Dr. Davis is Professor of Theology at Gordon-Conwell Theological Seminary in South Hamilton, Massachusetts, and the author of the book, Your Wealth in God’s World.
The impact of the data-communications revolution on the free market.
“Whenever you reduce computing cost significantly, you change the world,” observed Robert F. Elfant, general manager of the micro-component group at the Burroughs Corporation. Elfant’s comment reflects revolutionary new developments in computer technology, data processing, and telecommunications that are transforming the American economic landscape and challenging much of the conventional economic wisdom. At the same time, disturbing trends in the area of government regulation threaten to stifle these exciting new prospects—developments which may prove to be as crucial for America’s future world leadership as the development of atomic fission in the 1940s.
The global datacommunications industry is staggering in its sheer size. In 1984 the top 100 data processing companies in the world had $132 billion worth of business. IBM was number one with gross revenues of $44.2 billion. Lotus Development Corporation, a leading software firm, was number 100 with revenues of $157 million. These corporations represent new wealth-producing entities that Adam Smith could scarcely have envisioned in his own day.
In recent years personal computers have exploded on the American scene as a dynamic cultural and economic force. During 1984 personal computer hardware shipments grew 60 per cent to a hefty $20 billion. By 1989 it is estimated that personal computer sales will top $50 billion—more than mainframe shipments—and personal computer sales could number more than 125 million.
Computer expert John Gantz predicts that very soon the consumer will be able to buy a $4,000 personal computer with 500 times the disk storage, 20 times the memory, and twenty times the power of a 1978 computer at the same price! These dramatic changes, he notes, “. . . are comparable to finding in 1990 that your new $10,000 car will travel triple the speed of sound and get from Miami to Seattle on half a gallon of gas.” Such developments show that human ingenuity and creativity can disprove dire predictions that mankind is inevitably doomed to an ever-shrinking economic pie.
What Hath the Microchip Wrought?
Many of these new economic opportunities are being created by advances in chip technology, the tiny silicon microprocessors that are the real “brains” of today’s computer. Scientists in California’s Silicon Valley are now working on units so small that a quarter-inch square chip will contain more than a million transistors—four times the number on today’s cutting-edge 256 K memory chips. These new smaller and more powerful microprocessors will make possible consumer products that are far “friendlier” and “smarter” than anything available today. These “superchips” will give rise to mobile, personal robots, and “silicon secretaries” that can speak and be spoken to, organize messages, schedule meetings, and issue gentle reminders to absent-minded executives.
Spokesmen for Trilogy Systems Corporation have reported on their company’s progress in producing a self- repairing computer chip. Trilogy scientists are putting two or three times as many circuits on each chip as are actually needed to perform a given function. If one circuit breaks down, special diagnostic circuits in the unit detect the problem and divert the signal to another part of the chip. Adding such self-diagnosis and self-repair capability to conventional chips “could revolutionize the semiconductor business,” believes Trilogy President Frederick T. White. Trilogy’s research is yet another example of the crucial economic truth that in today’s world the creation of new wealth is not so much dependent on the extraction of physical resources from the earth as it is on knowledge, insight, and creativity—qualities promoted by a social system that values and fosters human freedom.
The new economic frontiers of the datacommunications revolution are to be found in outer space as well as in the laboratories of Silicon Valley. Communications satellites and the space shuttle are creating burgeoning new markets that did not exist a decade ago.
Today, only nine years after the first backyard satellite receiving station was built by H. Taylor Howard, a professor of electrical engineering at Stanford, perhaps a million Americans now own satellite antennas of various shapes and sizes. It is estimated that 20,000 to 40,000 new home satellite stations are being installed every month, and the pace is quickening. Owners of these systems can receive as many as a hundred different television channels carrying everything from X-rated movies to Russian weather reports to talk shows whose hosts are nuns.
Edwin B. Parker, also of Stanford University, has patented a small earth station with an antenna only two feet in diameter that can receive satellite signals with no interference. The scaled-down dishes allow workers using computer terminals in remote sites to receive data back from the home office at a cost of about 60 per cent of what AT&T charges to carry the same signals on its telephone lines. “The market opportunity was just sitting there to bypass AT&T,” noted Parker. News services such as Reuters and Dow Jones have bought 20,000 of Parker’s dishes in the last three years, and industry analysts believe that the Stanford scientist and entrepreneur has created a market with a $2 billion annual potential.
