Chapter One
Introduction 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.
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Excerpted from net LOSS by NATHAN NEWMAN Copyright © 2002 by The Pennsylvania State University
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