The Twilight of Sovereignty: How the Information Revolution is Transforming Our World

Wriston, Walter B.


Chapter Two

A New Source of Wealth

Chapter Two

A New Source of Wealth



We might say that in the nineteenth century the wealth in California came from the gold in our mountains; today it comes from the silicon in our valleys.

William J. Perry

DESPITE ALL THAT IS WRITTEN AND SAID ABOUT THE INFORMATION Revolution, many people still have not faced how it has changed the economy. While they understand that computers and telecommunications have become powerful economic forces, what many do not seem to realize is that these technologies have done far more than speed up the industrial economy or enrich it with new conveniences -- or overload it with new gadgets. The difference between the old industrial economy and the new information economy is quantitative, not merely qualitative. The world is changing not because computer operators have replaced clerk-typists and can produce more work in less time but because the human struggle to survive and prosper now depends on an entirely new source of wealth; it is information, knowledge applied to work to create value. Information technologies have created an entirely new economy, an information economy, as different from the industrial economy as the industrial was from the agricultural. And when the source of the wealth of nations changes, the politics of nations change as well.

The Industrial Revolution changed the source of wealth, transforming once useless piles of rock and ore into riches of steel and steam. Even as it gave value to once neglected natural resources, industrialization dramatically increased the power of the nation-state, not only by enhancing its revenues but also by expanding its regulatory power and the armaments needed to control those resources and the territory that embraced them. In the last few decades the information revolution is again changing the source of wealth, and even more dramatically. The new source of wealth is not material; it is information, knowledge applied to work to create value. The pursuit of wealth is now largely the pursuit of information, and the application of intellectual capital to the means of production. This shift in perception of what constitutes an asset, poses huge problems in expanding or even maintaining the power of government. Information resources are not bound to a particular geography or easily taxed and controlled by governments. A person with the skills to write a complex software system can walk past any customs officer in the world with nothing of "value" to declare. An information economy diminishes the rewards for control of territory and reduces the value of the resources that can be extracted through such control.

As a source of wealth, information comes in various forms, from streams of electronic data briefly valuable, to years of accumulated research embedded in computer memories operating automated factories, to the intellectual capital carried in the brain of an engineer, a manager, or an investment banker. The world desperately needs a model of economics of information that will schematize its forms and functions. But even without such a model one thing will be clear: When the world's most precious resource is immaterial, the economic doctrines, social structures, and political systems that evolved in a world devoted to the service of matter become rapidly ill suited to cope with the new situation. The rules and customs, skills and talents necessary to uncover, capture,


produce, preserve, and exploit information are now mankind's most important rules, customs, skills, and talents.

The information economy changes the very definition of an asset, transforms the nature of wealth, cuts a new path to prosperity. The information economy changes everything from how we make a living to how and by whom the world is run. The competition for the best information is vastly different from the competition for the best bottomlands or the best coalfields. Companies or nations competing for information will be vastly different from those that once competed primarily for material resources. The nature of information -- how it is traded and produced, the scope, shape, and protocols of information markets, and the other institutions of an information economy -- will impact government policy, set the limits of government power, and redefine sovereignty.

The changes in Eastern Europe are a dramatic example of the way the political structures are altered by information. The ideas, and even more important, the aspirations of the dissidents rose on a flood of information, now flowing easily through what used to be called the Iron Curtain, about life in the West. Tactically, the revolution of 1989 made full use of modern communications technologies, from fax machines to satellite dishes to superlightweight video cameras and VCRs. But information played an even more important role in the Eastern bloc revolution. The power of information may explain the revolution's greatest mystery: why the Soviets and their satraps did so little to resist, and even encouraged, the changes. During the 1970s the Soviet economy -- as it had for years -- depended on gold, gas, oil, manpower and military might, all of which were losing value compared to the resource in which, by idiotic political design, the USSR has long been poorest: information. As Gorbachev himself said: "The Soviet Union is in a spiritual decline. We have had to pay for this by lagging behind, and we will pay for it for a long time to come. We were one of the last to


realize that in the age of information science the most valuable asset is knowledge -- the breadth of mental outlook and creative imagination."