The American space shuttle program is creating revolutionary new possibilities not only in the area of national defense, but also in the American economy as well. Twenty-five years from now the scale of industrial activities in space could rival that of today’s computer industry. Some analysts believe that space-based materials processing involving drugs, alloys, and crystals could become more important commercially than genetic engineering. Some pharmaceuticals, for example, are worth literally millions of dollars per kilogram because they are used in saving human lives. One such drug, urokinase, an enzyme that dissolves blood clots, can be produced on earth only in minute quantities and at great expense. In the weightless environment of space, production costs of urokinase could be brought down from $1,200 a dose to around $100. This would be a tremendous benefit in light of the fact that bloodclotting disorders kill some 200,000 people every year.
Satellite communications already represents a $3 billion a year business, involving the transmission of television and radio broadcasts, telephone messages, electronic mail, and business data. Sensitive cameras on satellites have sophisticated remote-sensing capabilities that are improving weather forecasts, reducing deaths from hurricanes, detecting air pollution, and assisting geologists in oil, gas, and mineral exploration. According to one estimate, Florida citrus growers save $35 million each year because satellite weather data tell them exactly when to turn on the heaters in their orange groves, anticipating crop-killing frosts. The economic potential of such satellite capabilities is only beginning to be realized.
Telephones and Computers
Corporate leaders are now realizing that computer and telephone technologies are becoming inextricably intertwined. Long-distance calls are routinely routed by computerized switching banks. Office switchboards, or PBX’s, are equipped with computers and software that enables telephone conferences and call forwarding. As computers proliferate in offices and factories, they “talk” to one another over telephone lines. In a move which is symptomatic of converging trends in this field, IBM last year bought for $1.3 billion Rolm, a leading manufacturer of PBX’s.
For the individual consumer, the newer, computerized “smart” phones offer auto-dial, repeat, and features that answering machines have. “The new machines have the potential to revolutionize office communications,” notes computer analyst Paul Freiberger. “They resemble traditional squat black phones about as much as a Hasselblad resembles a box camera.” This trend toward the convergence of telephone and computer technologies, like the new developments in space, open vast new economic vistas for entrepreneurs who are alert enough to respond quickly to new conditions.
Clouds are beginning to emerge which threaten to darken these bright new economic horizons. Inept and inappropriate forms of government regulation, and protectionist sentiments within the American high-tech industry are disturbing trends in an area which should be among those with the greatest promise for America’s economic future.
Domestic computer manufacturers are finding it increasingly difficult to compete with Japan and other foreign producers. American high-tech firms are generally very strong in innovation and new product development, but are not as competitive in the manufacturing area. Most computer terminals, for example, are now being made in Korea, and the Japanese dominate the computer printer and disk drive market. As a result, Silicon Valley executives, long supporters of free-trade, are now beginning to speak in protectionist tones. “I’m not being asked to seek Detroit-style quotas,” states Silicon Valley lobbyist Ralph J. Thomson. But he says that many top computer executives are now beginning to question “whether we should retain our un-footnoted free- trade stance.”
Part of the industry’s problem is the overvalued dollar that inflates the cost of American goods relative to foreign competitors. The over-valued dollar is related in part to the ballooning federal deficit, which in turn attracts foreign investors to treasury bills and other debt-ser-vicing instruments, thus keeping the dollar high relative to other currencies.
More fundamentally, however, American computer manufacturers are losing their competitive edge by investing too little in basic research and development. As business writer John W. Wilson has aptly observed, “Americans save too little, the government spends too much, and the tax system is biased against investment.” The consequences of these misplaced economic priorities are now beginning to make themselves felt.
The Coming of Electronic Mercantilism
The danger of inappropriate government regulation in the datacommunications field is another cloud on the horizon. As more and more nations begin to appreciate the importance of telecommunications linked to computers, governments “. . . are beginning to treat information as they once treated goods,” commented former Citibank Chairman Walter Wriston. “We are seeing the growth of a kind of electronic mercantilism as sovereigns move to protect their power.” Some governments are now requiring that electronic codes used by private communicators to protect their privacy be registered with government agencies. These governments are reacting to the information revolution in the classic manner, notes Wriston, “by attempting to regulate, tax, and control the new technology.”
