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This is part nine of a diary series I began back in February (I got sidetracked by a couple other projects in the meantime), about the rise of the supra-national corporation. It is a draft manuscript of a book I am working on.  This section covers the economic wars with Japan and Europe in the 80's, and the rise of the multinational corporation.

Links to the other installments are below:


You must enter an Intro for your Diary Entry between 300 and 1150 characters long (that's approximately 50-175 words without any html or formatting markup).

The other installments, for those who didn't see them or don't remember them, are here:

Part One: The Anti-Corporate Revolution of 1776
Part Two: The Robber Barons
Part Three: The Progressive era
Part Four: The Roaring Twenties
Part Five: New Deal and World War 2
Part Six: The Organization Men
Part Seven:  The Man
Part Eight: the Reagan Revolution

Ten: The Multi-National Wars
The Reagan Revolution brought about the most lopsided distribution of wealth in the US since the days of John Rockefeller and Andrew Carnegie. Some 97% of the increase in income from 1979 to 1994 went to the richest 20% of the population. The richest 1% of Americans held 40% of the total wealth (around $4 trillion in assets), while the entire bottom 80% of the population held just 6% of the total wealth. For the super-wealthy, happy days were here again. But while the rich got richer, the poor got poorer. By 1996, 40 million Americans lived below poverty level, including one-fourth of all American children. In 1998, the US still had the highest poverty rate of any industrialized nation. The problem was not unemployment—the booming economy was providing plenty of jobs. But wages had been forced so low in so many sectors that 70% of the people living in poverty actually had jobs that didn’t pay them enough for a decent living.

The US corporations, however, could not rest comfortably on their moneybags. They may now have been at the top of the world, but the rest of the world was not standing still.

European Union
By 1945, Europe had twice been torn apart by war, and now lay shattered and powerless, threatened by the Soviet Union, and losing its position of world leadership to the Americans. Many recognized that Europe’s only hope for the future lay in unification—Winston Churchill was one of the first to call for a “United States of Europe”.

At the end of the war, the industrial areas of Germany’s Ruhr valley were placed under Allied control, with the intention of preventing Germany from again using its resources to build up military strength. In 1951, West Germany signed an agreement with its neighbors Italy, France, Belgium, the Netherlands and Luxemburg to form the European Coal and Steel Community, which took over the administration of the Ruhr valley from the Allies and began to coordinate their national steel and coal industries. By 1957, all the major European nations joined to form the European Economic Community, popularly known as the Common Market. The Common Market set up a unified economic structure and trade policy, which was intended as a prelude to political unification. European unification was made difficult by the nationalist objections of several countries, including England and especially France, but in 1992 the Maastricht Treaty was signed, establishing the European Union. Elections were held shortly later for a European Parliament, the Euro was adopted as the EU’s currency, and, although the individual nations retained their own identity and political autonomy, Europe became a unified economic entity. For the first time since the Roman Empire, the European continent shared a common currency and common political authority.

The Euro economy was regulated by the European Central Bank, located in Frankfurt, which plays the same basic role as the American Federal Reserve—adjusting the money supply and interest rates. Euro states are also required to maintain government spending deficits lower than three percent of their GDP.

By 2005, the Euro had a larger total money supply than the American dollar, and was rapidly approaching the dollar as the international trade currency of choice. European Union members were putting out 18% of the world’s production—about the same as the United States; the EU was producing 20% of the world’s exports, compared to 16% for the US and just 10% for Japan.

Already by the Reagan era, European corporations such as Royal Dutch Shell, British Petroleum, Daimler, Volkswagen, Allianz Insurance, HSBC Banks, Siemens, Nestle, BASF, Fiat and BMW were rivaling the largest American corporations and challenging them for world market share. A few even began to enter the American domestic market and gain an increasing share there.

The American corporations, for the first time in forty years, now faced a serious global challenge.

As the European Union was growing in global power, a sleeping giant in China was also awakening.

