"Walt Wriston gives us ideas to use, insights into what the future holds, and suggestions about what can be done to best achieve a bright and promising future."
from the Foreword by George P. Shultz
The Internet has changed everything. It is altering the way institutions, both public and private, are managed, and the way individuals react to one another, their workplace, and their government. From an economic and business perspective, the race to win is between those who "get it" and those who don't. In Bits, Bytes, and Balance Sheets, Walter/i>… See more details below
The Internet has changed everything. It is altering the way institutions, both public and private, are managed, and the way individuals react to one another, their workplace, and their government. From an economic and business perspective, the race to win is between those who "get it" and those who don't. In Bits, Bytes, and Balance Sheets, Walter Wriston explores the consequences of the changes produced by the new economy of the Internet, defining the new rules and examining some of the promising initiatives under way to create a system of measuring and valuing assets that reflects our new economic realities.
A long-awaited follow-up to the author's Twilight of Sovereignty, this book shows that, in today's economy, intellectual capital is more important than physical capitaland in fact, the very source of wealth and how it is created has changedand that businesses must adapt to this change or perish. Although he acknowledges that some of the "old" rulesthose based on human nature rather than economic dogmastill apply today, Wriston also shows how the information revolution has radically affected business and government practices, as well as political policymaking throughout the world.
Despite the sweeping changes brought about by the "wireless revolution," the author argues against increased government regulation, instead making the case that we must count on a society of trustworthy people, and that it is not more laws that should form the basis for regulating the new economy but the personal ethics of good people.
"Walt Wriston gives us ideas to use, insights into what the future holds, and suggestions about what can be done to best achieve a bright and promising future."
from the Foreword by George P. Shultz
The law of unintended consequences was at work with the passage of the Sarbanes-Oxley bill in 2002. This bill, which was ostensibly designed to help prevent cases of corporate malfeasance, now joins the approximately 300 other laws targeted at the same problem that attempt to turn moral questions into legal issues. The overregulation that surely will result is partly the fault of business itself because practices that are often overlooked in boom times may, in lean times, appear to be egregious excesses that never should have been allowed to happen.
The twenty-four-hour news cycle drums into the American consciousness the realization that something is amiss. At some point, the public demands that the government "do something" and Congress responds. But laws written in the heat of the moment rarely achieve their stated purpose and often have perverse effects. Sarbanes-Oxley, like many laws before it, delegates to a regulator the ability to write the regulations that presumably protect a "public interest" that generations of lawyers and philosophers have labored for years to define, with mixed results. With the passage of time, the regulators produce a plethora of regulations that have the force of law, and an administrative judge — often from the same regulatory body — becomes prosecutor, judge, and jury. Inevitably, the regulator substitutes his or her judgment for that of the market, and the system becomes backward-looking at a time when worldwide competition requires forward-looking innovation to survive. The system becomes neither consumer oriented nor business oriented, but bureaucracy oriented. In the banking sector, for years the regulators held below market the interest rate that banks could pay to consumers. That regulation cheated the public out of a fair return on its money but satisfied the bureaucracy. It took years and an act of Congress to get rid of it.
Long ago, John Locke warned against the delegation of authority to nonelected regulators who claim to represent the public interest. Locke said that the legislature cannot transfer the power of making laws to any other hands because it is a power delegated by the people, and they to whom it is delegated cannot pass it over to others. But passing it on to others is just what Congress does; the evidence is found in the thousands of pages of the Federal Register. As the regulations proliferate, able people who make the economy run will seek other employment. To the coming thicket of regulations is now added the congressional reciprocal gift to the plaintiffs' bar, which will add untold cost to American companies and do nothing for productivity. To ask how we can regulate instead of how we can improve is to demolish our competitive position in the world and, more important, to destroy our wealth.
In our system, the board of directors has the responsibility to hire and fire the CEO and to monitor the operations of the corporation. A director has great responsibility but no operating authority, and this equation requires men and women of judgment and experience who are, by definition, busy people. The concept embedded in the new law of either having a "financial expert" on the audit committee or publishing the reason for not having such an individual onboard sounds intelligent, but what is the definition of such an expert?
The Securities and Exchange Commission (SEC), acting on Sarbanes-Oxley guidelines, must furnish the official profile of a "financial expert." (By any definition, Enron had such a person on its audit committee.) But if he or she is lied to or if information is withheld, the most skilled person in the world will be of no avail. And if one "expert," as defined by a bureaucracy, is appointed, does he or she have an increased duty of care? Who would want the job?
