Recapturing the Spirit of Enterprise
A presentation at the Independent Policy Forum Luncheon -- Sheraton Palace Hotel, San Francisco
The Independent Institute
February 24, 1994
There is a world of poverty, decline, and decay, and every place has problems that are promoted by government into crises that then have to be "solved" by new government programs. Now, my great theme for the last decade or so, which I have adopted from Peter Drucker, who is one of the great men of our era, is "Don't solve problems, pursue opportunities."
I just came from Washington, D.C. Washington really is the problem center. There, they trump up problems into crises and then launch solutions, which collectively represent the one great problem of the modern era: the steady expansion of government, which itself is the fundamental problem but which can't be solved in Washington. We've had a health crisis, a poverty crisis, an inequality crisis and a trade crisis. Oh yes a trade crisis! Clinton is really tough on trade--isn't he? He has a Tanya Harding strategy for competitiveness. All his advisors have been maintaining for the last ten years or so that the Japanese would just blow us away in a whole series of areas.
Remember the semi-conductor crisis. Supposedly we weren't going to have any semi-conductor industry in a few years unless the government intervened and launched some massive effort in favor of semi-conductor competitiveness. At that time I said entrepreneurs were solving this alleged problem and that shortly the U.S. would regain dominance in semi-conductors. I said this in 1985-86, when it appeared that the Japanese were surging ahead but sure enough, this year, the United States, including all our production, is about ten percent ahead of the Japanese in semi-conductors and microchips. We're massively ahead in computers and we're massively ahead in the essential dimensions of telecommunications.
The United States, during all these years when crises were being announced, has been pulling decisively ahead in the most critical areas of the information economy, which really will assure dominance for the decades to come, having had the slightly unfortunate impact of giving the Clinton administration an opportunity to exercise its "cock-a-doodle-doo" theory of American competitiveness. You know the cock-a-doodle-doo theory: you announce you're going to support all these sun-rise industries, and sure enough, the sun does rise. Al Gore trots over to some fence post and declares, "Cock-a-doodle-doo," and claims credit for it all. This is the essential strategy that I hope the Clinton administration will pursue because as long as they restrict themselves to the Chanticleer role they won't inflict the kind of profound damage on entrepreneurs they would aspire to inflict.
All these problems in Washington really are spurious, except for the one problem which is Washington itself. I think that's even true about some of the conservative problems that we see. The deficit has so bemused many conservative groups that they actually give the impression that the Reagan administration was a time of runaway debt rather then a miraculous period of huge and unprecedented asset creation. In 1979, we virtually had a budget in balance and no trade gap in 1979, but the whole private economy was wallowing in red ink and most state governments were deep in debt and state and local and private pension funds were hundreds of billions of dollars in the red.
During the Reagan administration, there was about a six to seven trillion dollar creation of new assets in all the areas of pension funds, and state and local governments, including California, which was a great beneficiary. The fact is that the debt-asset ratio of American business massively improved throughout the 1980's, and the key industries of today, the key companies you read about day after day in the newspapers, were largely financed by the most widely condemned and lamented of all the debt instruments introduced during the 1980's, namely the "junk bond."
TCI, Macaw, Time Warner, Viacom, MCI--all these companies were the very foundations of the information economy of which we've embarked for the next decade, the foundations for the information super highway for which Al Gore will play the rooster. All were financed by junk bonds and not just a few junk bonds; CM got $2 billion dollars from Milken when it was a $200 million dollar company and its goal was to install a fiber optic long-distance system, the first fiber optic long distance system at a time when AT&T was projecting fiber optic for long-distance sometime deep in the twenty-first century. Two billion dollars of junk bonds financed one entrepeuner financing another entrepreneur, William McGowan, who financed by Milken, launched the fiber optic era.
Cable TV has also become a major U.S. asset. We're the only country in the world that has broad-band connections to sixty percent of homes. Broad-band connections are a fully capable of a Geiger hertz, a billion hertz, of communications, some 70,000 times more capacious, these coaxial connections, then the phone companies links to homes. This unique American asset again was financed by billions and billions of dollars in junk bonds. Two billion for TCI alone. Viacom about a billion. Time Warner which at that time was Warner and was in desperate straits as a result of the Atari collapse, got a billion dollars. Macaw got $2 billion dollars at a critical moment that allowed Macaw to enter cellular telephony.
These companies financed by Milken are collectively worth $80 billion dollars today--just these ones I mentioned but they were widely depicted as a ponzi scheme and part of the greed of the 1980s.
