bandwidth by factors of thousands and reconstruct the entire US economy in their image. TV will expire and transpire into a new cornucopia of choice and empowerment ... video culture will transcend its current mass-media doldrums ... Hollywood and Wall Street will totter and diffuse to all points of the nation and the globe.... The most deprived ghetto child in the most blighted project will gain educational opportunities exceeding those of today's suburban preppie."
TV will expire? Hollywood and Wall Street will totter? The most deprived ghetto child will gain educational opportunities exceeding those of today's affluent youth? And all by the time New Year's Day, 2004, rolls around? If the law of supply and demand can accomplish all this, then Gilder would be right - who needs government?
__ Possibilities versus realities__
In the real world, unfortunately, new technological possibilities must contend with existing social and economic realities. Rather than being shunted to the periphery of power by the decentralizing effects of digital technology, for example, a merger-mad Hollywood and Wall Street are becoming more powerful than ever in the funding and commercialization of new digital products and services. Mass-media television, rather than expiring of its own banality, is increasing in both influence and profitability, thanks to (among other things) its use of new technology that offers viewers added opportunities - from Court TV to CNN to tabloid shows like Hard Copy - to share in such mass-culture phenomena as the O. J. Simpson trial. And as for Gilder's utopian estimate of the educational prospects of ghetto children, even with new technology, these are becoming frighteningly dimmer with each passing day as the social cleavage in incomes, access to new technology, and the skills needed to use it grows ever wider.
What is so ironic about Gilder's faith in supply-and-demand economics is that the "open" telephone-style networks he insists will be the natural fruit of free-market beneficence are, at least in the telephone business, anything but creations of the free market. They are the deliberate product of such governmental policy as the "common carrier" and "universal service" provisions of the 1934 Communications Act and the 1982 Consent Decree that broke up AT&T. Indeed, for most of American telephony history - throughout the 37 years prior to government intervention in 1913 and during the next 70 years of federally supported domination over US communications - Ma Bell ran one of the most ruthless, vertically integrated monopolies the world has ever seen.
The truth is that for all of Washington's multiple and egregious sins, public policy intervention in the market by government has helped shape many of the most democratic and consumer-oriented contours of American economic life. In the auto industry, for example, the establishment in 1966 of safety standards by the National Highway Traffic Safety Administration - as well as the setting of pollution rules under the Clean Air Act of 1970 and their later monitoring by the Environmental Protection Agency - were instrumental in giving citizens what we now take for granted: seat belts, air bags, and cars that are more fuel-efficient and less polluting. While unsafe cars are still produced, you can bet that without federal intervention, a lot more of us would still be driving around in vehicles with shoddy brakes, unreinforced frames, and exploding gas tanks.
Much of this history seems to have been forgotten by the most extreme opponents of any government role in the market, who now propose to scrap our environmental laws and abolish the EPA. They seize on sometimes wrongheaded and overbureaucratic environmental rules - remember the snail darter? - to insist that new technology and the "wisdom of the marketplace" will be enough to guarantee that business, once freed from government public policy action, won't transform the planet into an orbiting toxic dump.
In some cases, libertarians even engage in a kind of redbaiting against environmentalists by pointing to the rape of the environment by the former Soviet government (while neglecting to mention that this tyrannical regime was built by ideologues who also saw their ultimate goal as the elimination of all government).
But comparisons to the USSR are hardly appropriate here. In the old Soviet Union, the chief environmental exploiter was the state, which brooked no interference to its destruction of ecosystems for military and industrial purposes. Here in the US, however, environmental exploiters are generally private commercial interests, and their ravaging of ecosystems can and has been checked by citizen initiatives and governmental action.
These arguments over the role of government in the market hearken back to the earliest days of capitalism. In The Wealth of Nations, Smith advanced the notion of the "invisible hand" guiding the market - the idea that in a free market made up of millions of individuals, each of whom "intends only his own gain," their collective actions will be "led by an invisible hand to promote ... the public interest."
