Diana McCarty on Mon, 7 Oct 96 06:26 MET |
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industrial hinterlands involved in the production of hardware and software, and both are animated by intense flows of knowledge and information, partly due to their association with large technical universities, Stanford and MIT respectively. The two ecologies are very different, however, and this has made a difference in their performance. "Slicon Valley has a decentralized industrial system that is organized around regional networks. Like firms in Japan, and parts of Germany and Italy, Silicon Valley companies tend to draw on local knowledge and relationships to create new markets, products, and applications. These specialist firms compete intensely while at the same time learning from one another about changing markets and technologies. The region's dense social networks and open labor markets encourage experimentation and entrepeneurship. The boundaries within firms are porous, as are those between firms themselves and between firms and local institutions such as trade associations and universities." {7} The growth of this region owed very little to large finantial flows from govermental and military institutions. Silicon Valley did not develop so much by the economies of scale typical of antimarkets, as by the benefits derived from an agglomeration of visionary engineers, specialist consultants and finantial entrepeneurs. Engineers moved often from one firm to another, developing loyalties to the craft and region's networks, not to the corporations. This constant migration, plus an unusual practice of information-sharing among the local producers, ensured that new formal and informal knowledge diffused rapidly through the entire region. Bussiness associations fostered collaboration between small and medium-sized companies. Risk-taking and innovation were prefered to stability and routinization. This, of course, does not mean that there were not large, routinized firms in Silicon Valley, only that they did not dominate the mix. Route 128, on the other hand, houses a completly different mixture of markets and anti-markets: "While Silicon Valley producers of the 1970's were embedded in, and inseparable from, intricate social and technical networks, the Route 128 region came to be dominated by a small number of highly self-sufficient corporations. Consonant with New England's two century old manufacturing tradition, Route 128 firms sought to preserve their independence by internalizing a wide range of activities. As a result, secrecy and corporate loyalty govern relations between firms and their customers, suppliers, and competitors, reinforcing a regional culture of stability and self-reliance. Corporate hierarchies ensured that authority remains centralized and information flows vertically. The boundaries between and within firms and between firms and local institutions thus remain far more distinct." {8} The different dynamics of these two institutional ecologies illustrate one of the potential benefits which computer networks could bring to a new economy. Although the dynamics of Silicon Valley involved networks of different kinds (social, institutional, educational networks) which formed more or less spontaneoualy, networks like the Internet could help energize other industrial hinterlands around the world (including the third world) by making possible the interconnection of many small bussinesses, allowing them to compete with large national and international corporations which enjoy economies of scale. The industrial regions in question would not, of course, have to produce computer equipment: any product that is today manufactured in large, militarized assembly lines could be competitively created in a less oppressive enviroment by an networked agglomeration of small firms, as has happened, for instance, in the production of textiles in certain regions of Italy. The other potential economic application of networks is related not to the effects of networks on traditional commerce and industry, but to the creation of a space on which to carry brand new commercial and industrial transactions. The Internet is today rapidly evolving into that space and the development of electronic cash and crypto-technology to perform secure and anonymous transactions will accelerate this trend. Much as a traditional economic systems may be seen as a means of allocating or distributing resources which are scarce, so scarcity is one of the factors that determines the nature of Net economics. The scarcity in question, however, is not of computer power or memory, both of which are becoming cheaper and more plentyful every day, but a scarcity of bandwidth, that is, of the capacity to transport information through the conduits or channels that link computers together. Of the writers that have analysed the effects on Internet economics that a change from a world of scarce to one of plentyful bandwidth would have, no one has received more attention than George Gilder. Gilder s technical