THE ASCENT OF E-MAN

SYNOPSIS: The failure of big industry and the success of Information was never predictable
 

I grew up in a planned economy. Bureaucrats didn't run everything: Small-business men were more or less free to buy and sell as they saw fit. But those who controlled the economy's "commanding heights," its key industries, were administrators rather than entrepreneurs, conformists who were valued less for their productivity than for their loyalty, whose career advancement depended on their political skill. For ordinary workers, the system had some benefits: It was hard to get ahead, but once you had a good job, your life was secure. Still, the economy was often appallingly inefficient and consistently unresponsive to consumer needs.  

No, I am not an immigrant from Eastern Europe. I'm talking about the U.S. economy of the '50s and '60s, when General Motors was the very model of a modern major company. In those days progressive thinkers like John Kenneth Galbraith used to ridicule economists who still believed what they had learned from Paul Samuelson's textbook, which was that free markets could be counted on to match supply and demand. After all, business itself was clearly moving away from markets and toward planning. More and more of the economy was dominated by large corporations, and those corporations didn't place much faith in the invisible hand. For example, AT&T owned it all--not just the long-distance lines, but the local phone systems, the factories that made telecommunications equipment, even the phones in your home. By contrast, in today's cutting-edge e-businesses (see Cover Stories), the company often owns--or rather, rents--little but brainpower.   That's a long way from the era of the man in the gray flannel suit, when the great business empires were not run according to the principles of supply and demand: They were command-and-control systems, and people did what they were told. As technology grew more complex, as big corporations grew ever bigger, as computers made it easier to impose centralized control, it was clear to smart people that the economy would bear ever less resemblance to the competitive system described in obsolete economics textbooks.  

But over the past two decades the market has steadily gained ground--not only against socialism but against big-business capitalism. Large companies account for a steadily declining share of employment and value added. Moreover, even within corporations there is a growing tendency to rely on individual initiative, on independent profit centers free to take risks and do it their way. (True, sometimes individual initiative leads to something that looks like mass conformity--seen one Banana Republic, you've seen 'em all. But we're talking about management here, not tastes.)  

The retreat of business bureaucracy in the face of the market was brought home to me recently when I joined the advisory board at Enron--a company formed in the '80s by the merger of two pipeline operators. In the old days energy companies tried to be as vertically integrated as possible: to own the hydrocarbons in the ground, the gas pump, and everything in between. And Enron does own gas fields, pipelines, and utilities. But it is not, and does not try to be, vertically integrated: It buys and sells gas both at the wellhead and the destination, leases pipeline (and electrical-transmission) capacity both to and from other companies, buys and sells electricity, and in general acts more like a broker and market maker than a traditional corporation. It's sort of like the difference between your father's bank, which took money from its regular depositors and lent it out to its regular customers, and Goldman Sachs. Sure enough, the company's pride and joy is a room filled with hundreds of casually dressed men and women staring at computer screens and barking into telephones, where cubic feet and megawatts are traded and packaged as if they were financial derivatives. (Instead of CNBC, though, the television screens on the floor show the Weather Channel.) The whole scene looks as if it had been constructed to illustrate the end of the corporation as we knew it.  

What happened to the man in the gray flannel suit? No doubt he was partly a victim of sex (er, I mean gender) and drugs and rock & roll- -that is, of social change. He was also a victim of information technology, which ended up deconstructing instead of reinforcing the corporation. But probably the biggest force has been a change in ideology, the shift to pro-market policies. It's not that government has vanished from the marketplace. It's still a good guess that in a completely unregulated phone market, long-distance companies would buy up local-access companies and deny their customers the right to connect to rivals, and that the evil empire--or at least monopoly capitalism--would rise again. However, what we have instead in a growing number of markets--phones, gas, electricity today, probably computer operating systems and high-speed Net access tomorrow--is a combination of deregulation that lets new competitors enter and "common carrier" regulation that prevents middlemen from playing favorites, making freewheeling markets possible.  

Who would have thunk it? The millennial economy turns out to look more like Adam Smith's vision--or better yet, that of the Victorian economist Alfred Marshall--than the corporatist future predicted by generations of corporate pundits. Get those old textbooks out of the attic: they're more relevant than ever.