The problems of government regulation of high technology are complicated by national security considerations. Pentagon investigations revealed that the Soviet Union had pirated from the U.S. the manu facturing technology used in the engine that powers the Tomahawk submarine-launched cruise missile. The Soviet counterpart contained a radar guidance system so sophisticated that U.S. officials were convinced that its computer chips were also stolen from U.S. designs. The problems of how to stop such dangerous technology leaks without stifling the freedom and creativity of the private sector is tying U.S. policy makers in knots.
Closer to home, the nation’s largest phone company, AT&T, is being hampered by bureaucratic regulations issued by the Federal Communications Commission. The FCC rules require AT&T to keep its telephone operations entirely separate from its computer business. AT&T’s splendid research division, Bell Laboratories, invests millions of dollars each year to design software for the company’s long-distance network, but is not allowed to share that work with the company’s commercial computer division. Such regulations “. . . put the company at a significant disadvantage in the exploding new market for customer services that integrate computers and telecommunications,” notes Princeton economist William J. Baumol. Such policies are not only deleterious to AT&T’s bottom line, but also affect adversely U.S. technology’s position as a whole relative to foreign competitors such as the Japanese.
Where Should We Go from Here?
One way that government can help rather than hinder U.S. high technology’s position is by retaining and even expanding tax credits for research and development spending. U.S. research and development expenditures have fallen behind those of our trading competitors as a percentage of gross national product. Military research and development spending, which accounts for nearly half of the country’s total outlay of $100 billion, no longer drives civilian technology to the extent that it once did in the 1950s and 1960s. Revising the tax code generally to encourage savings and long-term investment is a key element in any strategy seeking to retain America’s competitive edge.
Governments can also help by implementing policies that encourage rather than discourage the free flow of international information. Restoring the effectiveness of our patents and copyrights will encourage innovators to invest time, energy, and money in new ventures, since such policies will give greater assurance that they will be able to reap the benefits of their labors.
In the complicated field of technology transfer and national security, J. Fred Bucy, president of Texas Instruments, Inc., has offered a simple yet valuable suggestion. Instead of trying to control the tens of thousands of end products produced by the American high technology industry, a more workable approach would be to concentrate on the far smaller number of manufacturing processes and machines that make the advanced products possible. It may be practically impossible to prevent a foreign agent from obtaining the latest computer chip, but it is far easier to monitor the plants and machines that manufacture the chips. As things now stand, the Pentagon’s list of controlled products “is the size of a book, but it should be on five sheets of paper,” states Bucy. By concentrating on the far smaller number of manufacturing processes, the need for government controls would be diminished and American manufacturers would experience fewer regulatory headaches.
The trend toward deregulation evident under the current administration needs consistent application in the telecommunications industry. In the case of AT&T, for example, the Federal Communication Commission’s fears that AT&T’s combined activities in the areas of telephones and computers would constitute a monopolistic restraint of trade are unfounded. Since 1980 competition throughout the industry in long-distance service has accelerated enormously. It has been projected that by 1986 the total long-distance transmission capacity of the competitors will be several times larger than AT&T’s.
In the area of computer technology, given the dominant position of IBM, there is little danger that AT&T will exercise monopolistic influences in this field. The Federal Communication Commission’s rules concerning the artificial separation of telephone and computer activities have made necessary a duplication of capital, labor, and other facilities for AT&T. The net result of these regulations, as William Baumol has noted, has been to favor “. . . AT&T’s integrated foreign competition, which are not subject to similar restrictions and which market combined computer and communications services on a global scale.”
While deregulation and divestiture have created some uncertanties for the consumer, analysts believe that such policies will justify themselves in the longer run. Economist Manley Irwin of the University of New Hampshire believes that out of the current flux in the telecommunications industry “. . . will result a phenomenal cornucopia of new industries, new services, and new jobs.”
In order to harvest fully the rich economic yields of the data-communications revolution, policy makers need to be wise enough to let the market do its work. Deregulation, investment tax credits, and new thinking in the areas of patent and copyright law will help American industry stay competitive in the world economy. In the new Information Age where decision times can be measured in minutes and seconds rather than months and years, preserving the freedom of human action is more crucial than ever. 
11. 1985, p. 57.