The Soviet leaders recognized that in an information economy only nations that allow information capital to flow freely will have enough of it to compete. The free flow of information, however, means liberating not only data, but people and money, books and newspapers, and the proliferating electronic media. Free enterprise requires free expression. From the beginnings of Gorbachev's rhetoric showed that he grasped the price of a working modern economy. In 1991 he paid it.

The information revolution is one of the most heralded events in history, yet its essential nature is little understood. As everyone knows, the revolution was touched off, shortly after the invention of the electronic compute in 1946, by the remarkably rapid progress of computing and communications technologies. Over the past three decades, computers have grown in efficiency more than a millionfold. The computers of the fifties cost millions, required teams of expensive operators, filled whole suites of offices, were cumbersome to use or reprogram, and yielded but a fraction of the computing power of today's desktop personal computer (PC). In telecommunications the rise of fiber optics also enhanced efficiency as much as a millionfold. Today AT&T sends information between Chicago and the East Coast at the rate of 6.6 gigabits (the equivalent of a thousand books) per second. At this pace, the entire Library of Congress could be dispatched in twenty-four hours: Using conventional copper wire and a 2,400-baud modem it would take two thousand years.

In both technologies, progress was powered by the microchip, on which were integrated first dozens, then millions, of electronic switching circuits. Those switches are a computer's calculating tools, and are also used by modern telecom systems -- consisting largely of highly specialized computers -- to compress and organize information and to speed


up and direct its flow. Already the industry is placing some 10 million switches on a chip the size of a thumbnail. By decade's end, each chip will carry more than a billion switches, each operating in trillionths of a second.

These developments not only dramatically increased the computer's power to process and use information, but radically decentralized that power by liberating computer users from the tyranny of the million-dollar mainframe. As late as the 1970s, Soviet economic planners were still devoting enormous resources to massive centralized computer systems by which they hoped to administer the entire Soviet economy without strangling it -- the elusive Communist dream. The final collapse of those efforts was a crucial factor in the ensuing demoralization of the true believers and the rise of Gorbachev. Meanwhile, in the free world, computing power was being spread throughout the economy by mini-computers, PCs, and work stations to liberate initiative and enable innovations impossible only a few years before.

These developments are as crucial as they sound. And yet they are not in themselves the information economy. The triumph of the information economy is seen not primarily in new things that are made of microchips but in the use of microchips to make the same old things out of a new resource: information. With but 2 percent of its costs attributable to energy and raw materials and but 5 percent to ordinary labor, the modern microchip is far more a product of mind rather than matter. The really remarkable thing about the microchip, however, is that it helps men turn nearly everything else they make into a product of mind and undermines every merely material advantage. The struggle to support human life in our unforgiving world still very much depends on making steel and concrete, building shelter, growing food, and moving resources from place to place. But now we build houses and offices and factories from information, we sow, fertilize, and harvest our crops with infor-


mation, and we move our most precious -- and some of our most common -- possessions on highways of information.

Even steel, the paradigmatic product of the industrial age, has been transformed. A piece of steel, whether raw or as a part for a new automobile or skyscraper is very different today from what it was a generation ago: It still contains a lot of iron mixed with other metals, but it contains a great deal more information. The extra information in modern steel would not show up dramatically in a chemical analysis -- though hints of it are there in the subtly changing components of the alloy, and in some special steels, the lighter weight and greater strength of the metal. But in an economic analysis of modern steel the importance of information would resound from the figures. Modern steel plants use far less labor and energy, and even less raw material, to produce a given amount of steel than did the plants of a generation ago.

The biggest breakthrough in the steel industry in the past twenty years has been the "minimill," a new sort of steel mill using advanced melting, casting, and milling technologies. These technologies have freed steel making from its geographic ties to iron and coal deposits; have reduced capital costs for new mills by two-thirds; have reduced the minimum profitable size of a mill even more dramatically; and have doubled labor productivity. They have also, as we shall see, profoundly changed the lives of people who made their living from steel.

