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July 2000
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New Rules for a New Economy

By Madanmohan Rao

Building Wealth: The New Rules for Individuals, Companies and Nations in a Knowledge-Based Economy
By Lester Thurow
Harper Collins Publishers, New York
June 1999 (hardcover), August 2000 (paperback)
301 pages

Looking for a sweeping overview of emerging economic trends as well as a road map for success in the new economy? Try Building Wealth, by Lester Thurow, renowned MIT economist and author of other best-sellers like The Zero-Sum Society and The Future of Capitalism.

This 301-page book is an excellent read and covers a wide range of issues, including emerging knowledge-based industries, global economic integration, entrepreneurial skills, business scalability, national economic policies, and the digital divide. Comparative analyses also cover the U.S., Asia, and Europe.

"Humankind is living through its greatest technological decade ever," begins Thurow.

The "wealth and productivity pyramid" in the new economy, according to Thurow, is based on layers consisting of social organization, entrepreneurship, knowledge creation, workforce skills, infrastructural tools, and natural resources.

The steam engine ushered in the first industrial revolution at the end of the 18th century; electrification heralded the second industrial revolution a hundred years later. And the third industrial revolution is now under way, spearheaded by technologies like the Internet, designer materials, and biotechnology.

The Internet technologies help companies globally source and sell new products. The biggest changes wrought by the third industrial revolution may well occur in such areas as retailing.

A seller of outdoor clothing located in rural Maine, L. L. Bean, can sell hundreds of millions of dollars’ worth of clothing in Japan without having stores there. "The Net can allow such companies to jump the legal hurdles and local retail obstacles that have made it impossible for conventional foreign retailers to break into the Japanese market in the past," Thurow says.

"With today's electronic technology, the cut-flower business is in the hands of neither those who grow flowers nor those who sell them," says Thurow. Rather, it is in the hands of the Dutch, who have built a global online logistics system for tracking flower markets and movements worldwide.

Technological change creates economic, geographic, and developmental disequilibriums, and businesses can grow rapidly by exploiting such equilibriums, as in the case of the offshore software-development industry.

"Entrepreneurs are needed to see the economic possibilities of new technologies such as Internet retailing, and break the old barriers that will attempt to prevent them from happening," says Thurow.

The first few stages of economic progress typically involve copying to catch up. Just as the U.S. copied and then improved on British textile mills in the 19th century, Japan copied and refined on American consumer-electronics technology in the 20th century. Germany was a great inventor in the first half of the 20th century but not in the second half.

The real leaps, however, occur when advancement of knowledge becomes the key to economic success.

"With the onset of the third industrial revolution, the ability to rapidly open up the new and close down the old becomes the central characteristic needed for economic success. The American system—typified by the dismantling of phone giant AT&T or the transformation of Intel from a DRAM to a semiconductor company—was built to open up the new and close down the old. That is what America does best," Thurow says.

"Entrepreneurs built the national companies that destroyed local companies at the end of the 19th century—and they are building the global companies that are now destroying national companies," says Thurow.

Much of the success of a knowledge-based economy rests on a well-educated workforce with a strong spirit of curiosity and creativity. "The Americans invented mass universal public education, were its leaders for a century, and used it to create their 20th-century success," says Thurow. America's elite science and engineering education institutions emphasize creativity. They are not very interested in incremental improvements, he says.

In the U.S., venture capital is plentiful for such sectors as the Internet, and engineers and managers have plenty of entrepreneurial role models.

"The risks of failure are much lower in America than they are in societies where those who leave are considered traitors, where a business failure is seen as a personal failure, and where reemployment at a good firm is difficult if not impossible if one has left to start up one's own business," says Thurow.

Entrepreneurs are risk takers, organizers, and doers—not usually thinkers and inventors. "Bill Gates has invented no new technologies and was never a creative software programmer. He is, however, an entrepreneur and a builder," says Thurow. In fact, in an apt reflection of today's knowledge-based economy, Gates, the richest man in the world, derives his wealth more from a knowledge process than from any tangible physical assets—something unprecedented in history.

Socialism and communism failed because neither had a change agent, according to Thurow; both deliberately banished entrepreneurs. Societies won't have entrepreneurs unless they themselves are willing to change. And the changes that must be accepted are seldom limited to the economic sphere; today there are worldwide worries that the Internet will change local cultures and traditional patterns of behavior.

"It isn't guaranteed that something better will emerge. It will be different. But those used to the old patterns of behavior are unlikely to see the new patterns as better, even if new generations used to the new patterns of behavior see them as an improvement," writes Thurow.

To advance and use knowledge, a society needs the right mix of chaos and order. Too much order—as in China and Singapore—does not work; too much chaos—as in Russia—does not work either. "Any society that values order above all else will not be creative, but without the right degree of order, creativity disappears as if into a black hole," Thurow says.