If the balance between reward and liability, now barely tolerable, is weighted by the new law toward the liability end, directors of worth will become increasingly hard to find. In Tom Wolfe's novel The Bonfire of the Vanities, when the hapless central character, Sherman McCoy, is asked by a reporter on the steps of the courthouse what his occupation is, he replies, "professional defendant." No one wants to list such a title as his or her occupation, so if regulations continue to point in that direction, it will become difficult, if not impossible, to get anyone of substance to serve on a board of directors. And so, at the end of the day, the law designed in good faith to protect the public may in fact have the unintended consequence of lowering the quality of corporate governance.
Not Immediately Recognized
In her book A Distant Mirror, the great historian Barbara Tuchman tells us of the unintended consequences to society of the invention of the chimney: "As distinct from a hole in the roof, these chimneys were a technological advance of the eleventh century ... that by warming individual rooms, brought lords and ladies out of the common hall where all had once eaten together and gathered for warmth, separating the owners from the retainers. No other invention brought more comfort and refinement, although at the cost of a widening social gulf." In short, Tuchman is saying that the lowly chimney not only made privacy possible, but it also engendered all of the societal changes that flowed from that concept.
A little more complicated than a chimney was the forerunner of the modern air conditioner that Jacob Perkins put together in 1834 using a coil, a condenser, a fan, and a motor. It was an invention that changed not only American politics but also the industrial map of the world. Here's how.
In the early history of the United States, Alexander Hamilton made a political trade in order to assure the passage of our Constitution. In exchange for having the federal government assume the debts of the states, the nation's capital was to move from New York to Washington, D.C., with a stop in Philadelphia. Then, as now, Washington was almost unlivable in the summer months; indeed, to escape the heat and humidity, President Jefferson moved to Monticello for two months each summer and Congress adjourned. Today, air conditioning allows our government to operate 365 days a year. Whatever one may think of this, few would deny that it has had a profound effect on the very nature of our government. Air conditioning has also made it possible to turn many tropical lands into economic powerhouses.
And finally, there is the automobile. Its invention ended the isolation of the family farm as the youths of the day used cars to go to town, get away from their parents, and create their own privacy in thousands of automobile backseats.
None of the consequences of these technological advances was immediately recognized.
New Forms of Business
Just as the advent of the automobile spawned many new industries, from the corner garage to body shops to gas stations, so the new economy has triggered new forms of business. One of the most interesting is the incubator.
Although the form and size of incubators differ from place to place, they basically consist of a group of computer-literate consultants who, instead of going to a business dressed in their blue suits and carrying bulging briefcases, have the business come to them.
The workspace is designed to encourage the sharing of information. There are no private offices, only desks in an open space, although there are plenty of conference rooms if privacy with a client is desired. Everything is designed to attract the most competent people. The dress code is simply what people happen to be wearing. There is a common space — the modern equivalent of the water cooler — where employees gather to take a break and share the latest idea. These spaces are often equipped with video games, pool tables, and kitchens stocked with all manner of food and soft drinks. The coffee is always on, and the men's room is stocked with razors and shaving cream in the event that someone has to work all night.
Unlike most consulting companies, where people tend to specialize in, say, retail or financial services, in the new incubator model, men and women become generalists about how to get a business under way. A team of people sets up shop to incubate a new business in a dedicated open workspace that is furnished with a staff, computers, paper, pencils, sound Internet connections, and a Rolodex containing the names of specialists on everything from patent protection to human resources. The team literally takes an idea from a dream to a business, and when it is formed enough to survive by itself, it is moved out to its own quarters. The incubator is then ready for another startup that is in need of everything but a great idea.
As far as I know, this is a brand-new thing under the sun. The incubator furnishes startups with the infrastructure that, whether through lack of experience or money or both, they are unable to obtain acting alone.
The new economy has very low barriers, if any, to entry. In times past, one had to have capital, sometimes in large amounts, to start a business. The idea of going up against the giants of the industry was unheard of. Today, a person with a killer idea and a maxed-out credit card can challenge the largest company. Of course, not all such attempts are successful, but enough home runs are being hit to keep the entrepreneurs steadily coming on. Someone is always out there with the next new thing," so no business can coast along without a worry. The staffs of the incubators are encouraged to engage in constant learning, which is the touchstone of the new economy and the only road to survival in this changing environment.
We can argue about whether all of these advances, and their unintended consequences, have been good or bad for the human race. But either way, one thing is undeniable: they have had a profound effect on the way the world works.
A World Connected
The radio, then television, and now the Internet have tied the peoples of the world together in ways never before seen or even imagined.
This marriage of the computer and telecommunications to create a global information/network economy has touched a great many aspects of our lives, not the least of which are the relationships of one government to another, of citizen to government, and of nationalized industries to the private sector.
When great transitions like this occur in the world, there is often no clear dividing line between the ascendancy of the new and the decline of the old. For example, the dawn of the industrial age, which is often dated from James Watt's design of the steam engine in 1776, did not mean that agriculture suddenly vanished from the face of the earth. On the contrary, farms in the United States continued to produce more and more with fewer and fewer people while output in relative terms declined against industrial production.
