PARDON THE DISRUPTION - CHAPTER TEN

AMERICA’S ECONOMIC EVOLUTION

The connection between law and economic power is as old as mankind's first possessions. The old Southern redefinition of the Golden rule, "them’s got the gold makes the rules," has been a reality throughout history.

From the first days of governance in the western world, laws, land, and the rules people had to live by – the source of all wealth and power – were controlled by king and clergy. The entwinement of economic control and law has existed since the first formal ownership of land (and subsequent forms of wealth), and represented absolute power and control over the masses. And because control of land and wealth was the endgame, disruptive technologies generally are only acceptable to those in power if they can reign in the disruptive element.

Perhaps it was “The Goat with Red Horns” that provided one of the earliest disruptive technology discoveries as told by David Rothkopf, in his book Power, Inc.: The Epic Rivalry Between Big Business and Government – and the Reckoning That Lies Ahead. According to local folklore, an accidental discovery by a goat that strayed from its herd gave the Swedes in Falun an abundant supply of copper that changed their lives for a millennium, providing a new material for domestic purposes and weaponry and an extremely valuable trading currency. The Swedish kings exerted varying levels of control over copper mining and trade, forming the world’s oldest and longest continually operating corporation, Stora Kopparberg, in 1288.

But other rulers had other approaches. In their book Abundance, Peter Diamandis and Stephen Kotler retell the tale of Pliny the Elder, who reported that a goldsmith brought an unusual plate to Emperor Tiberius in the first century AD. Lightweight and shiny, it was truly something to behold. The goldsmith claimed he had made it from ordinary clay, using a secret technique known to only the gods and himself. This new object dazzled Tiberius, who had amassed quite a fortune in gold and silver from his war victories and plunder. It could be more valuable than his current holdings – and could even make gold and silver diminish substantially in value. The gods not being present to affirm their knowledge of the material, Tiberius knew of only one way to protect his current holdings and eliminate the threat, protecting the status quo: he had the goldsmith beheaded.

The law, power, and wealth of the time were firmly vested in the hands of Tiberius, and he flexed his political muscles as he saw fit. It wasn’t until the 19th century that scientists “rediscovered” how to process the third most abundant element in the earth’s crust, bauxite, and extract aluminum from it.

Advances in seafaring along with improved metallurgy in iron, copper and aluminum represented disruptive technology in an absolute form, but these – though huge at the time – represented incremental technology improvements from the perspective of world history.

But by the middle of the 16th century, Johannes Gutenberg had developed the printing press, creating a disruptive technology with the ability to appropriate knowledge and disburse it at a cheaper and greater scale than had ever been possible before. The classic instance of official response to disruptive technology is the confrontation of Galileo with Pope Paul V. Up to that time the church controlled knowledge (i.e. technology), and with it the power of entry into a better life. Heaven was impossibly compelling because everyday life was so brutal: children died, women died in childbirth, incredibly hard work went barely rewarded – unless you were a nobleman or an employee of the church, the slightest accident would doom you to eventual starvation and death. When the center of the universe shifted from Earth to the sun, man no longer seemed the central concern of God. Both the printing press and the heliocentric model of the solar system chipped away at the historic notion of church control of knowledge.

The book, the pamphlet and the newspaper held sway for mass communication until the discovery of radio waves, which created a new disruptive technology and allowed information to be transmitted even more broadly. Television followed. The present technology of emails, texts, Twitter, and broad social media continues the evolution of mass communication methods.

Until the time of Gutenberg and Galileo, technological advancements could be measured by century. Now they needed to be measured by generation. And the next big jump was the Industrial Revolution.

Though the base advancements necessary for what is now called the Industrial Revolution occurred over the centuries preceding, the specific technologies associated with the new industrial period began appearing around 1760. Textile production was the first industry to be impacted by the new machines created during this period, especially in England, where the home production of textiles was commonplace. The earlier, more modest advances of the flying-shuttle and roller spinner were superseded by more powerful advances like the Spinning Jenny, which allowed a single operator to produce multiple lines of thread versus a single line at home.

