B005HFI0X2 EBOK (49 page)

Several of his protégés, nicknamed “the Traitorous Eight,” quit to form Fairchild Semiconductor. Its veterans in turn went on to found dozens of companies like Intel in what became Silicon Valley, an area that included Palo Alto and—here is a link to the second industrial revolution—Menlo Park, named after Thomas Edison’s famous research laboratory in New Jersey.

Meanwhile, Hewlett-Packard had grown into a substantial electronics firm that moved into the computer market. The earliest documented use of the term “personal computer” has been found in the October 4, 1968, issue of
Science
magazine, in an ad for Hewlett-Packard’s HP 9100: “The new Hewlett-Packard 9100A personal computer is ready, willing, and able . . . to relieve you of waiting to get on the big computer.”
²⁹
At forty pounds and costing nearly five thousand dollars, the HP 9100A could be improved upon. And it was—by, among others, Steve Wozniak, who worked for HP before teaming up with Steve Jobs to found Apple Computer.

In another garage, the garage of Jobs’s parents’ house, Wozniak and Jobs experimented with assembling small personal computers. Wozniak’s boss at Hewlett-Packard reportedly told him, “HP doesn’t want to be in that kind of market.”
³⁰
Jobs and Wozniak founded Apple Computer, Inc., which in 1977 brought out the first successful personal computer (PC), the Apple II.

Jobs went on to have one of the most remarkable careers in the history of American business. Apple developed a cultlike following with its Apple Macintosh PC. But Jobs was forced out of the company by its board of directors. In 1985, he founded another company, NeXt. When NeXt was bought by Apple, Jobs returned as CEO from 1997 to 2011, overseeing the release of the innovative iPod, iPhone, and Apple Tablet.

Two other hobbyists, Bill Gates and Paul Allen, wrote beginners all-purpose symbolic instruction code (BASIC) to be used by Atari fans. They went on to found Microsoft, which began as a small Seattle company with only a few dozen employees.

Having decided to enter the personal computer market, IBM decided that it needed skilled outsiders to provide software. First it approached Gary Kildall of Data Research. For reasons that remain disputed, IBM instead chose Microsoft, run by Allen and the twenty-nine-year-old Gates. Microsoft bought software from a local firm, Seattle Computer Products, and developed it into the operating system MS-DOS. IBM brought out its personal computer, the IBM PC, in August 1981. Bundled with most IBM PCs and compatible machines, MS-DOS became the industry standard after IBM chose to buy its operating software from Microsoft—making Gates for a time the richest person in the world—and its microprocessors from Intel.

VENTURE CAPITAL

The term “venture capital” is frequently found in the memex discussion of Silicon Valley, so we follow a side trail to a treatment of that topic that begins with George Doriot.

Doriot is often identified as the founder of the American venture capital sector. This son of a founder of France’s Peugeot car company moved to the United States after World War I and became first a student and then a professor at Harvard Business School, where he taught for more than four decades.

During World War II, Doriot went to work for the US Army’s quartermaster corps as head of research and development, overseeing the creation of the portable meals known as K-rations and water-repellent boots and clothes, and taking part in the crash program to develop synthetic rubber. Plastic armor capable of resisting bullets was named Doron after him.

Following the war, Doriot, who had been promoted to general, went back to Harvard Business School. He founded American Research and Development (ARD), a pioneering venture capital company that commercialized new technologies, many of them devised at MIT. One of the companies that ARD invested in was Zapata Off-Shore, founded by the son of Connecticut senator Prescott Bush, the young George Herbert Walker Bush.
³¹

At Harvard Business School, General Doriot taught a popular class called Managing. Doriot tried to interest one of his students, Tom Perkins, into succeeding him at ARD. Instead, Perkins teamed up with an Austrian Jewish refugee from the Nazis, Eugene Kleiner, to form Kleiner Perkins in 1972. Kleiner Perkins and other venture capital firms played an integral role in the development of the tech industry in Silicon Valley and elsewhere.

