Lester is definitely more

Sometimes called the "dismal science," economics is far from dismal when you're discussing it with Lester Thurow, one of a handful of economists well-known outside his field. In this exclusive interview Thurow discusses e-business, Internet taxation, Linux, and other “networky type things.”

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By  Jon Tullett Published  November 27, 2000

Sometimes called the "dismal science," economics is far from dismal when you're discussing it with Lester Thurow, one of a handful of economists well-known outside his field. In this exclusive interview Thurow discusses e-business, Internet taxation, Linux, and other "networky type things."

Lester Thurow has been a professor of economics at the Massachusetts Institute of Technology for more than 30 years, including a stint as dean of MIT’s Sloan School of Management.

He served under Lyndon Johnson as staff economist on the President’s Council of Economic Advisers, after which he taught at Harvard. A prolific writer and speaker, Thurow has authored several books and served as a contributing editor and commentator for many leading publications and news programmes.

In his latest book, “Building Wealth: The New Rules For Individuals, Companies And Nations In A Knowledge-Based Economy,” Thurow says that in today’s global economy, knowledge-not physical assets-is the basis of wealth.

That shift, fueled in large part by swift technological progress, is reshaping business, intellectual, political and social relationships. And the high-tech sector is at the center of that transformation, Thurow says.

In an exclusive interview with Network Middle East, Thurow gives his views and predictions on IT monopolies, Bill Gates, Oracle and the viability of Linux and other emerging technologies. Thurow also weighs in on the presidential election, Internet taxation, the role of solution providers and the stock market.

You’ve said knowledge management is the ‘third industrial revolution,’ and this type of economy is different from anything we’ve ever seen before. Please explain.

Probably the big symbol of it is Bill Gates. If you go back and say, ‘Who is the richest person in the world for all of human history?’ it was always somebody that owned natural resources: land, gold, oil, etc.

[Gates] doesn’t own any land or oil; he doesn’t really even own patents. What he does is control a knowledge process and, at least until the Justice Department came along, it made him the wealthiest person in the world.

It’s a real symbol of a shift because this is the first time in human history that you can get rich by controlling knowledge as opposed to controlling natural resources.

You say Bill Gates controls the knowledge process. To the average person, that sounds a bit scary, like something out of Orwell’s ‘1984.’

Gates controls the knowledge process not because of anything he or Microsoft did. It’s what economists call ‘network economies of scale.’

You and I want to use the same computer system. I want to walk into a hotel business office in Hong Kong and use the computer system without learning anything new. And if you think of these Internet auction sites, like the one the automobile companies are setting up [called Covisint], they don’t work unless everybody uses exactly the same software. Compatible software just doesn’t exist at that level of detail.

That’s why, of course, Oracle is a high candidate for a Justice Department suit. I saw an ad saying Oracle now provides 85 percent of the software for the Fortune 500 companies on the Internet.

That’s almost like an ad saying, ‘Justice Department, you’ve got to sue us.’ I think the problem that a lot of these companies are going to have is that once you set the precedent, when you have that kind of a market share, you’re automatically a candidate for an antitrust suit.

[The Justice Department] won’t have any choice but to bring a suit against Oracle because if they don’t, private people will. What we tend to forget in this kind of a world is that it’s positive if we all use the same system, not negative.

So have they been too aggressive in pursuing Microsoft?

Yes. What I would argue is that in the end, [the case] will probably be dismissed. The industry will become competitive not because Microsoft loses its monopoly on PC operating systems but because other classes of products [will be able to do] exactly what a PC can do.

Monopolies sometimes have a way of reassembling themselves. An example is what’s going on with the Baby Bells. If Microsoft breaks up, would it come back in another form?

Yes. Somebody else will be the new Microsoft because you and I still want to use the same [operating] system.

Do you think the Linux operating system will be successful?

It can’t possibly work. It’s open architecture. People change it, and the changes aren’t compatible.

Look at Unix. There are now 18 different incompatible versions. That started out as one system with open architecture. The only way [software] can be compatible is if one company owns it.

Another hot issue these days is Internet taxation and regulation. Any thoughts ?

In this day and age, especially with things that can be downloaded, like movies, there is no way you can tax [the Internet]. It just isn’t physically possible.

It doesn’t make any difference what government would like to do. They won’t be able to do it. It’s the same thing with intellectual property rights. You can write all the laws you want, but the question is, can you enforce them?

If you look at music, we can shut down all these big [song download] sites. We can fine them $250 million, as the newspapers talk about. But what you can’t stop are two college kids creating CDs.

Who would be a better president for the high-tech sector, Bush or Gore? Or does it matter?

It probably doesn’t matter, except on one level. I think the real danger - and it’s a bigger danger under Bush than it is under Gore - is to get elected and propose a big tax cut. And then the Democrats will jump on it, like they did with Reagan, and make it an even bigger tax cut and put us back in the soup the way Reagan did in 1983.