For centuries, China had been important to the world economy as a market and as a source of raw materials. European powers had clashed with each other repeatedly over control of the China trade routes, and when the US announced an “Open Door” policy in the late 19th century, under which the US would maintain an interest in Chinese trade, diplomatic squabbles with Europe followed. Japan fought a war with Russia in 1905 over access to China, and Japan’s invasion of Manchuria led to war with the US in 1941. In 1949, the Chinese Communists under Mao Zedong took over, and for the next 25 years, China was cut off from the rest of the world. Mao’s economic efforts were a disaster, and China plunged into near ruin.
The framework for modern China was set in 1976, after the death of Mao and the ascension to power of Deng Xiaoping. Deng instituted a policy of “Four Modernizations”—in agriculture, industry, defense, and technology. Deng introduced a decentralized economic structure which allowed market forces to operate, and at the same time opened China to the rest of the world—culminating in the establishment of diplomatic relations with the US in 1979. In the 1980’s, China invited international businesses to enter the Chinese market, holding out the advantages of low wages and few government regulations or restrictions. At first, the Chinese government retained 51% ownership of all foreign industries located in China; this restriction was later relaxed.

A flood of foreign investment followed, and China’s manufacturing sector grew at a feverish pace, most of it for export (in 1978, China exported just 5% of its GDP; by 1994 this was 23%).

Although Chinese policy now allows foreign investors to own 100% of enterprises located in China, most of the large enterprises in China are still “joint equity ventures”. These are corporations that are jointly owned by the foreign company and the Chinese government (in some cases the People’s Liberation Army, which can act independently of the Communist Party, is the Chinese co-owner). The foreign partner must provide at least 25% of the capital, and the profits are divided proportionately. In 1986, the Chinese Communist Party began allowing Wholly Foreign-Owned Enterprises (WFOEs, pronounced “Woofies”), in which foreign companies were allowed to set up operations in China, provided that they were a manufacturing industry in a high-tech or new innovative product industry, were willing to locate in Special Economic Zones or Technology Promotion Zones chosen by the Chinese government, and would export at least half of their production. Some of these restrictions were later relaxed when China joined the World Trade Organization.

A flood of foreign investment poured in. Between 1990 and 1997, direct foreign investment in China shot from $1.5 billion to $45 billion a year, the second-highest rate of investment in the world. About half of this, some $170 billion in total, came from the autonomous area of Hong Kong; the United States, Japan and Taiwan accounted for another 25% of the total. By 2000, some ten percent of China’s total foreign investment came from the US (the second-largest share), while the United Kingdom, Germany, France, Canada and Holland increased their aggregate share to 10% of the total. About 95% of all foreign investment in China is in manufacturing industries.

The Chinese economy, fueled by this investment, grew at an average rate of 9.5% a year. China’s share of world exports quadrupled in 20 years to 3.9%; exports made up 23% of the economy. By 1999, China was the world’s leading manufacturer of TV sets, steel, and fertilizer, and number two in artificial textiles, and it passed Japan to become the second-largest economy in the world—behind only the United States.

It was not China or Europe, however, which sparked off the Multi-National Wars of the 1980’s—the iconic economic fight of that decade was the economic invasion of the US by Japan.

Until the late 1890’s, Japan was not a player on the world stage. The country was ruled in the name of a figurehead emperor by a feudal strongman called the Shogun, who insulated Japan from contact with the “barbarian” foreigners. In 1868, however, Emperor Meiji overthrew the Shogun and assumed direct rule—and implemented a crash program under which Japan would catch up to the West by a massive effort to obtain and assimilate European technology and methods. By 1905, Japan was strong enough militarily to defeat the Russian fleet, and Japan assumed a place as a regional power with aspirations for global power—which led to direct conflict and war with the United States in 1941.

One of the pillars of Japanese militarism were the zaibatsu (“money clans”), which consisted of huge financial and economic organizations formed and headed by prominent merchant families. The biggest and most powerful of the zaibatsu were Mitsubishi, Mitsui, Sumitomo, and Yasuda; others included Suzuki, Fujita, Nakajima, Matsushita, Kawasaki, Nissan, and Asano. These were the ancestors of nearly every major modern corporation in Japan.

After Japan’s surrender in 1945, the US at first demanded that the zaibatsu be broken up. Instead, they were turned into joint-stock companies and retained, in order to renew Japan’s economy and strengthen her as an American ally against Communist China and the USSR.
Postwar Japan was, therefore, faced with the daunting task of remaking herself into a stable economy from the shattered remnants of a defeated nation. The instrument that the Japanese government turned to was MITI, the Ministry of International Trade and Industry. MITI became in essence the central planning bureau of the Japanese government, carefully directing the framework of the Japanese economy to produce a viable domestic industry, coordinate the policies of the former zaibatsu (which were now publicly-traded corporations) towards growth, and seek out opportunities to earn investment funds through foreign trade.

