Net Loss

Winner of a 2003 Choice Award for an Outstanding Academic Title

How has the Internet been changing our lives, and how did these changes come about? Nathan Newman seeks the answers to these questions by studying the emergence of the Internet economy in Silicon Valley and the transformation of power relations it has brought about in our new information age. Net Loss is his effort to understand why technological innovation and growth have been accompanied by increasing economic inequality and a sense of political powerlessness among large sectors of the population.

Newman first tells the story of the federal government’s crucial role in the early development of the Internet, with the promotion of open computer standards and collaborative business practices that became the driving force of the Silicon Valley model. He then examines the complex dynamic of the process whereby regional economies have been changing as business alliances built around industries like the Internet replace the broader public investments that fueled regional growth in the past. A radical restructuring of once regionally focused industries like banking, electric utilities, and telephone companies is under way, with changes in federal regulation helping to undermine regional planning and the power of local community actors.

The rise of global Internet commerce itself contributes to weakening the tax base of local governments, even as these governments increasingly use networked technology to market themselves and their citizens to global business, usually at the expense of all but their most elite residents. More optimistically, Newman sees an emerging countertrend of global use of the Internet by grassroots organizations, such as those in the antiglobalization movements, that may help to transcend this local powerlessness.

“Nathan Newman has written a fascinating history of the Silicon Valley that chronicles the federal government’s leading role in creating, and then privatizing, the Internet. Net Loss not only dispels the myth that the Internet emerged full-blown as a result of entrepreneurial risk in a competitive marketplace, but also explains in depth how forces of globalization have undermined regional economies in California while reshaping social and political life in local communities. This groundbreaking book is a must read for anyone concerned with the power of global corporations and the future of democratic governance.”—Scott Bowman, California State University, Los Angeles

“Net Loss is the perfect antidote for the confusion generated by the years of hype and the recent disillusionment surrounding the Internet economy. Nathan Newman offers a cogent and original analysis of what the Internet has really meant to the regional economy of the Silicon Valley as well as to other regions. Anyone in search of fresh ideas carefully grounded in a rich base of research will find this book just what they have been looking for.”—Peter Evans, University of California, Berkeley

“While the dot.com’s have crashed and burned, the ideology surrounding them hasn't. Nathan Newman’s Net Loss is an essential and original contribution to putting the cyberlibertarians’ nonsense behind us—a reminder of the central role of government in developing the Internet, and the legal manipulations behind all the wacky and destructive experiments in deregulation of the last 20 years. An important story very well told.”—Doug Henwood, editor of Left Business Observer

“Nathan Newman tells us that the received wisdom on the Internet is simply wrong. The Internet is supposed to annihilate the state, undermining both the practical importance and the empirical need for government; Newman tells us the truth is exactly the opposite. The Internet is supposed to annihilate geography; Newman tells us that, at every stage, it shows us both the importance and the need for community level economic regulation. You may not agree with Newman's conclusions, but you will not be able to ignore them.”—James Boyle, Duke Law School

“The book provides an in-depth analysis of the federal government’s long-obscured role in the development of the Internet and the changing role of regions in the U.S. economy. At its heart, it is a call for individuals, groups, and communities to organize and counter the various political, social, and economic costs that have resulted. . . . Newman provides a well-written history of the Internet plus an analysis of key events, including the federal government’s decision to withdraw from controlling the net, the passage of Proposition 13 in California, the breakup of AT&T, the 1999 battle in Seattle during the World Trade Organization conference, and the 2001 energy crisis in California.”—Norm Hutcherson, Library Journal

“Makes a provocative case for business civic-mindedness.”—John T. Landry, Harvard Business Review

“This marvelous book provides a well-written and detailed analysis of the transformation of American society associated with the rise of the Internet. . . . This work contains a massive quantity of information yet it is in a way comprehensible for undergraduate students.”—M. Perelman, CHOICE

Nathan Newman is currently a union lawyer in New York City and has been a frequent writer on technology issues in such publications as MIT's Technology Review, Progressive Populist, and The American Prospect. A political activist and former union organizer, he was also the project director at NetAction, a consumer technology advocacy group.

