Paul and thread,
This is a really good article. Highly recommended in order to understand why Intel, with 90% or so of microprocessor capacity and 50%+ margins, is EXTREMELY UNDERVALUED at the moment.
Clear explanations of reality, like those in this essay, if widely disseminated, discussed and UNDERSTOOD, will be highly beneficial to the stock price - to the naysayers dismay.
Barry
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interactive.wsj.com
What Computers Really Do
By Gene Epstein
All that overblown rhetoric about the transcendent benefits of the computer age
can make you cringe. When Vice President Al Gore rambles on about "an
economy driven by information, research, knowledge and technology," or when
Britain's Economist magazine claims that computers "represent a change even
more far-reaching than the harnessing of electrical power," they sound like the
off-in-cyberspace crowd invoking a new religion.
Information technology (IT) has already made such an enormous contribution to
material well-being that there's no point in making a case that can't be
substantiated. Better to stick to the evidence at hand, since it's all plain enough.
Coals to Newcastle?
Skeptics like to argue that information technology offers a commodity we already
have too much of. After all, isn't information overload (IO) one of modern man's
greatest maladies? For sure, but this objection misses the point: What IT mainly
does is transmit information to those who need to know it.
Since most of us don't need to know most things, the hazards of IO can be
avoided. But as accountants, managers, scientists and lawyers; or as secretaries,
physicians, truckers and consumers -- or as virtually every other kind of
participant in this complex economy -- we can use IT for that piece of info we do
need to know.
Last week, I lambasted the mainstream's method of analyzing IT's role ("The
Wrong Rulers," June 22). What I want to do instead is approach the issue in the
manner of Nobel laureate economist Robert W. Fogel. In his 1964 monograph,
Railroads and Economic Growth, Fogel tried to assess the impact of railroads on
growth by asking a "counterfactual" question -- in this case, what would have
happened to the economy in the 19th century if railroads didn't exist? (He came to
the somewhat dubious conclusion that the canals would have served almost as
well, but that's a subject for another day.)
So in keeping with Fogel's example, let's ask: Where would the economy be if IT
were not around?
Answer: Just about nowhere. This $8.3 trillion economy might be operating at half
that level. A whole range of goods and services that IT makes possible simply
wouldn't exist. Many millions of people wouldn't be working at their present jobs,
but would instead be processing information that IT handles with infinitely greater
efficiency. For in a very real sense, gross domestic product is information, and
since GDP is now so vast, IT isn't just a help, it's what makes the economy go
'round.
This point is so straightforward that just a handful of examples should do:
Airlines. The heavy volume of air traffic requires that air-traffic controllers use
radar processors, communications processors and satellite systems to guide planes
to their destinations without mishap. The pilots themselves use computers to
perform their own operations. The vast flow of reservations and cancellations
would no longer be manageable. The computer-driven pricing strategy known as
yield management, which is key in filling the planes to capacity, would also be
unknown.
Offices. Faxes, voice-mail, photocopiers, mainframes and PCs have rendered
unnecessary huge numbers of secretaries, gofers and clerks. In a world without
these electronic devices, they'd be back on the job en masse.
Goods. We live in the age of the bar code and the scanner. In supermarkets,
department stores and retail chains, a product's bar code is scanned at the point of
sale. The code is instantaneously translated into a description and price of the item
being purchased. The benefits are not only that the cash register keeps an
automatic tally, but that the information can be relayed back to the warehouse.
All this makes it possible to track immense and varied inventories that would
otherwise require multitudes of stock clerks. Prices can be changed with far
greater ease, since they no longer have to be printed on the item or stamped by
hand, but can instead by posted on the shelf. Products can be replaced almost
immediately according to the now-standard practice of just-in-time inventory
management, and the profitability of each item can be more closely determined.
Wal-Mart and Home Depot, which together account for a huge chunk of all the
goods that are sold in this country, are creatures of IT. Ditto all the other
superstores that now dominate retailing. The benefits of low prices, together with
enormously greater variety and convenience, would be gone.
Manufacturing. Modern steel mills can run virtually without labor. And while
robotics haven't quite replaced the human worker, the substitution of IT for labor
is widespread. Production lines can be altered with far greater speed in order to
feed the superstores' appetite for a wider variety of goods. Products can be
stress-tested and quality control-tested with far more accuracy. Via the bar codes
and scanners, manufacturers can get sales information directly from retailers and
make decisions based on the data.
Telecommunications. If the marriage of computers and telecommunications
hadn't taken place a long time ago, we'd all be working for the phone companies
by now.
Taxes, Payrolls and Transfers. There are 130 million people currently drawing
paychecks, tens of millions of others receiving welfare and Social Security -- and
plenty of us who pay taxes. All of this would be quite difficult to handle without
computers.
Health Care. The "CAT" in CAT-scan stands for "computer-assisted
tomography," which is as good a place as any to underscore another point. IT not
only conveys information to people, but to inanimate objects as well. There are
minicomputers embedded in home appliances, elevators, security and
manufacturing systems -- and in scores of medical devices. Getting back to health
care, the processing of payments, insurance claims and diagnoses depends on IT.
Financial services. The creditworthiness of a piece of plastic can be checked in
seconds because mainframes talk to each other. The New York Stock Exchange
handles 600 million shares a day. Without computers, it could process maybe five
million. Back in the 1950s, armies of workers were employed by the banks,
insurance companies and brokerage firms. They spent all their time hunched over
their calculating machines; in those days, such people were actually called
"computers." You've heard of ATMs -- exaggerating slightly, we might say that
financial services are IT.
But you might think the above is hardly news. So let's get to the main issue. After
granting that information technology has made an enormous contribution to the
growth and development of the U.S. economy, we might still want to know how
the economy itself has done. And according to the official estimates, overall
performance has been no great shakes.
In that case, the computer "revolution" couldn't have won us any victories
especially worth celebrating. For if IT has made us so smart, then why aren't we
rich?
I believe we're a lot richer than the numbers say, and that the computer revolution
is at the core of the confusion over how well off we really are. Next week, I hope
to explain why.
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