Japan’s entry into the postwar economy was as a supplier of low-cost consumer goods in areas that were labor-intensive (where Japan’s cheap labor costs gave them an advantage)—“Made in Japan” became a common stamp on transistor radios, plastic toys, and other items. By investing those profits into new areas, Japanese companies were able to establish a place in the world market for cameras, optical instruments, televisions, and other mid-level consumer goods. And by the 1970s, Japan had a thriving heavy-manufacturing sector, and was producing some of the best quality automobiles in the world, as well as steel and electronics.

By 1970, Japan’s economy was strong enough that it no longer needed MITI’s support. The Japanese economy was now centered around keiretsu (“the system”)—modern versions of the wartime zaibatsu (in some cases their direct descendents). Unlike the zaibatsu, however, the keiretsu were not family-owned; instead, each was a conglomerate of corporations that formed around a large central bank which financed all of them. The keiretsu members owned each other’s stock and coordinated their economic strategies together. The most important keiretsu were:

Mitsui, centered around the Mitsui Bank. A direct descendent of the old Mitsui zaibatsu. It owned at least 26 companies, including the Mitsui Trust and Banking Company, the Mitsui Mutual Life Insurance Company, the Japan Steel Works, Suntory Food, the Mitsui Toatsu Chemical Company, the Fuji Film Company, Toshiba, and its largest holding, the Mitsui  Bussan trading company. Other corporations, including Honda, Toyota and Sony, were close allied with the Mitsui group but were not members.

Mitsubishi, centered around the Bank of Tokyo. A direct descendent of the Mitsubishi zaibatsu. It owned 29 companies, including the Mitsubishi Trust and Banking company, the Meiji Mutual Life Insurance company, the Mitsubishi Shoji trading company, the Mitsubishi Steel Company, the Kirin Brewery, the Mitsubishi Gas and Chemicals Company, Nikon Machinery, Nikko Securities, Mitsubishi Electric, Nippon Chemicals, and, of course, the Mitsubishi Motor Company.

Sumitomo, centered around the Sumitomo Bank. A direct descendent of the Sumitomo zaibatsu. It owned 20 companies, including Sumitomo Mutual Life, Sumitomo Metals, Mazda, Asahi Breweries, NEC, Sumitomo Chemical, and Nippon Electric.

Fuyo, centered around the Fuji Bank. It is a descendent of the Yasuda zaibatsu but also contains parts of a few other zaibatsu that failed, such as the Asano, Okura, Mori and Nissan. Fuyo owned 27 companies, including Nissan Motors, Yasuda Mutual Life, the Showa Shipping company, Sapporo Breweries, the NKK Steel Company, Nisshinbo Industries, Kubota Machinery, Canon, Hitachi Chemicals, Matsuya Real Estate, Ricoh, and Marubeni Financial.

Sanwa, centered around the Sanwa Bank. It was formed in the Osaka area by bringing together a collection of companies that had not already been obtained by other keiretsu, among them the Teijin textile company, Hitachi Electronics, Hitachi Chemicals, Kobe Steel, Sharp, Orix, Daihatsu Motors, and Konica Minolta.

Dai-Ichi Kangyo, centered around the Dai-Ichi Kangyo Bank. Formed from the remnants of the Matsukata and Furukawa zaibatsu, it owned Fujitsu Electronics, Hitachi Electronics, Fuji Electric, Isuzu, Kawasaki, and, later, Nippon Columbia.

In addition to the six large horizontal keiretsu, there were also a number of smaller vertically-organized keirestu. These were limited to one industry, but they controlled companies along each step from top to bottom, from raw materials to sales. The most important of the vertical keiretsu were in the automobile and electronics industries:

Toyota—Toyota is unique among Japanese companies, and not simply because it is the largest corporation in Japan and one of the largest in the world. It is the only keiretsu to be both vertical (owning all the various elements within an industry) but also horizontal (owning other industries). It also has no central bank around which it is organized—Toyota is large enough to do its own financing. Toyota has close ties to the Mitsui group, but is not a member. Its holdings include computer companies, real estate brokers, finance companies, aircraft development, and electronics. Toyota began as a silk-loom manufacturing company during the Meiji period.

Nissan—Nissan was formed in Japanese-occupied Manchuria in 1933. Its Aichi division manufactured dive bombers for the Japanese Navy. Today, Nissan holds about 190 auto parts manufacturers.