I think that the entrepreneurial upsurge of the 1980s is the key asset for the American economy in the 1990s to the extent that it can continue. That is so long as we don't fall into the trap of a policy that I depict in Wealth and Poverty and Recapturing the Spirit of Enterprise. In the latter, there is a chapter called "Capitalism Without Capitalists" that's really the kind of capitalism that the administration wants--they pretend to support capitalism but it is capitalists that they can't stand. This was actually what Tsongas said in the last campaign. He said the trouble with Democrats is that they love employment, but it is employers they can't stand. It was the perfect insight because the foundation of economic growth is entrepreneurship and this Independent Institute book that Richard Vedder and Lowell Gallaway, Out of Work, is directly on target. It shows that throughout American history the key force in creating unemployment has been government.
If you think that Vedder and Galloway's arguments are perhaps hypothetical or lacking proof, you just have to look to Europe today. After decades when in every political campaign the major issue was jobs. Preserving jobs, creating jobs, has been the refrain in every European political campaign for the last 40 years. But after 40 years of preserving and creating jobs, the Europeans today have unemployment rates that resemble the U.S. during the Great Depression. The Europeans have long-term unemployment today--that's unemployment for longer then six months, six times higher than U.S. unemployment rates. The Europeans have levels of overall employment that is decidedly lower than in the United States. They have been solving the unemployment problem in Europe for 30 years and the result is an unemployment disaster--a real crisis incidentally, which again derives from this overall problem of excessive government.
I said earlier, "Don't solve problems, pursue opportunities." I think we do face an unprecedented opportunity uniquely favorable to the cause of human liberty. That opportunity comes from the very technologies that entrepreneurs have launched and developed over the last decades. They come from technologies of sand and glass and air. Remember in the late 1970's, everybody was talking about an energy crisis, a natural resource crisis? Well, these technologies are based on the most common substances in the crust of the earth. The microchip is made of silicone, aluminum and oxygen, which are the three most common substances in the earth's crust. And, they are the foundation of the microchip revolution.
Well, these new technologies mostly subsist on the human mind, and as they spread, they almost inherently overcome all the environmental crises that are alleged by the opponents of economic growth that claim the name of "environmentalists."
We begin with this technology of sand, a silicon sliver the size of your thumb nail inscribed with a logical pattern as complex as a street map of America switching its traffic in trillions of seconds. Today, it's possible to put about 20 million transistors on a single sliver of silicon and produce it in volume. Within ten years or less, around the turn of the century, it's going to be possible to put a billion transistors on a single sliver of silicon--a billion transistors.
A billion transistors is equivalent to the central processing units of sixteen Cray YMP Super computers. The Cray super computer cost about 20 million bucks. Sixteen of them would be about $320 million dollars. That kind of computing power, sixteen Crays, will be manufacturable on a single silicon sliver for under a hundred $100 shortly after the turn of the century. The most important fact in the world economy today is the silicon juggernaut, which is just going to sweep away all the information industries that resist it.
Remember the Japanese threat of HDTV? This was an analog HDTV system that the Japanese adopted when it was introduced a few years ago. I said HDTV was a dog, was never going to fly, was sure to fail because of the tremendous rise in the power of digital electronics. Computers will blow away television of all kinds and the only reason people are even interested in HDTV, I said, was that it's a dog and the politician is always the dog's best friend. This entrepreneurial onrush of creativity in semi-conductors and computers would just blow it away and indeed, that is what's happening. Still, the semi-conductor itself just provides for separate computers and it's great it gives one person at a work station the creative power of an industrial tycoon of the previous era, but still it's separate people at work stations.
If you encountered a car in the jungle, and if you had never seen a car before, you might find it quite a dazzling technology. It has a radio, heater, air conditioning, bedding even a loud horn to frighten away fierce animals. Its a great technology. But in encountering this technology, you might never imagine the real magic of automobiles comes in conjunction with roads.
Similarly with computers, for twenty years or so we used our computers chiefly as cars in a jungle. We used them separately to do word processing and a few other functions like spread sheets, but we never really understood that the true power of computers, the true computer revolution, only comes when computers are joined together in networks. That is what is happening today. That is what produces the real juggernaut of sand and glass and air because when computer technology of sand joins with the fiber optic technology of glass and the technology of the radio frequency spectrum of air, that's when you really have the magic of computer technology coming to the fore. And that's just happening today.