Contents

Preface

Acronyms

1. Introduction

2. How the Federal Government Created the Internet, and How the Internet Is Threatened by the Government’s Withdrawal

3. Federal Spending and the Regionalization of Technology Development

4. Business Cooperation and the Business Politics of Regions in the Information Age

5. Banks, Electricity, and Phones: Technology, Regional Decline, and the Marketization of Fixed Capital

6. Local Government Up for Bid: Internet Taxes, Economic Development, and Public Information

7. Conclusion: The Death of Community Economics, or Think Locally, Act Globally

Bibliography

Index

Introduction

The post-information age will remove the limitations of geography. Digital living will include less and less dependence upon being in a specific place at a specific time, and the transmission of place itself will start to become possible.

—Nicholas Negroponte, director of MIT’s Media Lab, in Being Digital

National economies are swiftly breaking down into regional and sectoral parts—subnational economies with distinctive and differing problems of their own.

—Futurist Alvin Toffler on regional economies in The Third Wave

The new "information economy" seems to evoke a contradictory debate on regions and decentralization. On the one hand, technologists such as Nicholas Negroponte believe that local regions are disappearing as important entities in the face of the "spaceless" technology of information exchange. On the other hand, futurists like Alvin Toffler and his political disciples, such as Newt Gingrich, have argued that the microchip is the midwife of regional rebirth and the death knell for central political decision-making.

How do we explain this contradiction?

The Internet has emerged as the focus for much of the strongest hype and substance in debates on this new economy. It has become the defining economic event of the end of the twentieth century—a fact reflected by the obsessive media attention and by the raw economic explosion of companies associated with it.

The Internet is seen as the metaphor for, even the embodiment of, the new information age, of a postindustrial economy, and of a new paradigm in workplace and company organization. According to this view, information rather than raw materials has become the substance of commerce and the Internet is the highway of the new era.

Most strikingly, the Internet is seen as the herald of the globalization of the economy and the triumph of a deregulated marketplace. In this vision, the economics of place have given way to telecommuting, global production, and just-in-time delivery of goods and information from all points on the globe. In such a world, economic regions become an oxymoron as the economy becomes a matter of bits and e-mail in cyberspace, not transit and meetings in local space. The "Third Wave" in this scenario leaves economic regions as the archaic leftovers of the industrial age. Governments, those stalwart institutions tied to such geography, become impotent and unimportant in this new global information society.

Now, there are truths in each of these ideas, but the truths obscure the underlying reality of transformation rather than decline in both the vibrancy of local economic activity and the importance of government action. On the face of it, it is nonsensical to argue that new information technologies such as the Internet show the irrelevancy of national governments and economies. The Internet is one of the crowning achievements of central government in the past few decades—planned over decades, funded by a series of federal agencies, and overseen by a national network of experts. And its success is not merely an exemplar of technical achievement; it is also an example of the efficiency of government planning over purely private economic development. Almost all analysts admit that in the absence of the Internet’s open standards, which were developed and promoted by the federal government, the private vision of toll-road information services promoted by industry would not have created the surge of explosive economic innovation that we are currently seeing in connection to the Internet. It is only with the success of the Internet (and the profits to be made) that industry is now decrying the interference of government in information markets.

The most striking counter to the vision of global placelessness is the very existence of Silicon Valley, the region most closely associated with the rise of the Internet. If any region were to collapse on the wave of cybercommunication, it would be Northern California’s "hot-wired" Silicon Valley. Contrary to what some might expect, Silicon Valley not only survived but thrived and expanded its role as the geographic focus of a supposedly geography-free revolution in the 1990s. From network router companies such as Cisco to Web-tool makers among the dot-coms to the multimedia upstarts of San Francisco’s "multimedia gulch," companies in Northern California seem to be refusing to let geography die its proper death. While the dot-com meltdown raises the issue of the long-term role of the region, it is clear that in the short term, the Internet and regional strength went hand in hand.

But at a deeper level, the vibrancy of Silicon Valley’s regional economy does not defy the Internet’s globalizing trends; rather, its regional strength was in many ways the precondition for the triumph of the Internet. Such a fundamental technological innovation as the Internet requires more than the introduction of new products; it requires transformations in an array of mutually supporting institutions, goods, services, and standards, which must all advance together. While this process can take place between people and companies in different places, the organic trust and interaction of those living in the same region has always been a key factor in such broad-based technological advancement, whether in the car industry in Detroit or in the financial district of Wall Street.