The minimill depends on electric rather than coal- or coke-driven furnaces. The electric furnace is not a new technology, but rapid improvements in the past few years have raised the quality and lowered the price of steel made in such furnaces. Electric furnaces primarily use scrap, which is cheaper and more abundant than raw steel, as their raw material. The huge "basic oxygen furnaces" used in the grand old integrated steel mills of the past cannot use much scrap without sacrificing quality. They must have raw steel, reduced from ore in hugely


expensive blast furnaces, fed in their turn by massive coke ovens and ore processors. Because minimills do not depend on traditional raw materials they can be located almost anywhere there is a market for a few hundred thousand tons of steel a year. Integrated mills had to be located near their raw materials or near huge ports to which those materials could be shipped and could be profitable only by turning out millions of tons annually.

Because they use electric furnaces, minimills can also use "continuous casters," which make basic steel shapes directly from molten steel. Old-style mills must first cast ingots, which are then premilled into basic shapes by expensive primary mills, before they can be sent to a rolling mill for final shaping. The continuous caster, like the electric furnace on which it depends, dramatically reduces both capital and labor costs.

These new technologies depend on an infusion of information into the steel making process, a quantitative increase in the application of knowledge to work. They also depend significantly and increasingly on information technologies, particularly computers. Automated processing -- the actual running of furnaces and mills by computers -- was rather late coming to the steel industry but is now taking over the minimills, particularly those that make the most challenging and highest-quality products. The best continuous casters are computer driven, their processes are too precise for manual control.

Even before automation came to the mills themselves, computers were vital to the design and production of new steel-making technologies and equipment. To take a new steel technology from drawing board to working mill once required more than a decade. Now, with advanced computer modeling techniques eliminating much trial and error from the design process, a new idea can bear fruit in two or three years. Computer modeling has also reduced the amount of trial and error (and the waste in materials, labor, and money) mills undergo


in meeting their customers' special needs for a particular run of steel.

Modern inventory control, accounting, and marketing procedures all rest on computer and telecom technologies. The greater strength per weight and volume of certain specialty steels is the result of our rapidly increasing scientific knowledge of the microstructure of materials, knowledge acquired in part by the application of computer power to research. "Computers change what we make, change how we make it, and change how we make the equipment to make it," says Donald Barnett, a leading expert on the steel industry and consultant to many of its most important companies.[5] 

For all these reasons, a cost analysis of a given piece of steel would attribute a lot more value to information and information technologies, and a lot fewer to labor and materials, than was the case just twenty years ago. Steel is, as the philosophers might say, the limiting case. What is true for steel is even more true for the vast array of relatively traditional manufactured items that support our daily lives. For instance, even though steel is "smarter" than it used to be, newly invented plastic and composite materials containing an even greater proportion of information to matter, are often substituted for it. Engineering advances, made possible by advanced computer modeling, make planes, trains, and automobiles far more fuel efficient, thus substituting information for coal, oil, gas, and even more troublesome forms of matter such as uranium.

Even in such a classically industrial enterprise as steel making, matter has become the enemy of wealth, not its source. As one might guess from their name the outstanding feature of the minimills is that they are small -- less matter goes into the making of them. That is also one key to their success. Their modest size, for instance, helps keep them technologically up-to-date. Because they require much less money ($15,000-$25,000 per employee) than traditional old-technology mills ($30,000-$45,000 per employee),[6]  they can


be profitable investments even with an economic life of only a decade or so and then be replaced with an even more advanced technology. Technology has helped reduce not only the minimum profitable capacity of a mill (to about two hundred thousand tons a year) but even the optimal capacity, from about seven million down to one million tons, making it far easier for modern mills to weather downturns in the economy.

Part of this innovation was driven by the instinct for survival as more and more steel was replaced by engineered plastics. Indeed, over the last ten years, not only has the consumption of steel in the United States not grown, it has turned negative. The trend in Europe and Japan is similar. These new plastics are themselves an example of applying information -- in this case chemistry -- to make a product that has already replaced a thousand pounds of steel on most of the world's automobiles.

