If you're a fan of serious best-sellers, you've been doing some gloomy reading lately. Last year the heavyweight book of the year was Allan Bloom's crotchety polemic, The Closing of the American Mind. This year it's Paul Kennedy's The Rise and Fall of the Great Powers (Random House, 1987). With 540 pages of text and 121 of footnotes and bibliography, it's not what you would call light entertainment. Still, it has been on the best-seller list for many weeks now -- right up there with The 8-Week Cholesterol Cure.
When a scholarly tome such as Kennedy's makes the window display at Walden-books, it's a safe bet that the author has caught the next wave of the zeitgeist -- and that all those book buyers are reading him not for what he says about The Habsburg Bid for Mastery, 1519-1659 (Chapter 2), but for what he says about the future of the United States. America, argues Kennedy, is in decline relative to the rest of the world. It is militarily overextended and economically under siege. The imbalance between military commitments and the economic power required to sustain them may lead -- as it did for superpowers of past centuries -- to a fall from number one status.
Right there, unfortunately, is where Kennedy's book ends -- and where politicians then have to fill in the blanks. Is America's decline reversible? If so, what needs to be done? George Bush and Michael Dukakis, so far, have studiously avoided specific answers to these questions. But scholars and policy analysts -- the kind of people who will become Presidential advisers next January -- are already thrashing them out, with implications that are more than academic. In such shadow debates is the groundwork for future government action laid.
Consider the current rancorous dispute over the semiconductor industry, which is often considered a paradigm for American industry under siege from abroad. For several years now, American merchant chip makers (companies that make chips for sale rather than for their own use) have been losing market share to the Japanese, particularly in low-cost markets such as dynamic random-access memory (DRAM) chips. Not surprisingly, the industry has clamored for government help -- and has gotten some, such as the current U.S.-Japan semiconductor agreement, which among other things, prohibits selling chips below cost of production. But the dispute continues. Do semiconductor companies need more protecting? Is there something fundamentally wrong with the way the industry is structured? Far from being a debate over semiconductors alone, the argument touches on basic questions of economic policy, among them the desirability of entrepreneurship itself. And the two sides have come up with dramatically different answers.
The industry's position has been put forth most persuasively by Charles H. Ferguson, an MIT policy researcher and onetime analyst for IBM Corp. As information technology grows more complex, Ferguson says, semiconductor companies need mammoth production facilities and global distribution networks to compete effectively. Japan Inc. knows this, and concentrates its industry in the hands of six behemoths, which together control 80% of Japanese production. Big American companies, such as Intel Corp., can't keep up -- and why? Because our tax laws, our culture, and our capital markets all encourage people to split off and start their own companies. The result is a fragmented, "chronically entrepreneurial" industry.
Typically, says Ferguson, the new companies succeed for a while. Then they flounder, sometimes surviving only by licensing their hot new technologies to the Japanese. Older, larger companies, meanwhile, find themselves struggling. Always competing with the start-ups for capital, constantly losing their best people and their best ideas, they are "unable to sustain the large, long-term investments required for continued U.S. competitiveness." As a result, we're likely to lose yet another key industry to the Japanese. The implications for our economy and our national security are stark.
Ferguson's view has gained a broad hearing -- in articles, speeches, and testimony before Congress. Alas, says his most notable opponent, it is dead wrong.
The opponent is George Gilder, a conservative writer whose books Wealth and Poverty and The Spirit of Enterprise once provided some of the philosophical underpinnings of Reagaonomics. Gilder, who is currently completing a book on the semiconductor industry, has attacked Ferguson both directly and indirectly, most recently in the pages of the Harvard Business Review (March-April 1988) and in a subsequent face-to-face debate. (See Tom Peter's "Thinking Big," on page 72.)
If Ferguson is Cassandra, Gilder is Pollyanna. The American semiconductor industry, he says, is in great shape -- and it's precisely because of all those entrepreneurial growth companies, not in spite of them. Sure, the Japanese have gained market share, but mostly in the manufacture of standardized, low-value memory chips. The real added value in semiconductors isn't there, it's in the design of information-intensive customized chips, such as the microprocessors that are at the heart of computers and other digitial devices. In that department, the United States has overwhelming superiority. There's a "huge increase in the number of designs being produced in the industry," Gilder says. "In this increase, the U.S. has three times the share of the Japanese, and the U.S. has close to half of all the world's systems designers." It's the start-ups, moreover, that are turning the new designs into commercial products.
As entertainment, the exchanges between Ferguson and Gilder have their moments. Gilder charges Ferguson with being a "mouthpiece" for the semiconductor industry, and with having been "flim-flammed." Ferguson headlines an attack on Gilder "From the People Who Brought You Voodoo Economics." As anything more than entertainment, however, they're a little discouraging.