The industrial age in which most of us grew up is now slowly fading into the information/network society, and as much as some may wish to do so, we can't go back again. The information age exists and it will not go away. Indeed, it will only move faster and become more pervasive.
In the United States, thousands of manufacturing jobs that were once a mainstay of our society are never going to come back, nor will we ever again see American farms employing the approximately 20 million people who worked on them at the beginning of the twentieth century.
This does not mean that manufacturing as we know it will cease to exist any more than farming disappeared with the rise of industry. But it does mean that for a huge and growing sector of society there is, in fact, a new economy that is as different from the industrial economy as the industrial economy was from the agricultural.
Although sea changes have always been a part of life on this planet, the current velocity of today's technology-driven change has no historical precedent. The period between novel and obsolete gets shorter and shorter.
For example, it took forty years for radio to draw 50 million listeners in the United States, and it took thirteen years for television to gain a like number. But it took only four years for the Worldwide Web to attract 50 million users in the United States alone, and access to the Web is growing exponentially.
Today, the extent to which technology has influenced us and infiltrated every aspect of our lives is unprecedented. One has only to reflect on the hype about the Y2K problem. We were told, on the one hand, that it would cause a worldwide depression and that we should stockpile food and water, as the power grid would go down and all the lights would go out. On the other hand were those experts" who predicted only minor inconvenience.
As it turned out, the experts" were right. But the point is not who was proven right or wrong. Rather, it is that microchip technology has become imbedded in so many things, from the locks on our cars to the air conditioning systems in our homes, that our lives are inexorably intertwined with technology as never before.
The massive upheaval in the former Soviet Union is another good illustration of how potent this link has become. Although governments maintain elaborate intelligence-gathering facilities, when a crisis arises, eyes in all countries now turn to the television set, which has become standard furniture in all government crisis-management offices, and everyone tunes in to one of the twenty-four-hour cable news networks, such as CNN.
The foreign minister of the former Soviet Union, Eduard Shevardnadze, put it this way during the Yeltsin coup: "Praise be information technology! Praise be CNN. ... Anyone who owned a parabolic antenna able to see this network's transmissions had a complete picture of what was happening."
That such a statement could ever have come from a senior officer of what used to be a closed and secretive society would have been unthinkable just a decade earlier. Shevardnadze was right. The only ones in Moscow during the Yeltsin coup who did not know what was going on were the people in the U.S. Embassy, which did not have CNN.
Although historians are rarely able to identify the roots of a sea change while living through it, we can identify the sources of today's sea change with a remarkable degree of accuracy. They can be pinpointed to the U.S. Congress's passage of the GI Bill of Rights after World War II.
The GI bill made a college education possible for many returning servicemen and women who probably would not otherwise have had that opportunity. It was the last big government program that worked. Despite the fact that the returning service personnel were given what amounted to a voucher good at any college, no one raised the church-and-state issue that is part of the current conversation about vouchers in public schools. The veterans could, and did, go to public colleges and universities, including any religious school of their choice. All of our colleges and universities had to vie for these students, and competition had its usual result: a better product. It can be argued that open competition helped to make many American colleges and universities world-class institutions. The flow of graduates from this huge program helped position the United States to lead the information/network economy.
The significance of the GI bill and its unintended consequences has not been lost on the people of what used to be called the Third World, now more appropriately referred to as developing countries." Today, more than half of all college graduates are from developing countries; indeed, Mexico has more graduate engineers than France, and India more than all of Europe. As the year 2000 arrived, it was estimated that students from the developing nations made up three-fifths of all university students.
The message is that economic progress is largely a process of increasing the relative contribution of knowledge. And that message has finally gotten through to large segments of the world.
Knowledge Is Power
Not only are massive historical transitions disruptive, even often painful, but they also upset long-held beliefs and require us to think anew — which in itself is a painful process. We have to change the way we think of our jobs, our governments, our relationships, and, indeed, the way the world works. It is often easier to ignore changes and stick to what worked in the past than to sail into uncharted waters. But the new reality is that old solutions will not yield answers to new problems.
From the beginning of time, power has been based on knowledge. Someone learned to use a burning-glass to start a fire. Someone was able to find out where enemy troops were. Someone knew how to build a castle wall strong enough to withstand a siege until someone else learned how to build a catapult or cannon to penetrate that wall. Some politician found a pollster who gave notice of what the citizens really worried about. Timely information has always conferred power in both the commercial and the political marketplaces.
Excerpted from Bits, Bytes, and Balance Sheets by Walter B. Wriston. Copyright © 2007 Kathryn D. Wriston. Excerpted by permission of Hoover Institution Press.
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