Honda—Ichiro Honda formed the company in 1946, and began by manufacturing motorcycles; by 1964 Honda was the largest motorcycle manufacturer in the world, and attempted to expand into automobiles. The company had a hard time breaking into the domestic Japanese market and so in the 1970’s turned to export.

Hitachi—Formed in 1910 as the repair shop for the Hitachi Copper Mining Company, the Hitachi Company went off on its own in 1920 by manufacturing electrical equipment. In postwar Japan it produced industrial machinery and consumer electronics, and was one of the companies that produced the computer revolution.

Toshiba—Originally part of the Mitsui daibatsu, Toshiba manufactured ship engines in pre-War Japan. In 1939 it was merged with the Tokyo Electric Company and produced electrical equipment. After the war, it was broken from the Mitsui group and became Toshiba Electronics.

Sanyo—The Sanyo Company was formed after the war, and originally manufactured electric headlights for bicycles. During the 1950’s it grew by manufacturing transistor radios and electric washing machines, and by the 1960’s it was manufacturing television sets.

Matsushita—Although Matsushita is one of the largest electronics companies in the world, it does not sell its products under its own name and is therefore largely unrecognized outside of Japan. It markets to the US under the name “Panasonic”. Matsushita’s biggest economic coup was the development of the VHS video-recording system.

Sony—Founded in 1946 as the Tokyo Telecommunications Engineering Corporation, the company changed its name to Sony in 1958, and made its fortune producing transistor radios and later televisions.

By the 1970’s, Japan had become the second-largest economy in the world, behind the United States. As Japanese productive capacity began to saturate its home market, however, particularly in the automobile and steel sectors, Japanese corporations began looking for new markets overseas. And the biggest market of all was the United States.

The Multi-National Wars
The opening shots of the economic world war were fired in the automobile industry. By 1978, Japan had some of the largest automobile corporations in the world. Crucially, being designed for sale in Europe and Japan where gasoline was heavily taxed and expensive, Japanese cars also got some of the best gas mileage in the world. And, in the wake of the 1973 Arab oil embargo and the 1979 gas crunch, this opened a huge door to the American market. By 1980, Japanese automobiles made up one-fourth of all cars sold in the US.

The American auto companies were in a blind panic. For decades, they had lived at the top of the economic world by turning out big heavy overpowered gas-guzzlers; in an instant, their entire lineup was obsolete, as consumers flocked to buy small light gas-stingy Hondas and Toyotas. In just three years, production at Ford, GM and Chrysler fell 30% to its lowest level in 20 years; American auto companies found themselves $4.2 billion in the hole. Plants were closed down; almost a quarter-million workers were laid off.

Chrysler was the hardest-hit, and when laying off almost half its workforce didn’t help, the corporation went to Uncle Sam, hat in hand, for a bailout. The US Government had no choice but oblige; the automobile industry made up some 20% of the country’s Gross National Product and provided almost one-sixth of all the jobs in the country, and the government simply could not allow it to go under. Chrysler was given a $1.2 billion bailout loan. In addition, the company put the screws to the Auto Workers Union, declaring that it would go out of business if the union did not grant some $600,000 in givebacks on contracted wages and benefits.

With the money it got from the unions and from the government, Chrysler rushed out a line of small gas-efficient cars called K-Cars, designed specifically to compete with Japanese imports. The move saved Chrysler from bankruptcy, but it did not solve the problem, as Japanese cars continued to gain an increasing share of the American market.
But the auto industry was not the only one under attack. During the 80s and 90s, international trade grew at an enormous rate. Ironically, it was the American corporations, with their pre-eminent global power, that began the process. But now the corporations of Europe and Asia were strong enough to turn the tables—between 1970 and 1990, the proportion of the American manufacturing sector that was owned by foreign corporations shot from just 3 percent to 19 percent. Most of this came from British and European companies. But the most visible—and most resented—of the “economic invaders” was Japan.

The Japanese economy was booming in the 1980s, and Japanese foreign investment increased almost 2,500%, as investors, awash with yen, eagerly searched for places to invest their new fortunes. Increasingly, that was the US. In the early 80s, only 4.5% of foreign purchases of American companies were made by Japan, but that quickly changed as Japanese money flowed in. Investments in the US went from $1 billion a year to $18 billion per year. Japanese businessmen purchased large numbers of office buildings and other real estate, including highly visible deals like Rockefeller Center. By 1989, 33 Japanese banks held about half of all the foreign-owned financial assets in the US, amounting to some $329 billion—about ten percent of all bank capital in the country. In California, where yen flowed into Silicon Valley, the five largest banks in the state were all owned by Japanese. And Japanese products such as televisions, computer chips, and heavy machinery gained increasing shares of the American market.