And sure enough, the "invisible hand" theory has generally proven over the centuries to be remarkably valid. But note the word generally. Even Smith did not assert that the invisible hand would always or invariably promote the public interest. In fact, he argued explicitly for governmental intervention in such areas as infrastructure development, education, public services, and cultural works and activities that he considered "most suitable to the interest of the society."
Smith's arguments for limited government intervention were later elaborated upon by William Lloyd in his 1833 pamphlet, "Two Lectures on the Checks to Population," and then 135 years later, by Garrett Hardin's now-famous (at least among economists) article in the journal Science, "The Tragedy of the Commons."
__ Individual gain__
"The Tragedy of the Commons" posits a free-market grazing pasture open to all herdsmen, each of whom seeks to maximize his own gain. As rational beings, each individual herdsman will conclude that it is to his benefit to add more animals to his herd, even though he also knows that this may cause overgrazing and destruction of the common pasture. That's because he alone will receive the benefits of the sale of his animals grown fat off the commons, whereas the negative effects of overgrazing will be shared by all the herdsmen. In other words, the positive result of overgrazing to each herdsman is +1, whereas the negative result of the destruction of the common pasture is only a fraction of -1.
As Hardin noted, "Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit ... [so that] ruin is the destination toward which all men rush, each pursuing his own interest."
Later critiques of Hardin's thesis observed that the tragedy of the commons is not inevitable - cooperatively devised self-regulation can at times restrain individual self-interest - and Hardin himself conceded that in hindsight he ought to have titled his article, "The Tragedy of the Unmanaged Commons."
But the underlying point remains valid: while the spontaneous forces of the free market generally work in the public interest, this is not necessarily or always the case. There may be times when some larger coordinating social action, beyond that which is possible by individuals pursuing their own gain in the market, becomes necessary. This is especially true when the issues at stake involve the democratic character and public-access guarantees of our future communications infrastructure.
Gilder asks us to trust that as bandwidth expands, free-market forces alone will automatically transform lowest common denominator television into "a new cornucopia of choice and empowerment." But is that a reasonable presumption, given that the free-market TV business has so far largely failed to create much quality children's and educational television?
Indeed, if it wasn't for government-sponsored initiatives - specifically, the Corporation for Public Broadcasting now under such heavy attack from conservative and libertarian quarters - one can be fairly certain that even the few TV shows one might call "empowering" today would no longer exist. That's because market-driven entertainment must inevitably seek the maximum return on investment, and any show that is not the captive advertising vehicle of the toy and cereal industries will return precious little profit to its creators and sponsors.
And would market forces guarantee the free speech, equal access, and fairness doctrine rules that now apply in certain media? Should we trust that cable czar John Malone would open his cable systems to all programming regardless of its political content, or that absent federal broadcast license requirements, Disney's Michael Eisner would let ABC broadcast uneconomical but educational programs for children? All we know is that whatever democratic qualities inform our communications media today, these are in no small measure the product of public policy.
Some libertarian critics point to print media and argue that the market seems to have created quite a diverse and empowering literary culture here without the need for any sort of Corporation for Public Publishing. But they ignore the enormous government support - taxpayer-subsidized Second Class, book, and junk-mail postage rates for business; the exemption of periodicals from sales taxes in many states; and federal funding for universities (and their publishing operations) to cite a few examples - that has helped to create this thriving publishing market.
Finally, despite Gilder's ridiculing of government efforts to preserve what he calls "universal service in three dimensions for the homeless," the historical evidence demonstrates that broad public access to essential services such as communications has so far required at least some social intervention. Even in the richest country in the world, there are still significant markets - including some rural areas and high-crime poverty zones in urban areas - that would be too uneconomical for business to serve were it not for publicly mandated subsidies for such service.