OF MICE AND HYPERTEXTS

Returning to Vannevar Bush, we follow another trail on the imaginary memex that connects him with Douglass Engelbart. In 1962, Engelbart, then an engineer at Stanford Research Institution, wrote Bush: “I re-discovered your article about three years ago, and was rather startled to realize how much I had aligned my sights along the vector you had described.”
³²

Engelbart was in the navy, working as an electronics technician, when he read “As We May Think” at the time of its publication in 1945. Influenced by Bush’s description of the memex, he came up with the idea of a display like that of a radar set capable of interaction with users. He labored for years developing his ideas for an NLS (oNLine system) at Stanford University, before unveiling the finished product in San Francisco’s Brooks Hall on December 9, 1968. In what has been described as “the mother of all demos,” Engelbart demonstrated the use of the computer mouse to control symbols on a screen, along with texts and graphics sharing a screen, videoconferencing, and hyperlinks.
³³

Using “hyperlink” as the key phrase, our imaginary memex allows us to follow a “skip trail” to Theodore H. “Ted” Nelson. “Bush was right,” Nelson declared in a 1972 paper entitled “As We Will Think.”
³⁴
Nelson coined the term “hypertext” for the two types of trails that Bush imagined for his memex: side trails and step trails. Tim Berners-Lee incorporated Nelson’s term into “hypertext transfer protocol,” or “http.” Berners-Lee also named the World Wide Web, the source of the Internet address www.

THE INTERGALACTIC COMPUTER NETWORK

On the imaginary memex, we return to “As We May Think” and read: “Wholly new forms of encyclopedias will appear, ready made with a mesh of associative trails running through them, ready to be dropped into the memex and there amplified.” In his 1965 book
Libraries of the Future
, J. C. R. Licklider described “As We May Think” as the “main external influence on his ideas.”
³⁵

Licklider, a psychologist and computer scientist, worked for the Advanced Research Projects Agency (ARPA), created in order to achieve an American lead in technology following the shock of the successful launching of the first satellite, Sputnik, by the Soviet Union in October 1957. ARPA was renamed the Defense Advanced Research Projects Agency (DARPA) in 1972. Renamed ARPA in 1993, it became DARPA again in 1996 so that it could be shielded against conservative opposition to government spending on science and technology that is not defense related.

Licklider proposed a computer network allowing researchers working on defense contracts to communicate with each other. His 1962 memo about an “Intergalactic Computer Network” laid out a vision of the Internet, the first element of which was created by ARPA and MIT in the form of ARPANET, the world’s first packet-switching network. Contrary to folklore, the purpose of ARPANET was to allow researchers working on projects for ARPA to communicate with each other, not to create a communications system to survive nuclear war. In 1986, ARPANET was connected to NSFNET, a network created by the National Science Foundation (NSF) to allow researchers funded by its grants to communicate with each other. NSFNET was opened first to all academics and then to businesses and the general public, evolving into today’s Internet, which is global if not yet intergalactic.

A side trail leads us from NSFNET to Vannevar Bush’s brainchild, the NSF, from which another side trail goes to a discussion of the Digital Library Initiative (DLI). Among the graduate students funded by the DLI project were Larry Page and Sergey Brin, who was also supported by an NSF graduate student fellowship. Their research led them to create a superior search engine and in 1998—with an initial office in a garage, of course—they incorporated Google, Inc. With the help of Eric Schmidt as CEO, Page and Brin defeated competitors like Inktomi and Dogpile and built Google into the world’s dominant search engine.

Google’s search engine results were closer than anything yet to the trails on the imaginary memex. Searching for any number of topics involved in the third industrial revolution would lead to articles and books mentioning Vannevar Bush and “As We May Think.”

Right back where we began.

The nineteenth-century pattern of boom and slump, culminating in the World Depression of 1931, promises not to repeat itself since most governments have learnt the importance of preventing the collapse of their financial systems.