 American companies in several industries—everything from semiconductors to typewriter ribbons—angrily accused the Japanese of “dumping” (deliberately selling their products in the United States below market price in order to capture a bigger market share), and appealed to the US government for help. The most bitter of these trade disputes was in the steel industry. Japanese steel had increased its American sales by over 400%, and Bethlehem Steel and US Steel were feeling the squeeze. Like the auto companies, the steel companies extracted givebacks and concessions from their unions, laid off over 75% of their entire workforce (at US Steel alone, some 80,000 steelworkers lost their jobs), and spent $50 billion on modernizing their factories, but continued to lose market share to the Japanese. They complained to the US government, accusing the Japanese of unfair trade practices. The Japanese argued that it was the high value of the American dollar that caused Japanese steel to be so cheap in the US, and anyway it wasn’t Japan’s fault if American companies couldn’t compete on the world market. But the Reagan Administration, for economic as well as political reasons, had to go to the steel industry’s rescue, and it announced a series of punitive anti-dumping tariffs to be imposed on Japanese products ranging from steel to mobile telephones to oil rig equipment.

The Japanese, who were themselves an island nation heavily dependent on imports, did not want to wage a trade tariff war, and the Reagan Administration was ideologically committed to a deregulated free trade approach. After a series of talks, then, in 1981, Japan and the US reached a “Voluntary Restraint Agreement” under which Japan agreed to limit the number of automobiles it exported to the US each year. Similar agreements soon followed in the steel, semiconductor, and television industries. (The voluntary steel agreement limited Japanese steel from its current 25% to only 18.5% of the US market.)

In response to these voluntary government agreements, however, the Japanese corporations simply changed their strategy.  Now, instead of exporting cars to the US that had been manufactured in Japan (which were covered under the agreement), they would simply move factories to the US and make their cars there (where they were not covered by the agreement). Within a few years, Toyota had built a $1.3 billion assembly line in Texas and another in Alabama; Isuzu had opened an American plant jointly with Subaru; Honda had an assembly plant in Tennessee. When Japan and the United Kingdom reached a voluntary agreement, Nissan built a factory in Sunderland. At the same time, the Japanese and American corporations began buying large chunks of each other—Ford bought 25% of Mazda, GM bought one-third of Isuzu, and Chrysler bought 15% of Mitsubishi.

“Buy American”
The effect of the Multi-National Wars on the American worker was devastating. The economic invasion had struck at the tiny handful of American industries—steel and automobiles particularly—that still had powerful and active labor unions, and destroyed them.

In effect, the unions were being whipsawed, threatened with loss of their jobs to lower-wage workers if they did not agree to concessions and givebacks. As a result, the unions eagerly defended the corporation’s interests, declaring that Japanese companies (and workers) were their real enemy, and spending millions on advertising campaigns asking people to “Buy American”, hoping that if enough people patriotically refused to buy Japanese cars and bought more expensive gas-guzzling American cars instead, it would save the American auto industry, and their jobs. But sadly for the UAW, consumers’ wallets are more vital to them than their patriotism. More importantly, there was no longer any such thing as a “Japanese” company or an “American”—not only did the American Big Three own large shares of the Japanese companies, but the Japanese companies were increasingly building their plants in the United States (leading to such absurdities as UAW members holding “Buy American” protests at a union Mazda plant in Michigan) while the American companies were increasingly moving their plants to Mexico.

The unions, their quixotic “Buy American” campaign an utter failure, were forced into one round after another of givebacks and concessions—only to then see all their jobs lost anyway as their American owners relocated the factories to low-wage havens in Mexico or overseas. By 2005, GM and Chrysler were on the brink of collapse again, while Japanese-owned factories in the US employed 615,000 Americans, with about 400,000 of these in (non-union) automobile plants.

With the death of the last labor unions and the outsourcing of high-wage jobs overseas, the path was cleared for an unprecedented redistribution of wealth upwards. From the early 1980s, real wages in the United States, adjusted for inflation, would decline steadily for the next 30 years, as global corporate profits, fueled by outsourcing and relocated factories, soared to record levels.