By contrast, the massive integrated mills of the past were built to last indefinitely, and on the assumption that basic steel technology would be as durable as the mills themselves. Pundits opine that the great American steel companies fell on hard times because management did not reinvest and rebuild as times changed. But this is untrue. During the 1970s the classic firms spent massively to expand capacity and, within the context of the old technology, to update their plants. No new integrated mills were opened, but many firms added considerably to their existing plants. The industrial age had taught them that increased scale would bring increased efficiencies, so they built huge new blast furnaces and coke ovens. Industrial economics had taught them that massive infusions of physical and financial capital would increase productivity, so they invested heavily in the most up-to-date, best engineered, and most durable versions of an outmoded technology.

These classic strategies failed. In an information-rich economy innovations come quickly. The huge integrated steel


plants were too big and expensive to adapt. Smaller plants are the easiest to automate; large plants can computerize only at great cost and without many of the efficiencies of smaller plants. Huge investments in industrial capital may even become a burden when information capital provides the competitive edge. Indeed, only two integrated mills have been built since 1950. In ten years, the big firms had lost much of their market and billions of dollars.

For all their ponderous mass, many of the old mills just disappeared. Their rusted hulks remain, undoubtedly to be sold as scrap to the minimills. But the essence of the huge mills -- their massive capital investment, their great contribution to the nation's wealth, the 500,000 jobs and the communities that depended on them -- are no longer anchored to the earth by the imperatives of matter, and have floated away to other communities and other countries.

As the mills moved away or closed, tens of thousands of Americans saw their livelihoods, and even their identities -- as men who, by the labor of their bodies, had delivered their families to the safe harbor of the middle class -- vanish as well. For a variety of reasons -- including the great power of a union in a union town to which the company seemed bound by nature's distribution of iron and coal and the ports and loading docks to receive them -- and its own massive investments, American steelworkers in the 1970s were paid twice the wage of the typical American industrial worker. But if the integrated steel maker could not leave town, steel making could. As the specialty and minimill technology developed, new mills were launched quickly and cheaply in towns that had never heard of the United Steel Workers and produced steel with two man-hours per ton versus three to six man-hours per ton in the old mills.

When steel mills can move to more hospitable climates, they no longer present a stationary target for government or union control. The more than sixty minimills moved not toward the coal and iron deposits in the


ground, but toward the source of scrap and cheap electricity. The new technology moved them into the information economy, not an economy of gadgets and computer games but a fundamental upheaval by which men and nations make their living, and thus a revolution of all the rules by which we live.

Information has always been an important factor of production. The idea of substituting machines for manpower, for instance, is as old as the lever. It was the lever -- in the form of a plow to turn the soil -- that made agriculture possible. It was many years later that Archimedes boasted that given a lever long enough and a place upon which to rest it, he could move the earth. Of course no such lever existed, but by the thirteenth century a lever attached to a wheel produced the wheelbarrow, which did move the earth, albeit more gradually.

Until recently, however, even advanced manufacturing systems could make use of only small amounts of information. A few fairly simple instructions could be built into the mechanics of the system itself. The rest was carried around in the brains and on the clipboards and manuals of human operators. As for such questions as what to make, how to make it, what it should look like, when to schedule production, when to stock up on materials, when to draw down inventories, etc., that information was hardly integrated into the system at all. Information moved on myriad pathways and paper trails powered almost entirely by human beings, so-called service workers, who contributed mightily to the manufacturing enterprise.

Despite the intellectual achievements of the industrial age, information remained the most scarce and difficult to use of resources, which is why its use was minimized at every step. Thus, Henry Ford offered a Model T in any color the customer wanted as long as the customer wanted black: The cost of integrating into the system the information that 20 percent of customers wanted blue was too high for Ford's low-price strategy. When Alfred Sloan's innovations in corporate or-


ganization allowed General Motors (GM) plants to integrate rather modest amounts of marketing feedback into production decisions, GM became the leading carmaker, and Sloan went down in business history as a management genius.