Certainly, just because past historical experience indicating that government public policy intervention has been necessary in some arenas does not necessarily prove that the same sort of involvement will be either needed or beneficial in tomorrow's New Economy. Experiments in privatizing a few of our crumbling local school systems, for example, are just getting underway, and these should be strongly encouraged. But even if public education turns out to be an uneconomical "market" for businesses, one can still imagine how our bureaucracy-ridden school systems might greatly benefit from the introduction of a few marketplace dynamics such as competition and customer service. But until these market-driven education experiments prove superior to our present (and admittedly crippled) system on a mass scale, it would be folly to urge the abandonment of government's role in this area.
Market trial and error, after all, is how business develops new products, services, and forms of organization. So let business compete with government - in education, essential public services, and quality children's television. But just as in business, one does not abandon what one has (however flawed) until something superior is proven in the marketplace.
When we move from the field of public policy to government's role as market regulator, however, Gilder's critique is much stronger and more directly on target. "There is no way [government] can ... micromanage telecom," he observes correctly, "without direly damaging all its hopes for an information highway and thus the best prospects for the future of the US economy."
History offers plenty of examples both here and abroad of how government overregulation has squashed progress under the boot of overcentralized planning, overambitious social engineering, and overly rigid bureaucratic procedure. What's more, the dizzying complexity of modern society, with all its multiple and interlinked forces, only increases the likelihood that unforeseen harm may result from even the most well-intentioned government regulation of markets. It is only prudent, therefore, to acknowledge that the bigger and more unpredictable the industrial tiger - and they don't get much bigger than the US$300 billion US telecommunications industry - the more cautious Washington ought to be in poking it with the stick of national policy.
Even government officialdom has begun to acknowledge the failure of its regulatory zeal - witness the broad support in Washington for deregulating telecommunications. Indeed, one would have to be the most rabid of Rhodes-scholar policy wonks - or perhaps simply the author of Hillary Clinton's 1,400-page health care reform fiasco - to fail to see the debilitating gridlock that seems to result from even the daintiest federal forays into day-to-day market dynamics.
__ Bonehead regulators__
Consider this truly frightening description by Gilder of a 700-page Federal Communications Commission regulation order received by cable TV executive Brendan Clouston of TCI: "It was full of detailed regulations on everything from how fast he must pick up his phones for customer complaints and what he should charge for each tier of service and for each component of cable gear, to how large, implicitly, his return on investment can be [about 11.5 percent]," recounts Gilder. "He faced the mandate to adjust nearly every price and policy within the company and to justify each price by filling out 60 pages of forms."
While the insanity of such Byzantine regulatory requirements is self-evident, it's still worth noting that even with the 800-pound gorilla of government on its back, the US cable TV industry has still managed to build the most creative, ubiquitous, and profitable cable service in the world. Furthermore, it's also only fair to mention that when it comes to reaping the benefits of all those 15-year exclusive city franchises, cable TV executives have no beef with the role of government at all.
But Gilder's point about the strangulating effect of day-to-day federal regulation of specific markets and industries is well taken. This fact is evident in the long history of government's involvement in communications.
Government was not always involved in the communications business. During the telephone's first 37 years (particularly following the expiration of AT&T's early patents in 1894), Ma Bell faced intense competition from some 6,000 independent phone companies. But through various means both competitive and anticompetitive - including market-rigging schemes, the stock takeover of Western Union, and the successful campaign by chief shareholder J. P. Morgan to get Wall Street banks to deny commercial credit to independents - AT&T had by 1913 managed to buy out or destroy its major rivals, seizing effective monopoly control over US telecommunications.
Only a few independent phone companies still survived at the local level. But because Ma Bell refused to let these independents interconnect their several million customers to AT&T's long distance network - the only one then in existence - the development of a truly nationwide telephone service was roadblocked.