—James Foreman-Peck,
A History of the World Economy
(1983)
¹

I
n the early decades of the computer era following World War II, visions of the impact of information technology on American society in what was quaintly called “the year 2000” ranged from the utopian to the dystopian. Optimists envisioned an egalitarian future in which a universal middle class was freed from onerous labor by robots and computers. Pessimists worried about technological unemployment or the regimentation of society under the surveilliance of an omniscient Central Computer.

Nobody in the 1950s or 1960s could have guessed that average Americans in 2000 would be working longer hours or that their incomes, in real, inflation-adjusted terms, would not have risen in a generation, while a few rich Americans would have collected most of the gains from thirty years of economic growth. Americans during the glorious thirty years of capitalism after World War II would have reacted with shocked disbelief if they had been told that leading American companies would shut down their factories in the United States in order to exploit poor, unfree labor in China, an authoritarian state whose economy combined many of the most oppressive features of communism and capitalism. And they would have concluded that the visitor from the future who told them that the big winners in the computer age would be bankers—
bankers?—
was a complete lunatic.

THE INFRASTRUCTURE OF GLOBALIZATION

In earlier eras, transportation technologies such as canals, railroads, and interstate highways and communication technologies such as telegraphy and telephony had enlarged markets and transformed business models. The economic globalization of the late twentieth and early twenty-first centuries similarly rested on technologies that included jets, container ships, computers, and satellites.

The jet made air travel affordable to ordinary people around the world. It also revolutionized business. Diminishing air-flight times permitted increasingly centralized management of multinational corporations, by allowing managers from the home country to visit subsidiaries and allies. In the 1920s, Ford’s British division was a largely independent company. By the 1960s, thanks to jet travel and improved communications, it was completely controlled by the headquarters in Detroit.
²

In addition to making centralized global corporations possible, jets transformed global supply chains. Wide-bodied jets were used by the commercial cargo fleets of FedEx and UPS. In ton-kilometers, global air cargo rose from 750 million in 1950 to 140 billion in 2005—a 200-fold expansion.
³

Along with the jet, the most important part of the new global infrastructure of commerce that evolved during the third industrial era was the container ship. The age of container shipping began on April 26, 1956, when Malcolm Purcell McLean, owner of a North Carolina trucking company, sent a World War II T-2 tanker named
Ideal X
with fifty-eight large containers on deck from Port Newark, New Jersey, to Houston, Texas. The scale grew from the first specialized container ship built in 1960, with a capacity of 610 TEU (twenty-foot equivalent units), the
Emma Maersk
, which in 2006 had a capacity of 11,000 TEU.
⁴

Modern freight shipping is dominated by two kinds of ships—tankers and dry-bulk carriers, on the one hand, and container ships on the other. In 2005, there were forty-eight hundred ships in the global tanker fleet. Nearly half carried crude oil, while sixty-five hundred dry-bulk carriers hauled other cargoes.
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The leading dry-bulk commodities were coal, iron ore, and grain.
⁶

Container-ship technology transformed ports as well. The off-loading of ships, once a prolonged, laborious process, became swift and mechanized. Cranes lifted cargo containers directly from ship to dock, truck, or train. Modern cargo ships are off-loaded twenty times faster than their predecessors were in 1950.
⁷

WALMART AND THE GLOBALIZATION OF RETAIL

In the nineteenth and early twentieth centuries, the linking of local markets into a single national market first by railroads and then by highways permitted the emergence of national distributors like Sears, Roebuck and A&P. In the same way, the development of a global commercial infrastructure based on container ships and cargo jets, along with computerized business management, allowed national retailers to become global giants. Walmart was the biggest. In 2005, Walmart was not only the world’s largest retailer but also the world’s largest profit-making corporation.

Walmart was founded in Bentonville, Arkansas, by Sam and Bud Walton. They took advantage of road construction in the 1950s to replace small crossroads stores with Walmarts at highway intersections, first in the rural South and then throughout the nation.