Information technology is fundamentally different from industrial technology in that it can be programmed to do the required task and, if necessary, can be continuously adjusted. Industrial technology is just the opposite: The task must be adopted to the technology. It is a difference in kind and not just in degree. In the industrial economy, manufacturing systems were based on high volume, with sustained production runs producing standardized products. It usually took a long time -- with the consequent shutdown of production -- to change production runs. The new technology, however, permits the almost instant resetting of specifications, thus eliminating downtime. The garment trade is a good example of the new technology. The way in which the cloth is cut can be high value-added operation or a money loser. It used to be that the great cutting machines had to be set up to cut only one size at a time, say, a size 8 regular, and the knife would slice through dozens of pieces of cloth at once to turn out fabric of the right size. If, however, the customer wanted a size 12 stout or some size 6 petites, it was a long and uneconomic job to reset the machine to turn out the odd sizes. Today, with computer-controlled cutters, the machine can be programmed to turn out any number of different sizes in any volume, thus making it economical to supply whatever the customer wants.

Although computers are thought of as operating in the service sector, they are now so integrated with manufacturing as to make separate categories useless. A walk through a modern factory makes the point. Manufacturing plants are now run by computer hardware and software that integrate huge amounts of information into the manufacturing process, and process vast amounts of "feedback" information so as to make adjustments with a minimum of human intervention.


Digitally controlled machine tools are now linked together through communications systems and software to orchestrate entire production facilities. Human beings have found a way to apply their rapidly increasing knowledge to work to create value in ways unknown but a few years ago.

One innovation in this regard is the "expert system" by which modern technology is employed to capture knowledge so that it can continue to be applied to work and create value long after the person who acquired this valuable knowledge is gone. One famous expert system, used in GM factories, is called "Charley," after GM maintenance master Charley Amble, now retired. Charley the computer is an interactive system into which has been programmed the distilled wisdom of a lifetime of Charley Amble's experience in repairing machines. Over a period of twenty years Charley's job was listening to the noises machines make and, based on his analysis of the vibrations he heard, diagnosing whether or not the machine had to be adjusted, repaired, rebuilt, or retired. The vibration pattern of each machine are as distinctive as fingerprints, and their correct interpretation can save millions of dollars by timely preventive maintenance. His skill, experience, and rules of thumb, which had served him well, were painstakingly embedded in lines of software code. Today, even though the real Charley is gone, for the cost of $15,000, the price of a 50-megabyte workstation, an old factory's productivity is raised, and training time for maintenance people is greatly reduced. If the system cannot diagnose the trouble with certainty, it will offer a series of probabilities: a 60 percent chance the bearings are worn or a 70 percent chance that the alignment needs attention. Charley would be proud of the results.

Expert systems, artificial intelligence programs, computer aided design and computer aided manufacturing systems are now used in major companies doing everything from process planning at aircraft plants to reformatting international payments at major money center banks around the world


to designing and processing machine parts. All of these knowledge-based systems create value. They have become the essential component of industrial success.

In a newly automated General Electric(GE) locomotive plant in Erie, Pennsylvania, integrated information systems are weighted heavily toward the improvement of the management process itself. The system includes inventory control, order-entry systems, shop-floor reporting systems employing bar codes and wand-reading devices, payroll and accounting, master scheduling work, production control, job tracking and more. Since 1984 the new systems have been largely responsible for increasing asset turnover by 50 percent. The combination of these management systems with newly automated machine tools on the factory floor has reduced by half the labor needed to make a locomotive. In an ironic footnote, it took some time for the new savings to turn into new sales. As GE chairman Jack Welch explains, the railroad companies have so improved their own efficiency by employing modern information systems that they need fewer locomotives. "Where they used to use 4,000 locomotives, the now carry the same amount of freight with 2,500."[7] 

As information becomes the most important factor of production, there is less matter in nearly everything we make. From 1967 through 1988, the weight of U.S. product exports, per constant dollar value, fell 43 percent. The weight of U.S. imports fell even further.[8]  Japan increased its industrial production two and a half times from 1965 through 1985 while barely increasing its consumption of raw materials and energy. As Peter Drucker has pointed out, the most important manufactured product of the 1920s, the automobile, owed 60 percent of its cost to raw materials and energy.[9]  For the microchip that figure is only 2 percent, and for typical manufactured products today material and energy costs hover between 10 and 20 percent.