The development of these new implements, though certainly highly impactful, was only a part of the “revolution,” which was in fact a confluence of factors, including improved rail and water transportation to move goods, improved coal refining and iron-making techniques, and a stable governmental situation that supported free markets.

By the 1780’s, James Watt’s steam engine, using coal as its principal fuel source, had achieved enough of a market presence to create efficiencies and economies never before achieved in production. First widely employed in the textile industry, by the 1850s the steam engine was driving advances in railway and ship transportation, allowing goods to be transported cheaply to population centers as never before.

The ability to place these machines in one place with a single large source of power allowed the formation of textile factories. Though dank, dangerous, and unhealthy, the 18th century English factory was a much more efficient producer of goods than the home-based hand-produced process that had stood for ages.

The advances in productivity spawned by new technology and powered by new energy sources led to a rapid increase in income among the merchant class and a more reliable source of income for the still largely agricultural populace. But these technological advancements were not universally adored. In 1811, a revolt against the work-killing impact of these machines began in England. Wide-framed looms and other high-productivity textile manufacturing devices were absolute labor killers, rendering the home-based hand-constructed thread and fabric businesses increasingly obsolete. The threat to their livelihoods by these new technologies scared and angered those who were involved in home textile production, and many revolted. Those who rebelled were called “Luddites,” after a young man named Ned Ludd, who allegedly thirty years earlier had destroyed two pieces of textile machinery. Now, years later, “King Ludd” (or “General Ludd”) was the symbolic hero of those who countered mechanized industrial advancements with the riotous destruction of textile machinery and even of the textile factories themselves.

The wealth and power of the 19th and early 20th century American industrialists took on the air of the old landed aristocracies of Europe. Early U.S. industrialists – E.I Du Pont, Oliver Winchester, Samuel Colt, the Dodge-Phelps family, and others – brought the energy of the Industrial Revolution to America.

The United States had now become a true melting pot of immigrants who – both geographically and generationally – had left their homelands to experience social and economic freedoms that were uniquely American. Even with a heavy thumb on the scale of the electoral and governmental process, wealthy industrialists were now confronted with the everyman spirit of opportunity that was a critical factor in the creation of this country.

At the end of the Civil War, with the passage and ratification of the 13th Amendment to the U.S. Constitution (outlawing slavery) on December 6, 1865, followed by the 14th Amendment (civil rights in the states) and the 15th Amendment (voting rights equality) – collectively referred to as the Reconstruction Amendments – the base was established for the true American democracy we know today. But the social mood of the public remained decidedly negative in the post-war period, even as certain areas of the U.S. economy rebounded. A confluence of events, including a case of post-war inflation, the bursting of the post-war railroad building boom (and smaller booms in associated forms of building: warehouses, docks, factories), Germany’s abandonment of silver to back its currency (and the impact on western U. S. mining), and other factors led to what was then called the “Great Depression,” (since renamed the “Long Depression”) lasting until 1879.

It is Elliott Wave Theorist and Socionomist Robert Prechter who would make the case that the negative social mood of the period predated, and manifested itself in, the Civil War and the Panic of 1873, leading to the Long Depression. This negative sentiment also had little tolerance for the overindulgences of the super-wealthy. Yet the Great Industrial Age of America soon followed, represented by the pillars of industry and banking with names like Vanderbilt, Carnegie, Rockefeller, Mellon, and Ford, seemingly controlled all that was around them. To this day, eight out the ten wealthiest Americans in history developed their fortunes during this era. Their wealth and power was so great that they essentially elected whomever they needed to continue their reigns, perpetuating the system that had promoted their ascents.