As economic theorists dating back to Alfred Marshall have noted, regional "industrial districts" have always been a breeding ground for specialized innovation where day-to-day activity supports the trust and human interaction needed for such codependent innovation. If anything, the intense technological details needed in high technology and the conditions of rapid technological change that we live under only accentuate the need for ongoing local interaction, and Silicon Valley has just emerged as the premier space for innovation in networking technology.

Silicon Valley itself is largely the creature of federal spending and effort; its pioneering firms, among them Hewlett-Packard and Varian, grew as a result of defense contracts entered into during World War II and its aftermath, contracts that pumped billions of dollars into the Bay Area economy. This occurred just as federal research dollars were pouring into the region via the University of California at Berkeley, Stanford University, and government laboratories such as the Ames Research Center, run by the National Aeronautics and Space Administration (NASA). The Internet itself was a project directed for a quarter of a century by federal government agencies largely in association with regionally based university computer science departments.

Yet despite what might be seen as the continuity from the past in the role of both regions and government in advancing technology and its associated economic benefits, there is a justified sense that something has radically changed in the economy. While Silicon Valley designers may cluster together at Palo Alto bars, production of the computer components powering their tools has scattered to factories throughout the world. Industry is using the new technology to extend itself globally as production becomes a global process. Business-to-business interactions are in turn reshaped as the cost of communication at large distances drops to virtually zero. The Internet promises a global marketing venue reaching consumers around the world. For industries such as software or banking in which the transfer of ideas and commitments (rather than physical goods) is the key, the Internet promises an even more radical reshaping of where and how core services are distributed.

Community in regions increasingly takes the form of regional business associations emerging like kudzu across the economic landscape. It is through these business-based associations, tied to local, state, and federal government, that the innovations of specific regions are harvested to leverage corporate profits and global economic changes such as engendered by the Internet. This horizontal approach of business-to-business community alliances has largely supplanted the vestiges of the vertical cross-class collaborations that had once somewhat tied the economic fates of rich and poor together within regions. It is these local horizontal business linkages, supported by the federal government, that were essential to the emergence of the mutually reinforcing technologies and institutional changes that sped the dominance of the Internet in economic life.

Inequality within economic regions has increased, just as inequality has increased across the country and the globe. What is disappearing is not the importance of geography but the singularity of a "region," of the shared economic fate of those inhabiting the same physical space. Instead, information technology is being used to link the professional elites of regions within a space of shared innovation in order to market that space to a global marketplace, even as the less skilled workers of regions find themselves locked in geography that whipsaws wages downward through that same global competition.

The institutions that once linked investments and broad-based economic development within regions—local banks, power utilities, and the local telephone company—are being rapidly supplanted by global corporations competing in and fracturing local markets in favor of global niches serving different economic strata within regions. This in turn has undermined the shared regional economic-development strategies tied to such institutions that had once linked labor unions, community groups, and elite businesses in some degree of cross-class collaboration around regional goals.

In this transformation, government is not merely the victim of a deterministic technological trend but has been the trend’s enabler by means of specific political decisions. Beyond creating the Internet, the federal government promoted a program largely mislabeled "deregulation" that deliberately fractured regional banking, utility, and telephone institutions for the benefit of national and global competitors. But government did not disappear in this change of policy: in fact, federal regulation of telecommunications activity, crucial to the new information age, has accelerated as a range of subsidies, interconnection rules, and antitrust interventions have reshaped the economic map at the behest of government regulators and judges.

What has changed is the relative power of global corporations in dictating local government policy and the wage levels of lower-skilled workers within specific regions. Technological innovation may happen overwhelmingly within local venues, but because of the new technology, corporations have the ability to quickly pick and choose new venues outside the control of local government and beyond the influence of grassroots activists who desperately attempt to negotiate with these global partners. The lack of traditional regional economic anchors such as community banks and local utilities that once mediated some degree of alliance in regional growth has left local actors with few allies for broader integrated economic development.

With this, we see the present reality of local governments teetering on the edge of insolvency and austerity while abandoning any serious commitment to equality. We end up with a form of local government that increasingly markets services to global corporations over the needs of local lower-income citizens while using tax breaks to lure and keep businesses in their regions. The Internet and related information technologies promote an increasingly national and global retail market, thereby further undercutting local government revenues, which are dependent on sales taxes levied on locally purchased goods.