As author John Brooks wrote in Telephone: The First Hundred Years, "The monopoly-bound bandwagon was rolling along. Independent telephone companies were falling into the Bell basket by the dozen. Moreover, public pressure for interconnection continued to mount, and it was reflected in political pressure. Clearly, the people and their representatives had decided that [AT&T] was becoming too large and powerful." For AT&T, Brooks noted, only "two courses were open: to push on toward monopoly at the expense of certain public hatred and a huge government antitrust suit to dismantle the company, or to compromise."
Matters came to a head in 1913, when the Justice Department, facing a huge public outcry, began an investigation of AT&T under provisions of the Sherman Antitrust Act. But before a case could be made, AT&T cut a deal with the Feds: in exchange for being allowed to preserve its vertically integrated monopoly of telephony - from the local loop to phone equipment manufacturing to long distance service - AT&T agreed to let the independents interconnect, sell its controlling interest in Western Union, and subject itself henceforth to federal regulation as a quasi-utility.
At the time, it must have seemed the perfect solution for all sides. The public was able, at long last, to see the creation of a fully integrated nationwide phone service and the emergence of the modern era of communications. AT&T was able to avoid dismemberment. And the federal government, by gaining increased regulatory authority over one of America's fastest-growing industries (first through the Interstate Commerce Commission and later through the FCC), achieved a major expansion of its power.
As we now know, the AT&T agreement of 1913 (known as the Kingsbury Commitment) proved to be a mixed blessing. Coming at a time of unprecedented consolidation of the modern industrial age corporation and state, it clearly marked a turning point in the role that government played in economic life. No longer merely the citizens' defender against monopoly cartels, Washington increasingly came to see itself as the day-to-day regulator of vast markets and whole industries (usually to the benefit of those industries unless public pressure intervened). Many progressive thinkers of the time even believed that with its army of "experts" setting policy on everything from prices and tariffs to labor relations and corporate rates of return, government could help to rationalize US industrial activity and better promote the public interest.
But as the next half-century increasingly made clear, there were serious trade-offs involved in the rise of Big Government to its full glory. On the positive side, in its newly expanded public policy role Washington was able to inject issues of social responsibility and consumer rights into the boardroom decisions of business. The common-carrier and universal-service guarantees of US telephony are the legacy of this expanded role.
But at the same time, the vision of government as all-wise overseer of the marketplace gradually morphed into a Kafkaesque nightmare of bureaucrats clueless about how to deal with the ever-more-complex dynamics of modern economic life. This nightmare legacy is today a contributing factor in the deepening paralysis of our institutions and structural inertia in our economic life.
Meanwhile, the corrosive sore left untreated by the 1913 Kingsbury Commitment - the question of monopoly and its effects on innovation - was allowed to fester until, by the late 1960s, America's telecommunications industry had begun to rot from within.
New technologies had been devised - cellular telephony, for example, and Corning's development of fiber-optic cable - but lacking the incentive of competition, AT&T took almost no steps to commercialize and deploy them. On the consumer front, the 1968 Carterfone decision by the FCC theoretically allowed customers to use more cost-effective and feature-rich phones developed by Western Electric competitors, but AT&T imposed such burdensome restrictions on the process that few actually did so. And in long distance service, a May 1970 order by the FCC required AT&T to allow alternative microwave-relay carriers such as MCI (and later Sprint) to connect with local subscribers, but Ma Bell stonewalled the competition by requiring anyone using MCI or Sprint to dial 12 extra digits in order to complete a long distance call.
What market regulators failed to achieve in the end with their band-aid solutions the Justice Department was eventually able to accomplish with an antitrust suit filed in 1974. A gangrenous cancer had choked off innovation, wealth creation, and consumer choice in American telecommunications. That cancer was monopoly, and the cure was federal antitrust action.
__ Are monopolies good?__
For Gilder, however, government's antitrust role is based on a "spurious" desire for competition in the market. "If current fears of monopoly result in a contrived two-wire mandate on America's communications infrastructure," he declares, "all the hopes for an integrated two-way net will die until well into the next century."
