Are You Ready for the Networked Economy?

American business is dividing into three worlds. Take this quiz to see where your business fits in.

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American business is dividing into three worlds. Where individual companies end up will profoundly affect how well they -- and the U.S. economy -- compete in the 21st century

It's a brave new economic world. or perhaps worlds would be a more apt word to use, given that American industry is rapidly fragmenting into three distinct economies: the Networked, the Kluge, and the Provincial. A company's future increasingly depends on which of the three defines its dominant business activities.

The Networked economy consists of densely packed concentrations of entrepreneurs and companies in urbanized areas that generate virtually all the nation's globally competitive, high-wage industries. These highly specialized companies flourish because they can rapidly team up to manufacture products for world markets. Some examples include the small-scale, world-beating exporters and technology developers in Silicon Valley and San Diego, the Research Triangle biomedical centers in North Carolina, and auto-production specialists in the Midwest.

The nation's Kluge economy -- the concentration of public-sector bureaucracies, universities, and closely aligned private companies in government-related industries like utilities or defense -- exists virtually side by side with the Networked economy. (Kluge, pronounced "klooj," is software programmers' slang for code that is an ill-assorted collection of poorly matching parts, forming a distressing whole.) Although Kluge institutions are America's least-productive resources, they control urban politics.

All told, the Kluge and the Networked economies generate about 45% of total U.S. nonfarm employment, or 50 million jobs, of which 15% to 18% are directly accounted for by the government -- the primary Kluge constituency.

Watching from the sidelines in the growing southern and intermountain western regions of the country is America's Provincial economy -- the back-office service providers; lower-wage, lower-skill producers; and urban corporate refugees whose interests now dominate national politics. Once an industrial afterthought, the Provincial economy now generates about 35% of total U.S. nonfarm employment, or 40 million jobs.

The Networked economy is where a company wants to be. Of the three sectors, only it offers the high wages, profits, and skills that improve America's standard of living. The Provincial economy trades technological prowess and upward mobility for relatively rapid job growth in lower-paying, less-skilled activities. And the Kluge economy -- built on an increasingly shaky, discredited public-sector foundation -- is the least likely place for a company to flourish in 21st-century America.

The Networked economy developed because cutting-edge industries, like the Hollywood entertainment industry or the aerospace industry in Washington State, demand specialized companies and individuals that can work together to manufacture products rapidly. Urban regions in particular offer the critical mix of bottomless talent and clustering of companies that supercharges high-wage, high-skill sectors. It's no accident that the world's most technologically sophisticated economies are found in metropolises like Tokyo, Seoul, Taipei, and Los Angeles.

Unlike its Asian counterparts, however, America's Networked economy is constantly under attack by those who strive to preserve the Kluge economy. Composed of the last surviving caste systems in the United States -- government, educational institutions, hierarchical businesses -- the Kluge economy was once instrumental in fostering metropolitan development. Over time, however, it stagnated; today its long decline feeds one of the most self-defeating kinds of politics in U.S. history.

Public-employee unions, for example, think nothing of endangering their constituents' future by threatening an ever-expanding parade of plagues -- from race riots to Dark Age epidemics -- if jobs are cut from the public rolls or options for more efficient government are pursued. Universities, once an urban magnet, now frequently repel creative companies and entrepreneurs with their contempt for the private sector.

Turned off by Kluge rhetoric, the Networked economy is steadily migrating from central cities to less dysfunctional areas, like northern New Jersey; Sonoma County, north of San Francisco; and Burbank and Santa Monica. While even the most productive and clean company faces constant regulatory, tax, and social demands -- no matter how ill-conceived -- in the urban Kluge strongholds, it is at least left alone in the nation's suburban and rural peripheries. In many cases, migrating businesses can bargain for favorable treatment, if not outright subsidies, from their new communities, treatment that partially compensates for losing the skills, dense business contacts, and irreplaceable product-development opportunities in the regions they left behind.

Perversely, the Kluge economy uses that tragic exodus as justification for more government subsidies to stem the tide of fleeing businesses, further alienating Networked companies, reducing the local tax base, and producing yet another destructive round of Kluge apocalyptic rhetoric.

All of that feeds the growth of America's Provincial economy, which self-consciously styles itself as a more moral, less "Klugey" alternative for Networked businesses. But behind the hype is a decidedly unattractive reality. Far from building globally competitive industries, Provincial economic development is driven by the redeployment of less competitive businesses (generic, standardized manufacturing; financial back-office services; and the like) to low-cost areas. Its high-growth core is an honor roll of America's low-skill, low-wage states: Utah, Nevada, Louisiana, Georgia, Arizona, and Oregon. Self-congratulatory and smug, the Provincial economy offers America a 19th-century answer for 21st-century competition.

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