Jane S. Shaw is Senior Associate of the Political Economy Research Center in Bozeman, Montana, and was formerly Associate Economics Editor at Business Week.
In the continuing debate over the proper roles of government and the private sector, advocates of the market sometimes seem to imply that the private sector does no wrong. Of course, this is absurd. In fact, it is likely that the private sector makes more—perhaps many more—mistakes than the public sector does.
The saving grace of the market process is that, unlike government, private individuals and corporations catch their mistakes. They do not—cannot—perpetuate them for long. If the market tells them, through mounting losses, that their dreams and visions are wrong, they cut short their plans and stop pouring money into losing propositions. It may hurt, but they do it.
One dramatic example of a private sector mistake is the failure of the major computer companies to anticipate the personal computer. Two firms, Digital Equipment and Hewlett Packard, at least considered the idea of a personal computer, says Stan Augarten in his history of computers, Bit by Bit (Ticknor & Fields, 1984). But most computer companies didn’t. They envisioned a future of giant machines providing brainpower on a time-shared basis for multiple customers. With that vision, Augarten explains, they. “couldn’t imagine why anyone—any ordinary person, that is—would want a computer.”
It was electronic hobbyists, not experts, who figured out how computers could be put together cheaply enough for an individual to own one. The first crude personal computers appeared as computer kits sold through popular science magazines. And in 1977, two young hobbyists, Stephen Wozniak and Steven Jobs, formed the Apple Computer Company and introduced the Apple II.
The industry has never been the same since. The dazzling growth of personal computers has shattered forever the concept that the world would simply progress step-by-step to ever-larger computers. The future will be much more diverse!
IBM, which introduced its own personal computer in 1981, landed on its feet. But the big old companies that made giant “mainframe” computers gradually retreated into narrow niches in the face of burgeoning competition.
By 1983, Financial Worm called the mainframe companies “dinosaurs” headed for extinction and warned that a couple of the big ones might not be around in the 1990s. By mid-1986, two of the behemoths, Sperry and Burroughs, announced a merger. Even though the stock market was booming, Wall Street valued some of these companies—Control Data, Data General, and Honeywell—at less than their annual revenues, and a Wall Street analyst quoted in Business Week called the industry “ripe for consolidation,” with many companies up for sale.
We are seeing a multi-billion dollar transformation in the computer industry. The striking thing is that it has been occurring quietly and peacefully. You don’t read about it in the headlines, except in places like The Wall Street Journal; no one has called congressional hearings, no political coalitions have formed to save the industry. Stockholders have quietly bought and sold their shares. Those who invested in winning firms made money; others lost it. Doing their daily business, they completely changed a major segment of the corporate world.
In contrast, when government makes a mistake, true corrective action is rarely taken, and then only when the situation has reached scandal proportions and a politician is able to make hay out of exposing it. All too often, the commotion dies down and taxpayer money continues to flow for years into misbegotten projects.
An example: Twenty-five years ago, influential scientists worried that the nation might run out of helium. Inert and lighter than air, helium has “space-age” properties and, at the time, scientists feared there were no substitutes. By usual standards, helium is nonrenewable. If it is not extracted when natural gas is pumped out of the ground, it disappears into the atmosphere and can be recaptured only at high cost.
So, under pressure from experts and some private firms, Congress established a helium storage program. Helium would be extracted, purified, and re-injected into natural gas wells. Congress gave the Interior Department authority to borrow from the Treasury up to $47.5 million each year in loans to be paid back through helium sales.
But very quickly the project began to show signs of trouble. The sales that had been counted on to provide funds dried up. Substitutes were found after all. Moreover, new sources in the ground—promising enough helium to last hundreds of years—were found, making government storage superfluous.
The program became embarrassing enough for Congress to hold hearings. One congressmen called the continual borrowing from the Treasury an “albatross around our necks” and in 1973 the Interior Department stopped adding helium. But it continues to store billions of cubic feet of helium at taxpayers’ expense. It now has in storage 140 years’ worth of processed helium (assuming present rates of usage), and a recent count showed that it owed the Treasury $790 million!
Even so, suggestions that part of the helium stock should be auctioned off to help repay the Treasury were firmly rebuffed, year after year, by the Interior Department. Finally, in 1987, in an effort to cut the deficit, the President proposed selling the processing facilities (while keeping the helium). Congress has yet to take any action on that plan.
The helium program is only a small example of the failure of the government to correct its mistakes. The taxpayer continues to pour money into the farm program, even though it aids millionaires and increases rather than decreases the instability of the “family farm”; into subsidizing Amtrak, a perpetual moneyloser that transports affluent customers along the Northeast corridor; into environmentally unsound cutting of timber that can only be sold at a loss; and into the Bonneville Power Administration, whose policies brought about the $2.25 billion default of the Washington Public Power Supply System and currently cost the taxpayers several hundred million dollars every year.
Contrast these examples with the experience of the computer industry. One by one, the man agers of the computer companies recognized that their image of the future was not the way it was going to be and they adjusted their companies in the light of that new reality. They may still think that the future should have gone their way, but the message from investors on Wall Street got through.
Government managers have little incentive to recognize reality. The taxpayers, not the managers, pay the losses, and few taxpayers realize they are doing so. Even when the losses become so visible that politicians can attract media attention by exposing them, the projects survive in less obvious form for decades. Unlike mistakes in the private sector, government errors haunt us generation after generation.