Don’t Stop Thinking about Tomorrow

The interconnections among hope, trust, tech, and our modern economy show up all over the place. From the perspective of investors, most tech companies are growth companies. Even those few that could be value companies try not to be.

But investors were only part of the picture. Over in the business world, the late 1990s were also an interesting time. Y2K (a fear factor) and the Internet (a hope factor) forced companies to assess their IT abilities and needs. They learned about new tech and telecom capabilities that would increase their productivity and cut their costs. Businesses were excited. They invested in technological upgrades, often buying cutting-edge capa­bilities that they could justify only by projecting long-term payoffs.

Consumers followed a similar pattern. The Internet, new wireless phones, PDAs, MP3 players, and assorted other gadgets excited con­sumers. New devices quickly became “must have” equipment, and con­sumers favored high-end gadgets that promised to incorporate the next wave of exciting new functions and capabilities. Consumers, too, focused on the long term, projected significant product innovations, convinced themselves that the innovations would arrive quickly, and trusted tech companies to develop great products.

That was the world of the late 1990s. A world of widespread—some might say irrationally exuberant—hope and trust that tech would power wave after wave of growth. And then the trust and the hope began to erode. That epidemic erosion began with holiday shoppers disappointed by fulfillment problems, dimming consumer hope. Then the flow of tech products slowed. Consumers realized that they wouldn’t lose much by deferring their purchases, and consumer hopes dimmed further. Tech clients stopped paying their bills. Businesses holding unpaid bills noticed that the flow of new products had slowed, and ceased investing in new equipment. Business hope dimmed. But the epidemic exploded into a full- fledged plague only when it hit investors—who had trusted the most, hoped the most, and felt the most betrayed. When tech investments declined, investor hope dimmed. When non-tech investments declined, investor hope dimmed further. When investors learned that accounting conventions allow corporations to game their earnings, investor hope dimmed yet further and investor trust began to erode.

The coup de grace hit us all in one fell swoop on 9/11. Hope, trust, and growth fell far from the forefront of our minds. Our focus shifted to the short term. We worried about security; we kept our investments close to home; we projected meager profits into the future and applied steep discount rates to undervalue cash not yet in hand; we watched com­panies cut costs and lay off their workers. We found ourselves trying hard to remember the last time we actually “had” to have a new tech product and trying hard to imagine that broadband would someday finish rolling itself out. But above all, we lost our trust in corporate America. We’re unlikely to see a serious, sustained turnaround until we’ve recovered our hope in the future and our trust in the innovators and entrepreneurs who will bring us there.

Nurturing that hope is a job for the government. The tech sector— and the American economy—can thrive only if our economic policies allow it to thrive. Those economic policies, in turn, must embrace the pillars of market liberalism: broad opportunities, free choices, and ample incentives. They also must recognize that a sophisticated information economy requires an expanded definition of infrastructure—and savvy investment in infrastructure is among the key jobs of government in a free, liberal economy.

Government “investment” can take several different forms. Some­times, the government invests by using its own people and resources. Sometimes it oversees the performance of contractors. Sometimes it reg­ulates the behavior of private actors. And sometimes it enforces liability on private actors. Different mixes are right for different settings at dif­ferent times.²⁸ But one way or another, the government must apply its best efforts to ensure that our infrastructure defines a solid platform for growth. Appropriate approaches to IP and competition law are critical parts of that information infrastructure, but they are hardly sufficient.

“Infrastructure,” like “investment,” can assume many forms. Roads, highways, the electricity grid, the telephone system, TV, radio, and the Internet define the infrastructure underpinning our physical and infor­mation sectors, not to mention occupying most of our free time. The market cops who police oligopolists and monopolists, the real cops who police the streets, the soldiers who police the world, and the emergency workers who help clean up after their rare failures define the infrastruc­ture underpinning our security. Legal systems that enforce property rights, contracts, and liabilities define the infrastructure underpinning our economy and our social fabric. Education systems that prepare our workers for the information economy, employment systems that help match workers to jobs, and welfare systems that support people while they’re retraining or reorienting their skills, define the human infra­structure necessary to navigate the information age. The network that we call the free world defines the global infrastructure of a prosperous future. The government needs to develop, to maintain, and to improve all of these infrastructures.

The government also must ensure that our tax system generates enough revenue to support all of those infrastructure investments, without dampening incentives, restricting opportunities, or distorting behavior. The government thus has a challenging—and critical—role to play in transition planning. It must ensure that we have an infrastruc­ture upon which growth is possible, an expansive pool of people with the skills necessary to innovate and to take entrepreneurial risks, and a market in which they can compete unencumbered by either public or private monopolies. Within that free market, some of those entrepreneurs will succeed, some will fail, and society will emerge as the big winner.

The best way to restore our faith in corporate America—so that once again we can invest with confidence and be excited about business and technology—is to wed ourselves to global market liberalism. Ideas like free trade, low-to-moderate tax rates, minimal distortions in the tax code, tough enforcement of antitrust and securities laws, collaborative industry/government/university research, IP rights that promote more innovation than they deter, political and economic liberalization abroad, an effective education system, retraining and relocation assistance, and unemployment-to-retraining and welfare-to-work programs all provide our best prospects for success.