Between 1989 and 1993, the share of computers in the United States connected to networks rose from under 10 percent to over 60 percent. That's just in four years. As these information highways come into line, this is going to endow the computer with new exponential powers, just as the law of the microcosm derives from the proposition that you put any number "n" transistors on a single sliver of silicon and you get "n" square performance, you get exponential performance measured by the power product in semi-conductor manufacturing. So, that's really been the heart of the semi-conductor revolution: it has distributed power around the world because you get this exponential improvement as you increase the number of semi-conductors on a single device. The law of the telecosm is you take any number of computers and you interconnect them on computer networks and get "n" squared performance and value. In other words, the value of computers rises exponentially as you interconnect them in networks and that is going to be the driving force for the world economy for the next decade.
Just as the plummeting price of transistors has driven the world economy for the last decade so, the hugely increasing value of computers and the plummeting price of band web that is to connect computers will drive the world economy for the next decade.
Adam Smith maintained that the creative power of capitalism derives from the division of labor, the increase in specialization which drives and expands the market. Well, this is what computer networks are; they're engines of the division of labor. Computer networks make it possible for the best people in the world to solve a particular problem together regardless of the constraints of geography.
The spread of computer networks will spur huge expansion of economic growth around the world. Once again all these achievements came despite the collapse of all the major big companies in the computer industry. During the 1980's, all the major big American computer companies either collapsed or finally declined and what drove this marketplace was the emergence of scores of thousands of new computer and computer software companies. It's this entrepreneurial insurgence that made it possible.
Some people are all convinced that this is really only a revel of greed. They constantly refer to the homeless as sort of a typical harvest of capitalism. You know it is a real question, a real enigma of capitalism -- the reasons for its distribution of wealth it creates. I mean, why does "Harry Helmsley" have a billion dollars while "Harry Homeless" sits on a rug on a steam grate. Some are assured that it was because Harry Helmsley was so greedy--that it was the greed of the capitalist that caused the poverty of the homeless. In other words, the fundamental belief that wealth causes poverty that's really how you can sum up the theory of the Left, you know, the belief that wealth essentially comes from stealing. This is a very popular position both at prisons and at Harvard, that wealth essentially comes from stealing.
Intellectuals want to believe that because it disparages their competitive intellectual class of entrepreneurs, and the people in prison want to believe that because it extenuates their own crimes. But I think true greed, what greed really is the desire for unearned benefits and Harry Homeless occupies some of the most valuable real estate on the face of the earth from the beaches of Santa Monica to the center of Manhattan, wanting to live better than most of the people throughout the history of the world without giving anything whatsoever back to his society. That's the very epitome of greed!
What the entrepreneur does is constantly give back to his society. That's his fundamental principle. His companies survive and prosper to the extent that they respond imaginatively to the needs of others. That's how an entrepreneur prospers. Greed leads as by an invisible hand to an ever-growing welfare state because the greedy person's best way to assure unearned benefits is to turn to government and have government steal from others to gratify his greed. Greed leads as by an invisible hand to ever-growing welfare statism to socialism. The entrepreneur really has to be altruistic in his orientation. The entrepreneur has to also understand the needs of others. He has to forego his own appetites to save; foregoing consumption, that's what saving is. He has to collaborate with others. He has to reinvest. An investment is another term for giving and when you invest you give your resources to others and you trust them to preserve or increase the value. Giving is difficult. The chief fallacy of socialism is the idea that giving is easy. You just take it from one person and give it to the other hoping to benefit the community.
But all of us know that it is very hard to give without hurting. We've encountered this problem all the time with our children, during Christmas season, it's hard to give. It takes understanding of others to give successfully and the true foundation of capitalist success is that it is productive giving, an investment that is a truly productive gift. It truly responds to the needs of others and truly helps others and that is really the heart of capitalist success.
Giving is also the key rule of entrepreneurship--entrepreneurs don't get rich by taking, they get rich by giving. If their chief interest is their own consumption, that's the surest sell sign for any company. If you have a CEO who is chiefly interested in advancing his own consumption, you better sell.
Property rights link the giving of enterprise to the rise of the capitalist economy. The key principle of economic policy is to assure that the same people who create wealth also invest it because the best conceivable education for the further creation of wealth is the demonstration of past creation of wealth. The entrepreneurial experience allows the entrepreneur to invest effectively because it joins the two principle yields of enterprise. One yield is the financial profit and the other yield is the profit of learning, of knowledge. A capitalistic economy is a knowledge system and the reason it prevails is because the same people who create wealth also reinvest it. The knowledge profit is joined with the financial profit and that generates new wealth and opportunities for everyone. It is this foundation of capitalism and the moral order, through giving and in the information economy through the convergence of knowledge and the power of enterprise, that explains the triumph of countries that pursue the spirit of enterprise.
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