Here he is referring to government prohibitions against the merger of telephone and cable giants operating in the same region, and he could well be right to call for the removal of such restrictions. But Gilder does not limit his critique to this particular example. He ridicules all concern over monopoly control of markets as nothing more than "petty fears and pettifoggery," nothing more than a "monster hunt" waged by Big Government and the mass media. Even the robber barons of old, claims Gilder, were innocent victims of government persecution.
"In the industrial era, it was the so-called robber barons who greased the growth of government with their chimerical menace," he asserts. Chimerical is defined as unreal, imaginary, or wildly fanciful.
Hardly imaginary, however, were the real-world effects of late-19th-century and early- to mid-20th-century monopolies, whether market-created or government-supported, as in the case of AT&T. Consider, for example, the malignant history of the Big Three US automakers. Through a combination of market rigging, sweetheart deals with captive suppliers, and bald-faced conspiracies to kill off smaller rivals and to suppress all alternative transportation technologies, the Big Three colluded to surf the marketplace as if it were their own private tsunami of profit.
"What's good for General Motors is good for the country" was more than just a slogan of the time. It was the rationale for an auto-dominated social regime whose effects were in many respects certainly not good for the country. True, the auto giants were eventually weakened by foreign competitors as a result of their own monopoly-induced lack of innovation, but not before they had set personal transportation in America upon a course from which this country has still not, and may never, fully recover.
But to Gilder and others, market-created monopolies are inherently good for the economy. "Every innovation gives its owner a temporary monopoly," he notes, and goes on to insist that such "temporary" monopolies are essential to the rapid funding and growth of new industries. But two questions arise from Gilder's view:
Is it true that innovation can only occur when companies are able to enjoy monopoly profits and carte blanche freedom from societal regulation? And is it true that, in any event, monopolies are only "temporary" phenomena whose potentially negative effects are invariably corrected by the market's self-regulating action?
As to the first question, Gilder claimed that monopoly profits so huge they might be considered "obscene" would be "indispensable" in attracting Direct Broadcast Satellite and wireless cable systems into the broadband media business. If government persisted in enforcing its "spurious" competitive model, he warned, "these capital hungry competitors will languish."
As we can see, this has not been the case. Direct Broadcast Satellite companies are doing well - one as an upstart competitor to cable TV firms, the other as a subsidiary - and their profits are not "obscene" by any means. Likewise, wireless cable companies are either competing (or have received hefty premiums for merging) with phone companies in anticipation of the latter's eventual launch of broadband services.
And as to whether monopoly is "essential" to innovation, quite the opposite is true. A wealth of scholarly research and historical experience demonstrates that innovation is far more robust precisely when there is no monopoly control and competitors battle on a daily basis. One need only look at the rapid technological and service innovations among telephone and cable TV firms as they watch the approaching end of their monopoly control of local markets.
What about the second issue: are market-created monopolies only transitory and not worthy of concern? In arguing so, Gilder goes to absurd lengths. Addressing public concerns over Microsoft's growing power, for example, Gilder asserts that Microsoft has already outgrown its temporary monopoly and is now "at the twilight of its dominance."
If that's twilight Microsoft faces, then Bill Gates must be praying for nighttime!
What's more, Gilder asserts that "in this new [era], Microsoft's present market share and installed base are barriers to entry [into the vast communications markets of tomorrow] for Microsoft rather than for its rivals."
The truth is, Netscape or any of Microsoft's other rivals would kill for a 100 million-user installed base.
Even Gilder doesn't really believe such utopian nonsense about the twilight of Microsoft. Elsewhere in his new book, he concedes that Microsoft is executing "a brilliant coup" by "reaching out to leverage the telephone and network equipment manufacturing industries" in an "audacious grab for supremacy in the telecosm." The company's enormous leverage, says Gilder, "positions Microsoft to harvest the fruits of the single most massive and far-reaching [development] in all electronics today."