Labor also is being replaced by information. In the leading industrialized economies, workers today work only a bit more


than half as many hours a year as they did in 1900, yet capacity of these economies to produce wealth has grown by at least twenty times since then. To manufacture a product in the U.S. in 1988 required, on average only two-fifths of the blue-collar labor needed just eleven years earlier.[10] 

Even factories are shrinking as machines get smaller, use less energy, and require fewer workers to tend them. Certain types of automated manufacturing systems have reduced by 60 percent the amount of floor space required to make a product compared to just a few years ago. Computer-coordinated, just-in-time production systems reduce inventory needs and waste. The average number of employees per factory, which rose steadily in the past, has been falling lately. The average U.S. factory employed fifty-one people in 1937 but only 35 people in 1982. These changes play out the central theme of the modern economy: to create value by putting more information into products and services, or by taking matter out.

Virtually every society in history has believed that wealth flowed mainly from one form of capital, or from one type of productive activity, or from one particular sector of society. Societies have often been wrong about the source of wealth, causing misery to themselves and others. But right or wrong, both a society's beliefs about the source of wealth, and the underlying reality crucially affect political and social structures, and the allocation of power.

For thousands of years men were nomads who attached themselves to herds of animals moving from pasture to pasture. Wealth was counted in the size of the herd. Men owned nothing that could not be carried. Land was not regarded as an asset, and its permanent control formed no part of the scanty political institutions of the day. When village agriculture began to appear land became a form of wealth, as did water. Men began to lay down rules about the ownership of land and water rights, and political power began to shift away from nomadic chieftains and toward territorial rulers.

In the last years of the twentieth century it has been popular to say that real wealth comes from industry. Industry produces things that we can handle, things that are machined and solid, that we can see and touch. Only manufacturing creates real value by producing real goods for sale. Yet manufacturing itself was seen in an unfavorable light but a few hundred years ago. Francois Quesnay, the consulting physician to Louis the XV and a founder of the so-called Physiocrat school of economics, argued that the source of all wealth was land. His disciples had a profound influence on many important figures, including Benjamin Franklin, who wrote that "agriculture is truly productive of new wealth; manufactures only change forms, and whatever value they give to the materials they work upon, they in the meantime consume an equal value in provisions."[11] 

The cameralists, who powerfully influenced German policy in the late eighteenth century, postulated that there were three ways of increasing wealth: by increasing the population; by mining; and by controlling foreign commerce to produce an inflow of hard currency, which the state could hoard to pay for a huge army. Cameralist policies stifled German commerce, and Germany had to wait until the nineteenth century to become an explosive commercial power. Adam Smith published in 1776 largely to dissuade the British Empire from mercantilism, which similarly held that the state should firmly manage foreign trade for apparent national advantage. In arguing for the freedom of commerce, Smith showed that the ingenuity of British workers and businessmen was worth more than the hoards of gold in the king's treasure houses.

Smith's daunting task was to convince the ever more powerful sovereigns of his day to relinquish some of their cherished powers over trade and production for the good of their people and thus increase the rulers' own wealth. The emergence of the information economy will require concessions


of sovereign authority far greater than those Smith asked of the English crown.

Sovereignty is a modern institution but a few hundred years old, though like many modern institutions it began as a medieval idea, arising out of the efforts of kings to break the power of feudal lords and city-states and remove the privileges of the Church and trade guilds. By the nineteenth century, sovereignty came to mean that power by which a sovereign was empowered to act alone, without the consent of any higher authority. In international affairs, a state is sovereign if in the ordinary course of events its decisions are not legally or customarily reviewable by any other state.

In a modern sovereign state there may be many social and economic institutions that compete with the state for power -- churches, universities, corporations, voluntary associations -- and some of these may be powerful. Yet all such institutions live and act at the sufferance of the sovereign. Even in as liberal a nation as the United States, for example, the churches are free of government control not by virtue of ancient historical right or the force of custom or a commonly accepted view of natural law or the divine will or the protection of a rival sovereign or the churches' own economic, political, or military power but by the sovereign's own law, as expressed in the First Amendment.

Few modern states have been as sovereign as classical theory implies, in large part because of the power of these private institutions. Though these institutions are never any match for the state in raw power, their utility, popularity, or prestige has generally won them some degree of autonomy from the state. Nevertheless, the broad drift of political history since the waning of the Middle Ages has been toward sovereignty.