Principally because of anti-competitive abuses by the most powerful that helped build and promulgate their extensive fortunes, a backlash against the overreach of American economic power and politics took place with the passage of the Sherman Anti-Trust Act in 1879. Legislation like this doesn't happen in a vacuum. It took an economic collapse, perhaps the worst of 19th century, to set the table for such action. The next 30 years were filled with public angst that included two American Presidents’ assassinations (Garfield and McKinley) and a series of five economic recessions and four economic panics (which led to the creation of the Federal Reserve System). In the midst of these panics and recessions, it took an outrageous book – Upton Sinclair’s 1906 muckraking masterpiece The Jungle, and outrage over the 1911 Triangle Shirtwaist Fire for the first meatpacking health rules and child-safety labor requirements to be considered – and only because the abuses of health and human decency had been so badly violated.

A game of push and pushback between the actions of American corporations (and, ultimately, their abuses) and societal /governmental response (and, ultimately, overreach and overregulation) has been going on ever since. The many other reactions to the thoughtlessness or intentional malfeasance of corporate misbehavior are well-documented: Sarbanes-Oxley, Dodd-Frank, and Occupy Wall Street among them. Enron, WorldCom, BP, much of the American mining industry (with its safety violations and cave-ins), Union Carbide and Bhopal, river pollution from paper and textile operations, the Ford Pinto with its exploding gas tanks, Firestone Tire flaws, Love Canal chemical contamination, the Exxon Valdez spill, the Savings and Loan collapse, the Banking collapse of 2008– the list goes on seemingly forever – individually and collectively set the stage for governmental crackdowns that led to public debate and outrage. This is not unlike the Sherman Anti-Trust or the post-Great Depression Banking Act of 1933 (commonly called the Glass-Steagall Act, after the bill’s sponsors).

Despite generations of governmental investigations, penalties, fines, rules and regulations, one outcome remains clearly evident when you observe the truly monumental changes that have occurred between governance and the economy:

Revolt against economic repression and technological advances have provided the only disruptive elements of breaking wealth free from the hold of wealth from moneyed interests, providing some measure of economic democratization. Technological advances are generally preferred to revolts. But there are consequences to the exponential gains in technology – and not all of them are positive.

The recent exponential improvements in technology have created new realms of wealth in a way that never existed before. The billions of dollars of valuation developed by Facebook, Zynga, Google, and LinkedIn would not have been possible even ten years ago. Apple, a company in existence since the 1970s, had fallen on hard times and had even descended to the point that shareholders were calling for dissolution and the remission of proceeds to shareholders. Their rebound is legendary. Interesting anecdote:

On January 17, 2006 the Good Morning Silicon Valley column from the San Jose Mercury included this nugget that has become more profound as time goes by.

QUOTED

"Team, it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today."

• In a note to employees Friday, Apple CEO Steve Jobs called for moment of silence over the grave of Michael Dell's 1997 suggestion that Apple be shut down and sold, and its money given back to shareholders.

That reflection was in 2006! Steve Jobs had resurrected Apple through its iSeries of technological miracle-toys and online offerings to become the most valuable company in the world.

Yet, as we said before, these technological improvements may have adverse consequences on the value of old or existing assets and operations. In the next chapters we will assess some of those adverse impacts.

The wealth created by the technological marvels of the last 20 years is perhaps an economic anomaly. But we cannot ignore that the method of wealth creation employed by those in the technological realm made an economic impact never before seen in this manner -and at this scale – in the history of the world.

For the first time, it wasn’t land that mattered (European hierarchy, Van Rensselaer), it wasn’t control of capital and banking (again, European sovereigns, Mellon, Morgan, Taylor), energy(Rockefeller, Frick), heavy investment in transportation/rail (Vanderbilt, Girard), heavy industry (Carnegie, Ford ), natural resources (mining, furs, timber) (Weyerhaeuser, Astor, Fair), mercantile/retail (Stewart, Field, Walton) – none of the ways that civilization has always built and maintained wealth since the times of a true agrarian economy.