So which is it? Is Microsoft facing "the twilight of its dominance?" Or is Bill Gates "leading the pack in transforming his company from a computer company into a communications concern?"
At least there is no doubt about what Gilder thinks society ought to do regarding the supposedly chimerical menace of monopoly: nothing.
The underlying presumption of Gilder's temporary monopoly thesis is that the marketplace, if left to its own devices, will invariably reach and maintain an equilibrium state of free and open competition. This view, however, ignores the reality of markets as they are structured. In fact, tendencies toward both competition and monopolization co-exist in the market, with the latter being an especially strong drive not so much in the emergent phase of industries but rather in their later stages of consolidation and maturation, when all the advantages of economies of scale and scope finally become available. One need only contrast the early days of the cable TV, computer operating systems, or local telephone businesses, when competition was prevalent, with the situation that prevails in these markets today, where one or at most a few giant firms enjoy a stranglehold over their markets.
Clearly, big is not necessarily bad, nor is monopoly necessarily harmful to innovation or the public interest. There are good reasons to believe, for example, that the Disney-ABC merger, as well as the proposed mergers of Westinghouse Electric Co. with CBS and Turner Broadcasting System Inc. with Time Warner, will result in an expansion rather than a constriction of programming choices for consumers.
__ The case of IBM__
What's more, government antitrust action is not always wise or necessary even when monopolies are retarding innovation and diversity in the market. While the government spent nearly 30 years arguing with itself over whether to press its antitrust suit against IBM, for instance, Big Blue collapsed of its own lethargic weight.
But two caveats should be noted by those who would deduce from IBM's example that the market inevitably overthrows its own temporary monopolies.
First, IBM's downfall may have been less the result of self-regulating market forces than of Big Blue having committed one of the greatest strategic blunders in modern business history. Indeed, college dropout Bill Gates might today be flipping burgers and clipping coupons were it not for, among other factors, IBM's blindingly stupid giveaway of control over the DOS operating system.
And second, though it's reasonable to expect that in the long sweep of history the market will eventually overthrow its monopolies - if necessary, by somehow making them stupid like IBM - exactly how long is temporary? Thirty years, as in IBM's case? Or given the greater global reach and scale of today's media and communications empires, might a temporary market-created monopoly be able to cripple a strategic economic sector for 40, 50, or 60 years before the market eventually heals itself? And what would be the resulting cost in American living standards and competitiveness in world markets?
Absent antitrust action, we could only hope that our global competitors would be the even less innovative state-run monopolies that have bedeviled the European and Japanese telecommunications industries in recent years.
In any event, the point is not to defend government antitrust action as always necessary or wise. Rather, the real issue is whether it is wise to completely abandon one of society's proven tools for ensuring that the market delivers the benefits of innovation to citizens - at least within their lifetimes.
Gilder may argue that antitrust is inevitably anti-competitive, harmful to innovation, and "wantonly destructive of the future of the economy." But this rigidly absolutist view is simply not supported by the facts.
History records many instances in which government antitrust action proved to be a powerful catalyst for sparking innovation in a slumbering, sclerotic industry. In the auto industry, for example, a 1969 Justice Department antitrust suit against the Automobile Manufacturers Association helped propel the development of the modern smog-control device. The suit targeted a secret agreement among automakers in which they shared patent licenses royalty-free. This had the effect of killing competitive rivalry - and thus any spur to innovate - in the development of pollution-control devices. After automakers agreed to end the practice, the development of the modern smog-control device quickly followed.
All well and good for smokestack industries, some might say. But what about today's complex, technology-driven industries, whose competitive dynamics are in many respects truly different from those of some old-line industries? Where is the evidence that government antitrust action has played a positive role in these new sectors?
__ Proof positive__
Actually, the evidence is there every time we make a long distance call, send a fax, dial someone on a cell phone, or log on to the Internet. Much of what we now take for granted in communications is the direct result of the antitrust suit that resulted in the 1982 consent decree that finally broke AT&T's vertical monopoly over communications.
