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.
For one thing, both combatants seem to be living in a debater's dreamworld. Ferguson's solution to the problem he outlines, for example, is massive government support for the industry, including "direct industrial assistance" targeted primarily at large companies. His ideal is the "stable, concentrated, and protected industrial alliances" he sees in Japan. Excuse me -- but wasn't it precisely such stable, concentrated, and protected industries (steel, autos, consumer electronics) that lost out to Japan in the first place? Let's say we now create some new megateams, maybe lining up IBM with Intel and AT&T with Motorola, each with Japanese-style affiliations with banks, suppliers, and so on. Does anyone really believe such elephants would be dancing nimbly on the edge of technological innovation?
To say that entrepreneurship is to blame for the semiconductor (or any other) industry's decline, moreover, is to beg an only too obvious question. Why couldn't all those entrepreneurs accomplish what they wanted at the large companies they eventually left? The American semiconductor companies that are now hurting were once awash with cash and opportunities. All they lacked was management smart enough to attract top innovators, move quickly on the ideas those people came up with, and reward them accordingly. Had they done so, they might not be running to the government for help today.
Gilder has blinders of his own. The proliferation of design-intensive start-ups, as even Ferguson acknowledges, really is an American strength, and really does push the technology forward. But Gilder never does address the problem that has hamstrung the American economy in about 218 separate industries over the past two decades, which is that the United States invents and the Japanese manufacture. There's no doubt that encouraging entrepreneurship is the best way to encourage technological risk taking. There's also no doubt that the Japanese love to watch us take risks, then move in and figure out how to capitalize on the risks that pay off.
The reason for the contestants' blinders, of course, is that Ferguson and Gilder's debate is fundamentally ideological, not practical. The issue isn't the semiconductor industry, it's what role government should play in the economy -- and whether the unfettered free market "works." To Ferguson, Gilder's laissez-faire approach is dangerous stuff -- "voodoo competitive doctrine." To Gilder, Ferguson is just one more "scholar of the Left" who favors "an onslaught of government subsidies and guidance favoring established businesses and counteracting the bias toward new companies." Gilder's conclusion -- which you somehow suspect he'd have reached no matter what he discovered in researching his book -- is that the government shouldn't meddle with the industry. Ferguson's is that the government should meddle quite a bit. Like lawyers, both combatants seem less concerned with truth than with marshaling evidence to support their favored course of action.
That's a system of argument that makes sense in court, where the choice is usually between acquitting and convicting. But economic policy rarely lends itself to either/or propositions. One reasonable set of actions, for example, would be to offer start-ups more support, not less -- and at the same time mount a big cooperative program to develop new manufacturing technologies, bringing in the experts from IBM, et al. The former would be anathema to Ferguson, the latter to Gilder. But that doesn't make it a silly combination.
The popularity of books like Kennedy's Rise and Fall can't be traced to any immediate economic troubles; it's probably due, rather, to the decades-long transformation of the global marketplace that we're very much in the middle of. A beneficial effect of this economic turmoil is that it has shaken up conventional perceptions and challenged established ideologies. To see things once again as Ferguson and Gilder do -- black vs. white, big vs. small, government vs. no government -- is to go backward, not forward.
The debate on semiconductors and U.S. competitiveness
Maybe it was Charles H. Ferguson's Ph.D. thesis that started it all. A voluminous study with the imposing title "Technological Development, Strategic Behavior and Government Policy in Information Technology Industries," it must have rubbed George Gilder the wrong way. Whatever the cause, Gilder's article in the March-April Harvard Business Review ("The Revitalization of Everything: The Law of the Microcosm") devoted several pages to summarizing and attacking Ferguson's arguments. Ferguson responded in the May-June issue, with a piece titled "From the People Who Brought You Voodoo Economics."
Watch for future installments -- articles from Ferguson, a book on the semiconductor industry from Gilder. Meanwhile, the industry's viewpoint can be found in The Microelectronics Race (Westview Press, 1988), a book sponsored by the Semiconductor Industry Association.
BETWEEN HARD COVERS
Books from our writers
Three collections of articles -- The Best of Inc. -- are being published this month by Prentice Hall Press. Guide to Finding Capital ($11.95) examines capital sources of all sorts, and includes a section on valuing, buying, and selling businesses. Guide to Marketing and Selling ($10.95) focuses on marketing strategies and sales management. Guide to Business Strategy ($10.95) looks at how companies grow -- and where such enterprises can run into trouble as they do.
All three books are in paperback.