Walmart embodied the reactionary southern version of American capitalism that survived the New Deal and the civil rights revolution below the Mason-Dixon Line. Fordism was the system in which well-paid production workers provided a mass market for the products that they made. Walmart represented anti-Fordism. Its low wages and lack of benefits for most workers resulted in a workforce dominated by teenagers, retirees, and female workers. In the mid-twentieth century, factory supervisors at GM earned five times as much as the average production employee. Half a century later, Walmart district store managers earned ten times as much. In 1950, GM president Charles E. Wilson earned 140 times as much as each assembly worker. H. Lee Scott, Walmart CEO, in 2003 earned 1,500 times as much as a full-time Walmart employee.
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The heirs of the founders of Walmart together were as rich as the family of Bill Gates.

Another part of Walmart’s anti-Fordist version of American capitalism was the fact that the goods it sold were made elsewhere, chiefly in China. In 2006, Walmart sourced 80 percent of worldwide sales from China.
⁹
Many goods came from Shenzhen, the center of Chinese manufacturing for export. In Fordist America, high wages permitted American workers to buy goods produced by other well-paid American workers. In post-Fordist America, low prices for Chinese imports permitted low-wage American service workers to buy goods produced by poorly paid Chinese workers.

FROM INTERNATIONAL TRADE TO TRANSNATIONAL PRODUCTION

The most important economic effect of the third industrial revolution on the world economy was the replacement of traditional global trade by global production.
¹⁰
Information technology, satellite technology, and efficient, inexpensive container-freight transport allowed the establishment of corporations and industrial production networks on a regional or global scale. Between 1974 and 2000, world trade grew faster, at a rate of 5 percent a year, than overall world GDP, which grew at an annual rate of only 2.9 percent.
¹¹
By the early years of the twenty-first century, between a third and a half of what was labeled as global “trade” was intrafirm trade—that is, the transfer of components within a single multinational enterprise located in several countries.

Between the end of the Cold War and the crash of 2008, globalization resulted in the organization of one global industry after another as an oligopoly, with most of the transnational enterprises headquartered in the United States, Europe, or Japan. A similar pattern of consolidation was evident among both final-assembly, or “system-integrator,” firms and their suppliers.

Two companies, US-based Boeing and Europe’s Airbus, had 100 percent of the global market share in large jet airliners. Among their suppliers, the global market for jet engines was divided among three firms: GE, Pratt and Whitney, and Rolls-Royce. Microsoft enjoyed 90 percent of the global market share for PC operating systems. Four firms divided 55 percent of the PC market among themselves, while three companies shared 65 percent of the market for mobile handset phones. Three firms dominated the world market in agricultural equipment (69 percent) and ten companies dominated the global pharmaceutical market (69 percent).
¹²
Ninety-five percent of microprocessors (chips) were made by four companies—Intel, Advanced Micro Devices, NEC, and Motorola. Four automobile companies—GM, Ford, Toyota-Daihatsu, and DaimlerChrysler—manufactured 50 percent of all cars, while three firms—Bridgestone, Goodyear, and Michelin—made 60 percent of the tires. Owens-Illinois and Saint Gobin made two-thirds of all the glass bottles in the world.
¹³
Concentration in global finance was accelerated by US deregulation, which allowed the emergence of a small number of US-based megabanks, some of which grew even more during the Great Recession when, with the support of the US government, they absorbed failing banks, as Bank of America took over Merrill Lynch and JPMorgan Chase acquired Washington Mutual (WaMu).

In addition to being dominated by oligopolies, the emerging world economy was highly regionalized and still connected to the nation-state. The hundred largest multinationals in 2008 had 57 percent of their total assets and 58 percent of their total employment abroad, and foreign sales made up 61 percent of their total sales.
¹⁴
As this demonstrates, the typical multinational still had a distinct national identity, with around half of its assets, employment, and sales within its home market. Few multinational corporations did an overwhelming majority of their business outside their home countries. Those that did, such as Nestle and Ikea, tended to be based in small countries, so their markets were largely foreign. More typical were the large automobile companies, each of which assembled and sold a majority of its products in its home region, with a minority of its sales in other regions.