In the 11 years since AT&T's 1984 divestiture, long distance rates have dropped by 50 percent. People now have a choice in long distance service - indeed, nearly 25 million people switched long distance carriers in 1994 alone. Four nationwide fiber-optic networks have now been laid, whereas previously AT&T saw fiber deployment as an MCI threat. AT&T once scoffed at the idea that wireless telephony would find a market of even 1 million customers by 2000. But today, more than 17 million people use cellular phones - and we still have four more years to go before the millennium.
The bottom line? As a direct consequence of the catalyzing effect of federal antitrust action, we are now witnessing the greatest surge of technological innovation in history. And in the process, this explosion of new voice and data services has restructured not only a host of industries - consider how the growth of toll-free catalog shopping has affected retailing, for example - but, for tens of millions of people who telecommute, the nature of work itself.
Even Gilder acknowledges some of the benefits of the government's antitrust action against AT&T: "Creating most of the new value during the 1980s were companies funded or restructured by corporate raiders, venture capitalists, and even - in the case of a $75 billion gain from the AT&T breakup - the courts (disbanding a monopoly previously created by government)." Gilder, of course, is being disingenuous here and playing upon a popular misconception of government's role in telephony. Washington did not create AT&T's original monopoly. Indeed, it was the reason for government's entry into the communications field in 1913. But in attempting to regulate it for more than 70 years, government, ironically, ended up only strengthening the monopoly.
The question arises: what would have happened had government not taken the antitrust action it did and left the market alone? The futurist Alvin Toffler, a leading voice along with Gilder in A Magna Carta for the Knowledge Age (a project sponsored by the Progress and Freedom Foundation, which is generally regarded as Newt Gingrich's think tank), addressed precisely this question in his little known yet seminal book on AT&T, The Adaptive Corporation: "A truly 21st-century communications system could not have been built by an oversized, overcentralized, and overconstrained organization of the kind AT&T was before the great breakup," Toffler noted. "To have kept AT&T's old structure would have guaranteed America's loss, before long, of its claim to the world's most advanced telecommunications."
Toffler goes on to place the question of government's proper role in the marketplace in the larger social context: "I have publicly urged, again and again, that market forces be allowed to work in communications and other fields. But to recognize the creative forces of the marketplace is not to deny the need for some policy coordination that reaches beyond the scope of any individual company. Communications is too important to be left entirely to the short-term pressures of competition. Nor should the future of communications be determined entirely by economic considerations. Communications, above all, is a social act. It is inherently cultural, political, psychological. To regulate (or deregulate) telecommunications for narrowly economic reasons is to lose sight of its primal importance. Telecommunications is part of the glue that must hold us together in a world that is quaking with change and fragmentation."
And therein lies the more profound danger of a society governed solely by the unconscious mechanisms of free-market forces. We are entering an era that holds enormous and empowering promise, but that promise necessarily rests upon the precarious edifice of a society already dangerously dysfunctional and fractured by growing inequalities between haves and have-nots.
Even Intel co-founder Gordon Moore, whose Moore's Law is so often invoked by Gilder to demonstrate the efficiency of the market-driven computer industry, has recently stated that he is deeply worried about the fact that despite all the wealth-generating power of the technology marketplace, the gap between info rich and info poor is growing wider.
How do we ensure that the future does not become a wonderland of opportunity for the minority among us who are affluent, mobile, and highly educated and, at the same time, a digital dark age for the majority of citizens - the poor, the non-college-educated - who are not?
Given that no society, not even ours, can survive such a stark dissonance of parallel futures for long, what must be done to ensure the development of a sustainable political economy for the digital age?
Unfortunately, the established political system has been unable to offer much innovative thought or policy on these questions - even with self-styled "revolutionaries" such as Newt Gingrich in power. Doubtless this is partly the result of government being mainly in the business of protecting entrenched elites, who not surprisingly tend to look with disfavor upon any social change that threatens their status.