Japan and Europe were not the only economic predators in the 1980s. American corporations themselves started a tidal wave of outsourcing, moving their “runaway factories” elsewhere in a desperate bid to find low-wage havens that would allow them to compete with the new international players. One of the earliest efforts in this direction was the “maquiladora” sector in Mexico.
Up until 1964, the border between Mexico and the United States was virtually open. Each year, large numbers of Mexicans crossed the border into the US to work as migrant farm-workers, under a US government incentive called the Bracero Program. In 1964, however, due partly to Cold War fears and partly to a racist reaction to the large number of Mexicans living in the US, the program was ended, Mexicans in the US were pushed out, and the border was tightly sealed.

In response, the Mexican government tried to alleviate the unemployment problem in its northern areas, near the US border, by offering financial incentives to foreign businesses that were willing to relocate in the area, under a program called “maquiladora”.

For the next decade, the Mexican maquiladora had few takers. But in the 1980’s, corporations began looking for low-wage areas where they could relocate for increased profits, and, to American companies in particular, Mexico became very attractive. In 1985, the Mexican government added new tax and regulatory incentives and joined the GATT (General Agreement on Tariffs and Trade) treaty which regulated international trade, and the maquiladora sector began to grow at a furious pace.

The name “maquiladora” comes from “maquila”, referring to the fees that grain grinders charged for using their millstones to grind other farmer’s grain. In essence, that is what the maquiladora sector does—a foreign investor provides raw materials, the Mexican laborers process it, and return the finished product. Originally, there were restrictions on foreign owners, and all of the manufactured items had to be exported from Mexico. Many of these regulations have since been removed as a result of the NAFTA (North American Free Trade Agreement) treaty.

The primary attraction of the maquiladora is the extremely low labor cost, which immediately attracted industries that were labor-intensive. While the minimum wage in the US in 1980 was $5.15 per hour, the minimum wage in the Mexican maquiladora was only $3.40 per day. About three-fourths of the employees in the maquiladora sector are women; although the legal minimum age is 16, many poor Mexicans obtain false documents and take jobs at age 13, 14 or 15.

According to many reports, the young women who work in the maquiladora are subject to sexual and physical abuse. Any attempts to unionize or act to produce better pay and conditions are met with effective, sometimes violent, opposition.

Among the corporations that have been active in the maquiladora sector are: Acer Computers, Bayer, BMW, Canon, Casio, Chrysler, Daewoo, Kodak, Fisher Price, Ford, Foster Grant, GE, JVC, General Motors, Hasbro, Hewlett-Packard, Hitachi, Honda, Honeywell, Hughes Aircraft, Hyundai, IBM, Mattel, Mercedes Benz, Motorola, Nissan, Panasonic, Pioneer, Samsonite, Samsung, Sanyo, Sony, Tiffany, Toshiba, Volkswagen, Xerox, and Zenith.  
With the appearance in the 1990’s of even lower-wage refuges like China, the corporations in turn abandoned the maquiladora sector. Soon, the once-thriving industrial centers in northern Mexico were ghost towns, and thousands of Mexicans were crossing the border in search of jobs.

The New Economy
In the midst of the corporate world war, another revolution broke out, one that was to change the face of modern society—and it began in a garage.
In 1971, two teenagers in California named Steve Jobs and Steve Wozniak began building and selling primitive electronic computers from their parent’s garage. Six years later, their company, Apple, began selling a “personal computer”, the Apple II. In 1980, college dropout Bill Gates formed a company named Microsoft and wrote an operating system called BASIC for IBM’s new Personal Computer. The computer revolution was on; by 1989, Apple was one of the richest companies in the world, and Microsoft was earning over $1 billion a year.

By 1995, the computer revolution had changed the entire economy. As manufacturing jobs disappeared, shipped off to Mexico or China, pundits talked about a “New Economy”, one based not on the production of goods on an assembly line, but on the production and transfer of computerized information. The Internet promised to remake the entire economy, and a new breed of financier, the “venture capitalist”, specialized in funding promising new companies, and the dot coms seemed extremely promising. Soon, dozens of new Internet-based companies, awash with cash from venture capitalists and, when possible, from Initial Public Offerings (IPOs) of stock, flashed into existence, particularly around the mecca of Silicon Valley in California. Few of them had made any profit; many of them didn’t even have a business plan—but investments flowed in anyway, based on nothing more than sheer enthusiasm, making them instant millionaires. In March 2000, the NASDAQ index, which was heavily weighted towards high-tech companies, hit a high of over 5,000. It was a classic setup for a financial bubble.