So it’s just a shade of difference between the two candidates?

Yes. I think the one [big] issue is what the antitrust policies will be in a high-tech era when you have all of these, what we used to call, ‘natural monopolies.’ You don’t really want to regulate them.

One interesting thing about the Microsoft suit is that government economists at the beginning testified that no consumer had been hurt because the price of the system is low and going down.

What do you see as the big technology breakthrough or opportunity in the next few years.

I think you are asking a sociological question, not a technological question. The question is, what do people want to buy? It’s very hard to figure out ahead of time.

So you try a lot of things. And some work and some don’t. Between eight and nine out of 10 companies [that try new technologies] will go out of business within five years.

Is e-commerce still more hype than hope? Lots of numbers are being thrown around. For example, the B2B e-commerce market will be a trillion dollars in the next 10 years. Are they accurate?

One of the things that’s true is that, in some industries, you almost have to go electronic - automobiles, for example. If you look at a modern auto factory, it makes a car with about 10 hours of labour.

Suppose you pay $40 an hour and you make the factory twice as efficient. You only save $200. On the other hand, suppose a consulting firm estimated that if you do direct sales you could save $1,000 a car, and if you do electronic supply chain management you could save $1,000 a car, and if you could do direct billing and get rid of inventories you could save $1,500 a car. That’s $3,500 [in savings].

So it’s selective-for example, supply chain management improving efficiencies downstream?

Yes.

Is e-commerce as indispensable to businesses as people think it is?

It depends on what business you’re in. For auto companies, for example, there’s certain low-hanging fruit you just ought to get. It costs Ford $95 to have a physical purchase order.

They think if they can make it electronic, it would cost $12. And they have hundreds of thousands if not millions of purchase orders. You’ve just got to get that money.

So it’s not for everybody?

It’s not for everybody. Take the [Covisint] auction site for the auto industry. The Justice Department is kind of rumbling about bringing an antitrust suit. Well, the big reason it hasn’t happened yet is the auto companies have to use the same software.

There’s no such thing as taking all these complicated systems for supply chain management and making them compatible. You have to use exactly the same system, which means you get into double antitrust: one, because all the sales on the new site are controlled by the three companies and, two, because you’ve got to use the same software.

Given today’s changing business relationships, do antitrust statutes need to be rewritten?

We certainly have to rethink them. They haven’t been significantly revised in a very long time.

What role do you see for solution providers that supply the technology products and services that businesses need?

It goes in a pendulum. For a while, everybody will swing toward outsourcing, as opposed to having expertise on the staff, and then they’ll swing back.

Some argue that to ensure a steady flow of skilled personnel, high-tech companies must become more active in education. Should they do that?

Probably they should do it, but I’m not sure they could. The problem is, the school system is very tough to reform and you’ve got to take a lot of flak. And businessmen are basically cowards, political cowards.

They don’t take the flak that politicians are willing to take. And they don’t want people picketing their offices. So I think it’s very hard for the business community to be a leader in something that’s controversial, and the problem with the educational forum is everybody is in favor of it in theory, but not in practice.

You’ve said that what people need to be successful in a knowledge-based economy is ‘skills, skills, skills.’ What are some important skills people need?

One thing that’s clearly happening is mathematics is becoming more important for average workers. Computer programming is basically a branch of logic and mathematics.

All of those mathematical skills are becoming more important than they used to be. A big shortage of computer software people exists, but a college education is not the right way to become a computer software person.

So in some cases, people should just jump right in and not worry about college?

You need some training, but you don’t need a four-year college education. If you want somebody who writes code, you don’t want a college graduate because college graduates have learned a standard way of doing it, as opposed to having to invent new ways. You want the computer geek who is flunking out of high school because on everything else he gets F’s.

Do you think tech stocks are still overvalued?

In general, the answer is yes. But for particular stocks, no. It is very hard to know for sure.

For example, suppose it’s 1981. I’m Moses, I speak to God and I come to you and say, ‘God gave me a stock market tip.’ And that tip is, ‘Eighteen years from now, in 1999, the world will sell 114 million personal computers.’ You would have rushed out to buy Commodore stock.

In 1981, [Commodore] was the leading maker of personal computers and, of course, it went out of business. The big winner, Microsoft, wasn’t even a company until 1986.

The tech sector is only eight percent of GNP but plays a much larger role in the stock market. How much of a danger is that to the economy, especially if earnings fall short of estimates and tech stock prices take a dive?

If you look at the dot-com stocks, they collapsed and nothing serious happened. They’re all one-third or one-quarter of what they were in March. And nothing serious has happened because, in fact, 90 percent of the stock market is owned by the top 10 percent of the population.

Stock markets are kind of fluff on the top. They’re the whitecap, so to speak. It’s kind of nice when you’ve got a rising tide, and it’s not so nice when you’ve got a falling tide. But they don’t bring economies down. We saw it in 1987. The stock market went down 40 percent in two days, and made no difference in 1988.

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