But the paralysis of our social institutions is also a reflection of a larger national confusion and ambivalence. As a society, we are coming to the end of the industrial-age tunnel. We can make out the blinding light of the digital future some distance ahead, but we are still caught in a no man's land between.
As a result, our understanding of the questions we will face is only partial and generally conditioned by the lone thing we have to go on - our past experiences. We are trying, after all, to model the structures for a new age with brains that were trained and developed in its dying predecessor. Considering that the future is only partially visible, is it any surprise that many of our ideas about it are murky and opaque?
Nonetheless, there are some things about which we can be reasonably certain. The free market is without question the most powerful and creative force for change and the betterment of human society. It is the beating heart of all progress, the proving ground of all innovations in technology, and the creation of social wealth.
__ The free market's limits__
But at the same time, the free market cannot do all. It does not contain the sum total of all human knowledge and wisdom, nor does it encompass and reflect the full range of human endeavors, needs, and concerns. Indeed, that is precisely why for millennia people have invented governments in the first place - so that citizens can act together, consciously, to shape the spontaneous economic and natural processes going on around them. Perhaps here lies the difference between a bazaar and a civilization.
As noted earlier, governments generally tend to protect the power of entrenched elites, and even in the United States the average citizen has only a limited voice. But as our own history also illustrates - from the destruction of slavery during the Civil War to the union-building, civil rights, and other movements of this century - citizens have used governing institutions to alter history for the better. Indeed, for all its high costs, egregious sins, and political and economic failings, government still remains the only societywide institution we possess with sufficient scope and legitimacy to represent the public will (at least to some degree) and to intervene in the flow of history to give it shape and direction.
It is possible to imagine a tomorrow - say, 100 years from now - in which most or even all government functions have been taken over by privatized, market-driven social and economic organizations. But that tomorrow, if it comes, will evolve only out of a long historical process of development. To advocate replacing government today with some sort of marketocracy of the technologically enabled would, for starters, disenfranchise the 70 percent of Americans who don't own computers. It is precisely in such proposals that one can see the fundamental elitism of today's ultralibertarians.
But for the nearer term, what seems the most sensible way for government to function in economic life? The evidence suggests that society benefits most when government avoids meddling in the day-to-day action of the market, while at the same time maintaining not only a potent antitrust weapon should it be needed to counter the innovation-crippling effects of monopolization, but also a prudent, minimalist role in promoting society's most vital public interests.
In short, we must abandon the industrial-age mandate that has shaped the role and actions of government for almost 200 years. Much of what Washington once did should now be done by people acting together in their self-created social and economic communities. And as for government's remaining tasks, these ought to be carried out in new and more dynamic, market-responsive ways.
What might some of these tasks be? Promoting the broadest possible access to tomorrow's communications and information networks. Ensuring that today's free-speech and common-carrier guarantees are maintained on those networks. Protecting consumer rights and our precious environmental resources in a fast-changing marketplace. Continuing to seed research and development of new technologies (such as led to the creation of the Internet). Using tax and other incentives to preserve high value-added manufacturing and technical jobs at home, with all the broad-based economic ripple effects that flow from these jobs. And, perhaps most important of all, helping to fund and develop the massive and truly effective skills training and education programs that will be needed if we want to see the rising tide of the New Economy lift the boats of all citizens - including those of the information have nots.
These are some of the critical challenges we face, and to deny any role for government in our attempts to meet them would only put our society at risk. For when it comes to an enterprise as far reaching in its social and economic implications as the so-called information highway, it is imperative that we make conscious choices about how and in whose interests it will be financed, built, and operated. We are dealing, after all, with a technology that has the potential to become either a profoundly liberating and revitalizing force in society or a grave threat to personal liberty and the human spirit.
It is not recommended that we trust the outcome solely to the corporate accountants and investment bankers.