The emergence of information as the preeminent form of capital reverses this drift toward centralizing power. The nation-state will not disappear; indeed, we will see many new nations formed. Nor will sovereignty vanish either as an idea or as an institution. But the power of the state will diminish,


particularly its sovereign power: the power to judge without being judged, the power to delimit the powers and privileges of the other institutions within society. Even Japan, which for years appeared to be in firm control of its own destiny, is seeing market forces overwhelm its bureaucratic power. After World War II, the powerful Japanese Ministry of International Trade and Industry (MITI) proposed that Japan's twelve automobile companies merge to create two or three companies to battle American's Big Three. Instead, the Japanese auto companies defied the powerful MITI, and Toyota and others refused to specialize in cars of a certain size and became market driven to produce a full line of cars the customer wanted.

Information has always been power; now it is also wealth. Nonmaterial and, with the aid of modern technology, extremely mobile, information can escape government control far more easily than other forms of capital. Draconian or even merely bureaucratic systems for controlling the flow or use of information tend to destroy or waste it. Economically useful information is usually original, innovative, or at least timely, nuanced, precise, complex, and challenging. Bureaucracies and governments live for delay, blunt originality, oppose innovation, abhor nuance. Governments are good at governing matter but everywhere misrule mind, especially the best and most productive minds, minds that are frustrated and demoralized by the pretensions of the merely powerful.

Governments are good at regulating, taxing, confiscating, and controlling things that they can readily see, measure, and keep track of, things that don't readily move out of town or across the border and cannot be concealed inside a man's head. Governments have always sought to exact high "rents" both in the form of taxes and other government controls from businesses located within their borders. Such rents are a very important source of government power and wealth. In an information economy, government rent collectors have much less leverage because the tenants can leave town.

In the industrial era, progress was built on massive econ-


omies of scale, which made capital easy to exploit. As firms, plants, and machines got larger they became more difficult to move in the event of government harassment or expropriation. To Karl Marx this immobility seemed an opportunity: It was possible in those days to imagine that the state really could capture the capital assets of society and manage them for the good of the proletariat -- or the . This did not often happen, and certainly not in the way Marx imagined. But the great leverage governments held against nearly captive capital -- mines and land, forests and factories -- did allow and promote an enormous expansion of government power. As long as capital consisted largely of factories, heavy equipment, and natural resources, governments felt free to impose rules and exact payments with no fear that the nation's capital base would steal away in the night. Extreme impositions would reduce productivity -- the Communist economies never worked very well -- but on the whole, government held the cards.

All this has changed. Intellectual capital will go where it is wanted, and it will stay where it is well treated. It cannot be driven; it can only be attracted. Its movement across borders or around the world cannot be stopped, and even the most totalitarian governments can do no more than temporarily impede it. As Gorbachev discovered, states that impose exorbitant rents on information enterprises, either in taxes, regulation, or simply in political control and repression, soon will not have enough information capital to compete. Such societies are generally run by people who simply do not understand the power of information capital or the workings of a modern economy; if they had understood, they would not have imagined that police and military might could build or sustain a nation. The economic history of Easter Europe stands witness to this truth.

Under the strain of a global competition for information capital, governments are more likely to reduce rents than raise them. They will compete to cut taxes and deregulate -- as


most of the industrialized and industrializing nations have been doing for more than a decade -- and they will knock down the Berlin Wall. Not all governments will move at the same speed; Tiananmen Square is but one reminder that the record is not and will not be perfect. We are speaking of a political trend, not a law of physics; but in politics, powerful trends are made by slight changes in what the Soviets used to call the "alignment of forces."

When natural resources were the dominant factor of production, the conquest and control of territory seemed a reliable way to enhance national power. Today conquest of territory is rarely worth the cost to the nation. War and long years of pacification and repression almost inevitably destroy or scatter intellectual capital, and the material resources that might be gained by conquest are everywhere declining in value. Size can still be an advantage -- the United States. will probably always be a greater power than Singapore -- but imperialist adventures now have a far higher "hurdle rate of return."