But liberal markets also have a dark side; they tend toward bazaar­like chaos. The growth bubbling up from below can be phenomenal, both in network and in nonnetwork industries, but it’s also difficult to direct. Market liberalism tends to favor the process over a preselected outcome. And market processes are notoriously hard to control. Mis­perceptions can lead to misdirected investment, to irrational exuberance, to bubbles, and to terrifying losses. The bubble was a speculative gloss that eventually blew off an impressive record of growth. Real produc­tivity growth and the excitement that it engendered drove the 1990s’ economic boom—as well as our roller-coaster ride through the infor­mation sector.

Retrenchment after the last part of our ride has motivated something of a backlash against market liberalism, and driven many to seek safety in stable, reliable incumbents. Today’s information-sector investors and observers, like their government, are more sympathetic to Microsoft and the record companies than were their recent predecessors. In the broader worlds of technology and communications, incumbent media outlets and the Baby Bells have fared much better than their late start-up competi­tors. We have fallen prey to a tech sector governed more by lock-in than by growth. And therein lies a classic danger, for we run the risk of allow­ing a few powerful incumbents to plan the information sector’s future— even as we aver that we would never accept such an outcome. Friedrich Hayek, who won the 1974 Nobel Prize in economics for his resounding defense of liberal economic policies, foresaw this danger with his char­acteristic prescience.

Few central planners are content to say that central planning is desirable. Most of them affirm that we can no longer choose but are compelled by circumstances beyond our control to substitute planning for competition. The myth is deliber­ately cultivated that we are embarking on the new course not out of free will but because competition is spontaneously eliminated by technological changes which we neither can reverse nor should wish to prevent.

There is yet another theory which connects the growth of monopolies with technological progress It contends that... it will be impossible to make use

of many of the new technological possibilities unless protection against compe­tition is granted, i.e., a monopoly is conferred. This type of argument is not nec­essarily fraudulent.... No doubt in many cases it is used merely as a form of special pleading by interested parties. Even more often it is probably based on a confusion between technical excellence from a narrow engineering point of view and desirability from the point of view of society as a whole.

There remains, however, a group of instances where the argument has some force.... [It] must be admitted that it is possible that, by compulsory standard­ization or the prohibition of variety beyond a certain degree, abundance might be increased in some fields more than sufficiently to compensate for the restric­tion of the choice of the consumer. It is even conceivable that a new invention may be made some day whose adoption would seem unquestionably beneficial but which could be used only if many or all people were made to avail them­selves of it at the same time...................................

It is true that in such situations we may have to sacrifice a possible immedi­ate gain as the price of our freedom—but we avoid, on the other hand, the neces­sity of making future developments dependent upon the knowledge which particular people now possess. By sacrificing such possible present advantages, we preserve an important stimulus to further progress. Though in the short run the price we have to pay for variety and freedom of choice may sometimes be high, in the long run even material progress will depend on this very variety, because we can never predict from which of the many forms in which a good or service can be provided something better may develop........................................................................ [T]he argument for

freedom is precisely that we ought to leave room for the unforeseeable free growth. It applies, therefore, no less when, on the basis of our present knowl­edge, compulsion would seem to bring only advantages, and although in a par­ticular instance it may actually do no harm.³⁰

Milton and Rose Friedman, who like Hayek, are typically associated with critiques of government planning, similarly recognized that the true danger of planning is inherent in the structure of a monopoly market rather than in the identity of the planner. “The great danger to the con­sumer is monopoly—whether private or governmental.... Alternative sources of supply protect the consumer far more effectively than all the Ralph Naders of the world.”³¹ Consumers locked in to monopoly sup­pliers are unprotected. They remain subject to the monopolist’s whims and tastes. Innovation and technological development cease being the result of a competitive marketplace and become instead the diktat of the incumbent planner.

With each passing day, powerful incumbents lock us ever more deeply into their proprietary standards, and ensure that all future innovation will pass through the narrow channels that they already control. We find fewer choices and fewer exciting innovations. We lose the job growth powered by entrepreneurial start-ups. We rely increasingly on paternal­istic incumbents, and hope that they prove to be good parents. We seem able to do little but to fight for second-best fixes, like antitrust enforce­ment or procurement legislation. The underlying problem—our poten­tially anachronistic IP system—appears to remain sacrosanct.

We’ve already seen this problem permeate the information sector. We’re likely to see it recur throughout the broad world of technology. Companies pushing new innovations frequently find a powerful incum­bent in their way, not as a direct competitor, but rather as the “con­troller” of an industry or a market, acting as a de facto central planner. The entrants ask the government to prevent the incumbent from lever­aging its strength, either by tough enforcement actions or by changing the governing laws and regulations; the incumbent objects. The govern­ment’s choice will dictate who will succeed and who will fail.

So there it is in a nutshell. We must rebuild our sense of security and our feeling of trust if we ever want to return to long-run network growth. Those are tasks for the government. But even after we start thinking about the long term and trusting the corporations best poised to build it, we’ll still need to see an exciting enough future to jump into it happily. That’s the tech sector’s job. When we regain our hope in the future, tech­nology will continue making us all richer (government permitting). Until we do, until we learn to trust again, to look to the future, and to hope for a better tomorrow, we’re not likely to go anywhere fast. That’s how the information sector relates to the tech sector, to the broader Ameri­can economy, and in turn to the world: it promotes hope in a better future.