analyses are indeed quite interesting but their merits must be assessed against the background of my introductory remarks. In particular, Gilder is an extreme invisible-hander, that is, someone with a strong ideological commitment to nineteenth century economic ideas, ideas that as I said, are not even good to analyse the nineteenth century, let alone the new millenium. However, Gilder s right wing politics are so transparent that it is quite easy to separate them out form his concrete analyses of the technologies that could one day end the bandwidth scarcity. To begin with, the current channels used by the Internet are owned by telephone companies, and the technology that runs those channels was designed to deal with bandwidth scarcity. That is, when bandwidth is expensive much of the infrastructure investment is on the switches that control the movement of analog or digital information through the conduits. Today, as Gilder argues, the telephone companies have replaced much of the old copper wire with optical fiber, vastly increasing the amounts of data that can flow through these channels. However, to take advantage of the huge bandwidth increase optical fiber makes possible we need to get rid of hardware switches (replacing them with control devices simulated by software) but this move is resisted by the telephone companies, since they are in the bussiness of selling services based on switches. A similar point applies to other potential channels for data, such as wireless transmission through the electromagnetic spectrum. Just like a switch-based technology evolved in a world of bandwidth scarcity, so our current broadcast technology grew to take advantage of the limited space in the radio portion of the spectrum. Today the technology exists to use higher-frequency portions of the spectrum, increasing bandwidth enormously, but the cellular telephone companies that should be rushing to take advantage of this are still caught in their scarcity-based paradigm. A system of optical fiber liberated from switches, a fibersphere as Gilder calls it, together with the use of the atmosphere at high-frequencies, could result in a world where bandwidth is so plentyful as to be virtually free. {9} We may agree with these assessments because Gilder picked up from engineers, or from reading engineering books, the relevant knowledge of the potential of the new technologies . But when he switches to an analysis of the economic consequences of these developments, and even more, to his advice to policy-makers, Gilder s ideological baggage completly overrides his technological insights. There are two biases which an invisible-hander will bring to an analysis. First, the most obvious one, any intervention by the government is by definition evil, since it interferes with the invisible hand. Therefore one has to attack government regulations, even if they serve to break up monopolies thereby contributing to technological development, as was the case of the break-up of AT&T in 1984. The second bias is more dangerous because it is less visible: one divides society into public and a private sectors and then one applies the term market to the private firms regardless of their size, structure, and economic power. This ideological maneuver is performed through several operations. First one uses the word competition as if it applied both to the anonymous competition between hundreds of small buyers and sellers in a real market (the only situation to which Adam Smith applied his invisible hand theory) as well as to the competition between oligopolies, say, General Motors, Ford and Chrysler. The problem is that, these two forms of competition are completly different, with the competition between oligopolies involving rivalry between opponents which must take each other s responses into account when planning a strategy. As economist John Keneth Galbraith has shown, oligopolies are structures as hierarchical as any government bureocracy, with as much centralized planning, and as little dependency on market dynamics. {10} Unlike the small buyers and sellers in a real market, who are price-takers (that is, they buy and sell at prices that set themselves), oligopolies are price-makers, that is, they create prices by adding a mark-up to the costs of production. In short, when one confuses these two types of competition one fails to distinguish between markets and antimarkets. The consequences of these two biases are very obvious. Oligopolies, and their power to absorbe smaller competitors though vertical and horizontal intergration, are eliminated from the picture, and the landscape now contains only markets and the government, with monopolies being now the only antimarket force left, but one that can be easily dismissed. Thus Gilder agrees that there are such thing as monopolies, like those of the Robber Barons of the nineteenth century, but the enourmous profits that these monopolists generate are seen as transitory, and therefore the menace they represent is dismissed as largely