The domination of global commerce by corporations based in the United States, Japan, and Germany—the three most populous industrial democracies—showed the continuing importance of a large domestic market as a base for multinational sales and operations. Despite the celebration of global corporations by libertarians and their denunciation by leftists and populists, global companies turned out to have national identities after all during the crisis that began in 2008, when major banks and automobile companies turned to their home country governments for bailouts.

THE CURRENCY WARS

Far from being created abruptly by the end of Communism or the rise of the Internet, the global economy of the 1990s and 2000s represented an extension of the America-centered “free world” economy of the Cold War era to former Communist countries like China and former neutral third world countries like India that had practiced import substitution during the Cold War. Following World War II, the United States had offered its defeated great power rivals Germany (in the form of West Germany) and Japan a deal. If they accepted the status of semisovereign, largely demilitarized powers in world politics, the United States would protect their interests, including access to resources like Middle Eastern oil. In return for giving up the ambition to be independent military powers again, the Germans and the Japanese also would be informally guaranteed access to American consumer markets for their exports and to American investments and technology. West Germany and Japan accepted the offer and specialized as civilian trading states. They made cars, not wars.

Following the collapse of its bubble economy, the Japanese government asked the Clinton administration to allow Japan to try to export its way out of its problems with the help of a devalued yen. The administration agreed, and in 1996 the “Reverse Plaza Accord” ended a decade of US policy and lowered the value of the yen to the dollar by 60 percent.

The strong-dollar policy benefited Wall Street. But it was a catastrophe for American exporters. And the Reverse Plaza Accord had even more disastrous effects on Japan’s rivals in East Asia. In the decade since the original Plaza Accord, many developing countries in Asia had pegged their currencies to the weak dollar in order to compete more effectively with the Japanese for export markets in the United States and elsewhere. The Reverse Plaza Accord abruptly made their exports more expensive, even as Japan’s became cheaper.

The US government and the IMF had pressured developing countries to open up their financial markets to foreign investors—yet another policy that benefited Wall Street. As growth slowed in many Asian countries, however, foreign investors became nervous and troubles in Thailand inspired an irrational rush of foreign capital out of many Asian countries in a short time. The Asian financial crisis that began in 1997 crippled many of the nations in the region, hitting Thailand, Indonesia, and South Korea particularly hard. China and Malaysia, which had resisted American pressure to liberalize their financial systems, proved to be less vulnerable and suffered less.

The Asian financial crisis was only the first of a series of unforeseen disasters that went off like a string of firecrackers following the Reverse Plaza Accord. The collapse of the preceding boom in Asia led to a decline in oil prices, which in turn triggered the Russian financial crisis of 1998. The Russian crisis led to the collapse of an American hedge fund, Long-Term Capital Management, foreshadowing greater crises to come.

BRETTON WOODS II

In the 1990s and 2000s, China grew rapidly to surpass Japan in the size of its economy. The Chinese economic model was a variant of the mercantilist system used by Japan and the Little Tigers, with distinctive Chinese characteristics.

Like Japan, China intervened in currency markets to undervalue its currency, the renminbi, in order to help Chinese exports and cripple American exports. If the exporters of a nation with trade surpluses are allowed to turn their dollar earnings into buying domestic cash, such as Chinese yuan or Japanese yen, then the surplus country’s money supply will increase and the currency will appreciate relative to other currencies, making its exports less competitive. In order to prevent the currency from appreciating, the surplus country must purchase and hold foreign exchange. Beginning in 2003, China, followed by other East Asian governments, engaged in currency intervention on a massive scale to keep the US dollar high, Chinese exports strong, and American exports weak. To facilitate its mercantilist industrial policy, China forbade its companies to sell or buy debt or stocks in transactions with foreigners without government approval. Using different methods, Japan pursued a similar currency manipulation strategy of imposing “currency tariffs” on American exports.