The information economy, as we shall see in greater detail later, is intractably global. In part this is because trade in information, now little bound by geography or burdened by matter, is global. A truly global economy, as opposed to the multinational economy of the recent past, will require concessions of national power and compromises of national sovereignty that seemed impossible a few years ago and which even now we can but partly imagine. Such an economy cannot be readily contained or controlled by mercantilist or protectionist strategies. The attempts of sovereign states to cut off and control little bits of the world market for their own advantage will be more obviously futile than ever in the past. And yet control of international trade has been one of the most cherished of sovereign powers since well before the Industrial Revolution.

People who carry in their heads an increasing amount of intellectual capital also pose a challenge to government, since


if the nation is to prosper, governments must court and keep their human resources. Increasingly, their specialized knowledge will make them more difficult to govern. In many areas of economic and social life in which the government once credibly professed to be the only party both sufficiently qualified and disinterested to lay down the rules, "knowledge workers" will rightly feel themselves better informed than government regulators. Government intervention, once the cherished protection of weaker parties, will be increasingly resented and opposed by an ever larger class of such workers. These citizens are a new bourgeoisie who carry the means of production in their brains. Unlike Marx's bourgeoisie, their power and numbers are destined to grow not decrease. And they are unlikely to view the government as a natural ally.

Nowhere will the power of these knowledge workers be more evident than in those great nongovernmental institutions whose subordination to the state is essential to sovereignty as we have known it. As Drucker writes:

Theory still postulates that there is only one organized power center -- the government. But both society and polity in developed countries are now full of power centers that are outside of and separate from government. Each of these institutions has to have a great deal of autonomy to produce results.[12] 

As even the communist nations seem finally to have learned, subjecting business organizations -- including nonprofit business, such as hospitals and schools -- to the control of a large central government bureaucracy is not a recipe for success.

These private institutions began their rapid increase in size and power long before the computer era. The growth of the great modern private organizations dates from about the midpoint of the Industrial Revolution and was prompted by the need to organize human efforts on a scale rarely attempted outside the army. In the information economy, these institutions become relatively far stronger thanks to the infor-


mation capital that uniquely suits them to their tasks. Those tasks become more demanding and specialized, making it harder for any generalist, including those who run the government, to supervise their work without stymieing it. The people who dominate these institutions -- even when they do not formally run them -- are professionals, treated by their own supervisors not as subordinates but as colleagues. They do not respond well to old "command and control" styles of management, nor do they have to: They are conscious of their value. The transformation of General Electric from a huge bureaucracy to a company where the people on the shop floor are the ones whose ideas are not only heard but implemented has turned out to be the premier example of this phenomenon. What is true for the inhabitants of these institutions is true for the institutions as a whole. The information economy increases these institutions' need for autonomy as well as the intellectual and economic leverage by which they procure this autonomy.


[5] Conversation with Donald Barnett, March 31, 1990. Much of the information about modern steel making incorporated in this chapter comes from conversations with Barnett or from two of his books: Steel: Upheaval in a Basic Industry (Cambridge: Ballinger, 1983); and (co-authored with Robert Crandall) Up From the Ashes: The Rise of the Steel Minimill in the United States (Washington, D.C.: Brookings Institution, 1986). See also The Competitive Status of the U.S. Steel Industry, (Washington, D.C.: National Academy Press, 1985).

[6] The Competitive Status of the U.S. Steel Industry, A Study of the Influences of Technology in Determining International Competitive Advantages, National Research Council (Washington, D.C.: National Academy Press, 1985), pg. 2.

[7] Tom Redburn and James Flanigan,"U.S. Firms Regain Competitive Edge," Los Angeles Times, 2 August 1987.

[8] Alan Greenspan, "Goods Shrink and Trade Grows," Wall Street Journal, 24 October 1988.

[9] Peter F. Drucker, The New Realities (New York: Harper & Row, 1989), p. 122.

[10] Ibid., p. 123.

[11] Cited by Henry W. Spiegal in The Growth of American Economic Thought (Durham, N.C.: Duke University Press, 1991).

[12] Peter Drucker has stated this many times, but first in The Age of Discontinuity (New York: Harper & Row, 1969).