The growth of the Internet is a good example of managing the dynamic tension between the two opposing forces of chaos and order. The Internet could not have been established in America without three decades of government financial support, but it has now been able to flourish largely by unleashing free-market forces in cyberspace.

Similar trends are being observed in the field of microbiology in the U.S. Staying ahead in the knowledge game requires massive R&D investment by governmental and corporate sectors. Compared with the leading industrialized countries, the challenge in smaller economies lies in figuring out which industries and sectors will receive the smaller pool of investment funding.

Companies in countries like the U.S. invest much more in hardware and software innovations; they also benefit from having more technologically savvy consumer bases that constitute readier markets for new products than developing countries have. The U.S. also has much richer macro- and microeconomic data than most other countries in the world, which allows for better planning and forecasting methodologies.

"In fast-moving fields, the advantages of being inside the relevant communities are enormous," says Thurow. For instance, Internet companies often buy or build subsidiaries in Silicon Valley to ensure themselves a listening post. Other geographic locations have much lower operating costs, but the same information isn't available on the intellectual grapevine.

As for other parts of the world, Europe, for instance, has to reinvent itself to allow entrepreneurs to emerge, says Thurow. Europe saves a lot, is well educated, has a strong technological and infrastructural base, and will have a well-integrated regional economy—but lags considerably in entrepreneurial-change capacity.

Japan has an excellent workforce with skill levels in the bottom half, but currently lacks creativity at the top; it has more than enough order to be efficient, but too little chaos to be creative and risk taking, according to Thurow.

In a time of such turbulent change, individuals will have to play the game based on their education and their skills—and on their willingness to change. Adult education, lifelong learning, network literacy, and on-the-job training are becoming increasingly important.

"The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are no careers," Thurow cautions. Individuals may no longer have lifetime careers with one company, and companies may no longer have lifetime employees, as in the old economy. Cultures have to be rebuilt to accept rapid technical change, according to Thurow.

"In a knowledge-based economy, successful regions have to have the ability to grow new big companies rapidly. No one in Europe has been able to rapidly grow new big companies, as in the U.S.," says Thurow.

But in the U.S., the bottom two-thirds of the labor force is poorly educated and less skilled compared with world standards, says Thurow. "Its rapidly rising earnings gap between the top and bottom quintiles of the workforce is in the long run unsustainable. It is a low-savings and -investment society," he says.

In addition to all of these controllable variables, there is one more key unpredictable factor: luck. "One needs to be in the right place at the right time with the right skill set to be successful in the knowledge age," says Thurow, and this is best typified by the rise of Microsoft Corporation.

In the Internet era, the "right place at the right time" varies along the value-added e-commerce chain in different countries. It could be in core technology, or in logistics companies, or in e-tailers, or in successful branding strategies.

"These technological opportunities are creating fortunes faster than they have ever been created," says Thurow, but are also creating greater uncertainties in areas like intellectual property enforcement and the financial turbulences of a global economy.

"Capitalism comes with two major defects: recessions and financial meltdowns. Both are permanently embedded in capitalism's genetic code. Any capitalistic society that cannot cope with meltdowns is in trouble," warns Thurow.

In a deflationary world, business firms cannot afford to hold inventory. Dell Computer's Internet-driven model of building computers to order only after the computer has been paid for becomes the only profitable business model.

"Just as the second industrial revolution moved us from local to national economies, so the third industrial revolution is moving us from national economies to a global economy. But the transition from national to global is going to be far more turbulent than the transition from local to national. There is no global government to learn how the new global economy should be managed," Thurow warns. "Wealth will have to be built in a global economy that will not be working smoothly and that will from time to time produce completely unexpected economic storms."

These technologies also spill over from the commercial to the political and military realms, of course. Today the concept of a superpower—which has enough firepower to destroy the world—has given way to the concept of a hyperpower, which can seamlessly use its global networks to see and hear everything while also being able to completely destabilize another country's communications systems.

"During the Cold War, there were two superpowers. Now there is only one hyperpower: the U.S.," says Thurow.

The interaction between the national wealth pyramids of different countries also opens up critical issues for emerging economies like India. Software engineers in India may be able to play the global game by tapping into the wealth pyramids of other countries, but India as a whole will not gain unless it builds its own national wealth pyramid, Thurow says.

In sum, Building Wealth is a very thought-provoking and comprehensive treatise on the emergence and future of the new economy. It effectively weaves together the roles of various actors like individuals, organizations, nations, and cultures. Some more comparative analysis of different parts of the world like Eastern Europe or Latin America would have helped give the book more global appeal. Still, it is a must read for all those wanting to reflect on what exactly this new economy has wrought on our futures.

About the Author: Madanmohan Rao

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