For all the grief he is taken for the last 15 years for buying innovation rather than creating it, Bill Gates of Microsoft may be regarded as the first true pioneer to create value outside of the historic value chains. Steve Jobs followed a much more erratic timeline of success, and his work generally trailed Gates’s. Gates was the first to create significant value in software as he was the first to break the mold of the traditional land/capital/ manufacturing paradigm that had ruled the world's economy since the 14th century. Jobs, especially in his later years, did it in a way that most people don’t think about.

With the exception of the iTunes franchise created by Apple – a truly exceptional disruptive technology – virtually every Apple product relied on margins from manufacturing the better mousetrap. And, oh, better mousetraps they were.

AMERICA’S POST-WAR MIND

“The future always comes too fast and in the wrong order.” –Alvin Toffler

Alvin Toffler, the famed futurist and author of Future Shock and The Third Wave nailed the last 50 years with this observation. While Moore's Law described technology’s exponential advance, America's industrial power has settled into a nice Eisenhower-era comfort zone. Its clock stopped, setting up permanent house in the world of Ward and June Cleaver, dismissing the disruptive civil rights protests and hippie culture of the sixties as passing fads, rather than the cultural sea changes they were.

We owned the world's productive capacity: big auto, big steel, big tobacco, big oil, big telecom, textiles and apparel – you name it. We had it bigger and better than anyone. Education mattered, but anyone with a strong back or nimble fingers and a willing attitude could survive in the right circumstances and do pretty well.
America's corporate structure had come into its own. It was right out of the World War II military handbook: follow the strict hierarchy, do as you're told, be a team player, subvert any individual desires, ability, or creativity to the corporate party line. These were the days of "the whiz kids," the name given to Robert McNamara and his cadre of smart, ambitious young men, so instrumental in John F. Kennedy's and Lyndon Johnson’s administrations. They were exactly what America thought itself to be: smart, aggressive team players, carrying their Harvard educations and flag-waving patriotism to new heights.

This was America's industrial golden age. Young men – black and white – continued to leave family farms in droves to take advantage of full time mill and factory work. Through wartime experiences they had seen other places, encountered other cultures, and grown less enamored of repetitive, tame farm life. Women, too, had played a different role during the war while the men were away, sharpening their management tools in industrial settings and fulfilling a host of different responsibilities. Though the glass ceiling seemed as impenetrable as ever, young women were getting business and outside-the-home experience before settling into their "natural" role as a wives, mothers, and homemakers.

This was the heyday of middle management, where paying one's dues by following the corporate rules meant one more step up the corporate ladder. These were the days when corporations actually had positions for freshly scrubbed college graduates called "management trainees." These were the days of the three-martini lunch, the corporate jet, a company apartment in New York City, living off the expense account in a white-male-dominated corporate setting. You didn’t buck the rules; you went along to get along.

I saw firsthand the good ol’ boy corporate culture in its prime. There likely wasn’t a more chauvinistically white, male, hard-drinking, hard-working, hard-playing industry than textile production in the South in the early 1980s. Unifi was a relative upstart in the industry as a texturizer of filament polyester. If that doesn’t ring a bell, then if you can remember back to the glory days of double-knit polyester – these were the companies (and their brands) that supplied the POY (Partially Oriented Yarn) to Unifi: DuPont Dacron, Eastman Kodel, and Celanese Fortrel. I called on knitters and weavers up and down the east coast –but mainly in the Carolinas – and witnessed the mill culture of the day. These were the times and places and work culture immortalized in the movie “Norma Rae” (literally – I was in these mills the year after the movie came out). Multi-generational mill ownership with a high school dropout workforce was the mainstay of many a small town. This paradigm now intersected with the next generation of textile execs - gunslingers who were introducing modern equipment, synthetic yarns, and a brash whatever-it-takes mentality. This all-white, all-male fraternity was almost universally on the road all week, highly pressured to push whatever needed to be sold (even horrible product), quick with a joke, hard drinking, marriages failing – but married to a lifestyle that they could really never leave.

Dissenting opinions, like those in William Whyte's The Organization Man shined a light – no matter how dimly – on the pitfalls of yes-man corporate-think. Yet Moore’s Law kept accelerating.