nettime:Markets, Anti-Markets 2/2

[diana@dial.isys.hu (Diana McCarty)]

     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


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