For local government, the promise of the new technology to enhance democracy is increasingly giving way to a blurring of the lines between government functions and business interests as "public-private partnerships" and privatization undermine local political control. Desperate for revenue, local governments have begun marketing information about their own citizens to global corporations, even as those same corporations use the Internet to rapidly survey and play off local governments against one another in bidding for corporate location decisions. The fragmentation of utilities leads to increasing inequality in telecommunications between richer and poorer towns and between schools serving richer and poorer students.

There is a sad irony (and a political agenda) in calls for returning budgetary decision-making powers to local governments, prostrate before the power of global corporations to dictate local policy. That this "decentralization" agenda is occurring even as federal regulators increasingly displace local government control over banks, utilities, and telecommunications only emphasizes that the ambiguity about the globalizing and decentralizing effects of the new information economy are not merely technological contradictions but also political and ideological ones that are shaping the economic landscape.

The Focus of This Book

This book is intended to be a case study in the interactions of government, technology, and the changing role of regions in our economy, using the emergence of the Internet in Silicon Valley as the focus. The more modest goal is to tell that history in the context of the issues raised in the previous section and to throw new light on the dynamics of a region and a technology too often discussed in purely economistic or technological terms.

The more ambitious goal is to use this case study to build a broader case for how technology, government, and regions are interacting with one another in this new economic era. Obviously, Silicon Valley as an early consumer as well as producer of networking technology is a key region in understanding these dynamics, even as its uniqueness makes it problematic for complete generalization to other areas. The Internet is a radically unique innovation whose lessons are only partly applicable to lesser breakthroughs. Still, Silicon Valley’s very precociousness as a high-tech region makes its evolution a credible model for insights into the fate of other regions where technological innovation is increasingly supplanting raw-commodity production. The dynamics in this region of economic inequality and the corporate undercutting of integrated regional economic development to be explored in this book will only highlight the even more pronounced effects seen in more peripheral regions, which are even more at the mercy of global production.

The study of the Internet and Silicon Valley illuminates the highly mediated nature of regions—mediated by the technology that shapes new industries, by the federal investments that fuel the growth of new population sectors and new innovations, by the shaping of new business relationships that grow around such new industries and by how global markets themselves interact heavily with core regions that produce the innovation fueling those global markets. The particularity of the story of the evolution of the Internet and its interaction with the Silicon Valley region, like the unique story of all technologies and regions, helps to undermine the simplistic models of universal economic development, models that favor abstract "market rules" while ignoring the specific history of government and of the social interaction that lies at the creation of each new market.

The focus on the federal government’s role in the evolution of both Silicon Valley and the Internet inevitably raises more universal issues of how and why the federal government acts in the development of technology and of the economy. As specific controversies are detailed in this volume, the experience of other regions will be used to highlight similarities and contrasts to throw greater light on these universal dynamics. Although no region will be treated with the same integrated and comprehensive manner as will Northern California, comparisons will help to enrich the overall case study of the region.

Since this book highlights some of the bleaker implications of technology, it is worth emphasizing that my view is not antitechnology in any sense. In fact, one of my main purposes is to refute the technological determinism of both the optimists of the Right and the technological pessimists of the Left in favor of an analysis that recognizes the crucial interaction between political choices and the direction of technology with its specific social outcomes. It is through the application of technology and through the social structure created to implement the technology that the positives and negatives of technology manifest themselves.

In The Visible Hand, Alfred Chandler wrote that the wholesale transformation of capitalism as a system between the nineteenth and twentieth centuries was caused by the combined effects of communication and transportation technology along with radical changes in managerial systems. In the case of the Internet and related information technologies, relations of production are being as deeply reshaped in the transition from the twentieth to the twenty-first century.

At the heart of any changes in production are changes in power relations, and the Internet itself embodies changing social forces, which are shaping the political and economic forces that will hold power in the new era. Karl Polanyi emphasized the way that the underlying government-created infrastructure of rules of exchange under capitalism shaped all actors in the economy; those rules set the environment for how economic conflict and technology played out in the rise of industrialization. In the same way, the Internet is less the cables and wires tying homes and offices together than a system of contested rules for information exchange. It is these rules that are constraining the shape of power in the new information age. At the heart of this book is the story of how the battle over those contested rules are reshaping regional economies and politics in the modern era.

Business & Economics

History

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