imaginary. Although Microsoft is today playing a similar role as the Robber Barons, according to Gilder its potential menace (and any government action againt it) should be dismissed. So what if Bill Gates has aquired a virtual monopoly on operating systems, a position of power that allows him to control the evolution of much of the software that runs on top of those operating systems?. No problem, says Gilder, in a world of bandwidth plenty, the paradigm of operating systems will change to one of distributed software in the Internet, and this by itself will end Microsoft s domination. This, of course, assumes that Microsoft using its enormous leverage cannot simply buy and internalize any company it needs in order to ensure its powerful presence in a networked economy. {11} In short, the core of Gilder s ideological maneuver is to lump together small producers and oligopolies in one category, and to call that the market , and to focus exclusively on government regulation as the only real enemy, dismissing monopolies as chimerical. Applied to his theory of the Internet, this maneuver works like this. A world of bandwidth scarcity, like today s cable television, favours the creation of large companies that aquire control of both the channel and the contents flowing through those channels, and therefore gain monopoly rents. For example, TCI, a cable giant, also owns content-producing companies such as the Discovery Channel, Home Shopping Channel, TNT and so on. With bandwidth scarcity gone, argues Guilder, the rationale for owning both conduit and data is gone and this will benefit small producers of content. So here he seems to be siding with real, decentralized markets. But what are his policy recomendations to get to this decentralized world created by cheap bandwidth?. Well, the fastest way to get there is to allow the optical fiber infrastructure of the telephone companies to be combined with the final connections to homes owned by cable companies, even if this creates huge monopoly profits. (Remember that, after all, according to Gilder, this would be transitory.) So the government, who of course, opposess this merger between the telcos and the cable giants, is the enemy of the people, because its anti-trust regulations are preventing us from enjoying the benefits of a world with cheap bandwidth. I could go on adding detail to this criticism, one that Gilder himself makes easy by offering such an obvious target. But we would be wrong to think that the only ones to be ideologically biased in this debate are right-wing invisible handers. Left-wing commodifiers are equally simplistic in their assessments, although perhaps disguising their methodological biases a little bit bettter. My conclusion is that neither side of the political spectrum can be trusted anymore in their economic analyses, and that a new economic theory, one that respects the lessons of economic history and that assimilates the insights from nonlinear dynamics and complexity theory, should be created. As I said in my introduction, the elements for this new theory are already here, not only from institutionalist economists and materialist historians, but from philosophers of economics that are now more than ever participating in dispelling the myths that have obscured our thought for so many centuries. References: {1} Douglas C. North. Institutions, Institutional Change and Economic Performance. (New York: Cambridge University Press, 1990). {2} Uskali Maki. Economics with Institutions: Agenda for Methodological Enquiry. And: Christian Knudsen. Modelling Rationality, Institutions and Processes in Economic Theory. Both in: Uskali Maki, Bo Gustafsson and Christian Knudsen eds. Rationality, Institutions and Economic Methodology. (London: Routledge, 1993). {3} Fernand Braudel. The Perspective of the World. (New York: Harper and Row, 1986), page 630 {4} ibid. 631 {5} Christopher G. Langton. Artificial Life. In Artificial Life. Christopher G. Langton ed. (Red Wood California: Addisson-Wesley, 1989). {6} Merrit Roe Smith. Army Ordnance and the American System of Manufacturing , 1815-1861. And: Charles F. O Connell, Jr. The Corps of Engineers and the Rise of Modern Management, 1827-1856. Both in: Military Enterprise. Perspectives on the American Experience. Merrit Roe Smith, ed. (Cambridge Mass: MIT Press, 1987). {7} Annalee Saxenian. Lessons from Silicon Valley. In Technology Review, Vol. 97, no. 5. page. 44 {8} ibid. p. 47 {9} George Gilder. The Fibersphere. And: The New Rule of Wireless. Both in Forber ASAP (#1 and 2) {10} John Keneth Galbraith. The New Industrial State. (Boston: Houghton Mifflin,1978). {11} George Gilder. Washington s Bogeymen. In Forbes ASAP #3 -- * distributed via nettime-l : no commercial use without permission * <nettime> is a closed moderated mailinglist for net criticism, * collaborative text filtering and cultural politics of the nets * more info: majordomo@is.in-berlin.de and "info nettime" in the msg body * URL: http://www.desk.nl/~nettime/ contact: nettime-owner@is.in-berlin.de