Some dot coms disappeared after they had burned through all their working capital, never having turned a profit. Pets.Com, which sold $82.5 million in stock with its IPO in February 2000, was already filing for bankruptcy in November. One of the largest Internet companies, World.Com, was found to have illegally tampered with its accounting to show billions in false profits—its subsequent collapse was the second-largest bankruptcy in the US to that time. By October 2002, some $5 trillion worth of dot com stock value had disappeared, lost when the financial bubble finally collapsed. Only a few of the dot coms, including eBay, Amazon, Yahoo and Google, survived the crash and went on to become successful corporations.

The myriad of software and hardware companies that had appeared, meanwhile, underwent a similar winnowing. In many ways, the new computer industry followed the same trajectory as the traditional manufacturing industries, like cars and oil, had—a large number of startups appeared, only to have competition kill off most of them while a handful of survivors grew huge and rich. In the 90s, a bewildering number of computer producers, software companies and peripheral manufacturers appeared. Corporate apologists proudly pointed to computers as an industry where “anyone could form a company and get rich”. In just a few years, however, nearly all of the new companies were gone. Most of them went broke or were bought up by bigger competitors, and by 1996, the once-freewheeling computer and software industries had become just as concentrated into the hands of a few super-rich large corporations as every other “old economy” industry was. Bill Gates, alone, was worth some $50 billion—more than the entire bottom 40% of the entire US population put together. And the Clinton Administration had set its regulatory sights on Microsoft.
The most important bit of software for the Internet user is the “browser”, the program that allows World Wide Web pages to be viewed. The earliest popular web browser was a program called Lynx (a word play on “links”), which was a text-based browser—it allowed a viewer to read text and click on hypertext links to other pages, but Lynx could not display pictures or graphical information. When the Mosaic browser appeared, it revolutionized the Internet experience—Mosaic was a graphical browser, allowing users to view photos, graphics, illustrations and icons. With Mosaic, the Internet was no longer dull and clunky, and usage grew at an astounding rate.
Soon another graphical browser appeared, called Netscape. Although the Netscape browser was given away as “freeware”, it became the basis for an entire company which made money through advertising and the sale of peripheral software and add-ons. By 1990, the vast majority of the rapidly-increasing millions who surfed the Internet were doing it with Netscape.

 Microsoft looked on with envious eyes. Although Netscape was a minor company compared to Microsoft, Bill Gates knew that the Internet was the future of the entire computer industry, and the company that controlled the way people accessed the Net, was in the best position to dominate the future computer industry. And it was Netscape, not Microsoft, that owned the browser market.

Microsoft had its own Internet browser, called Internet Explorer, that had been released for sale as part of an add-on pack to the Windows 95 operating system. In an attempt to compete with Netscape, Microsoft began releasing Internet Explorer as a freeware download, but Netscape continued to hold most of the market.

So Microsoft decided to throw its considerable weight around. As a near-monopoly on computer operating systems, Gates realized that he could use that monopoly power to bring Netscape to its knees. Microsoft began bundling its free Internet Explorer browser along with Windows, and began threatening to revoke the licensing agreements with computer manufacturers if they included Netscape’s browsers on their computers. Since they could not possibly sell any computers without the Microsoft Windows operating system, the manufacturers had no choice but give in to the blackmail.
It was a blatant predatory practice by a monopolistic corporation, and the Justice Department quickly stepped in. Microsoft was slapped with an antitrust lawsuit, and the  Clinton Administration sought openly to break up Microsoft into a series of smaller companies. In November 1999, a Federal judge ruled against Microsoft. Fortunately for the company, however, the 2000 election removed the Justice Department prosecutors from the scene. The appeals were allowed by the new Bush Administration to drag on for years and eventually to die out in exchange for some promises from Microsoft in a 2004 settlement.

The computer industry, however, was by then beginning to feel the effects of the Multi-National Wars. By 2004, the number of computer programmers, systems analysts, and hardware engineers dropped sharply, as large numbers of high-tech jobs were outsourced from the US to India and China, and large numbers of computer employees left for other industries.
The outsourcing of well-paying high-tech American jobs was an icon of a much larger trend as the Multi-National Wars drew to a close.

Extended (Optional)

Originally posted to Lenny Flank on Tue Sep 28, 2010 at 03:42 PM PDT.

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