…In Silicon Valley, all the Sturm und Drang of 2011 seemed as relevant as the Cricket World Cup. High unemployment? Crippling debt? Not in Silicon Valley, where the fog burns off by noon and it’s an article of faith that talented, hard-working techies can change the world and reap unimaginable wealth in the process. “We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” says Google Chairman Eric Schmidt. “And what a world it is: Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in daily discussion, because their issues are not our daily reality.”  It was never clearer than in 2011 that Silicon Valley exists in an alternate reality—a bubble of prosperity….

Brad Stone, Bloomberg BusinessWeek, December 22, 2011

 

The Federal Reserve Bank of Boston’s 2010 Annual Report, when it appeared last year, was decorated by a series of falling autumn leaves and featured a nifty restrospective essay, “New England Transformed,” by retiring research director Lynn E. Brown. She — and the falling leaves — emphasize the region’s aging population.

The future of the six-state region hadn’t looked bright when she joined the bank, in 1975, Brown recalled. Textile and shoe manufacturing were continuing their century-long decline. With the end of the moon race and the Vietnam War, military spending was cutting back. The energy crisis had hit the region hard. The sobriquet Taxachusetts was just beginning to bite. Per capita income was falling, from 109 percent of national average in 1970 to 103 percent in 1975.

Though it was not obvious at the time, Brown wrote, 1975 was a turning point. The phrase “high technology” was gaining currency: computers in the ’70s, software in the ’80s, Internet technologies and life sciences in the ’90s, and financial services throughout, in Greater Boston and southwestern Connecticut. Per capita income rose to 120 percent of the national average (though, naturally, living costs rose as well).

Education was a large part of the story, according to Brown. By 2008, 35 percent of adult New Englanders possessed college degrees, as opposed to around 28 percent nationally.  So was the cooperation between business and political leaders that ended the underlying reality of Taxachusetts, if not necessarily the reputation itself:  today, wrote Brown, the tax burden compares favorably with most other states.

Three severe recessions in the past twenty years, however, two of them worse than the national average, have put an end to “the Massachusetts Miracle,” and its various regional spillover effects.  Foreign competition has cut New England’s manufacturing jobs nearly in half since the mid-’80s. Net outmigration has been the result.  High vacancy rates in key occupations indicate a shortage of specialized skills. Slow population growth; advancing age, low birth rates: Maine and Vermont are the oldest and second-oldest states in the nation, and New Hampshire is fourth.  You can’t call it a declining region, wrote Brown.  But significant challenges lie ahead.

Concealed beneath the aggregates of the professional economists are successive waves of collapse.  The mini-computer giant Digital Equipment Corp. disappeared into Hewlett-Packard. Proud old banks, including the First National Bank of Boston and New England Merchants, were merged out of existence; insurance companies, including John Hancock and New England Life, were absorbed by other companies.  Thomas H. Lee Partners and Bain Capital entered the private-equity business; but, thanks to schisms in Boston’s venture capital industry, no first-tier buy-out firm emerged.

Proud old publishers, Houghton Mifflin and Little Brown, were acquired. The Atlantic Monthly moved to Washington, D.C. The New York Times bought The Boston Globe it in 1993, thinking it would be a money machine and, for a decade, it was. But after the Times installed a team of its own, starting in1999, readership declined disproportionately. Once the fifteenth-largest newspaper in the nation, the Globe last year dropped to thirty-first in weekday circulation. All big newspapers’ circulations are shrinking, but none more rapidly than the Globe.

Meanwhile, the San Jose (Calif.) Mercury News has vaulted to sixth-best-selling daily paper on the country, behind The Wall Street Journal, USA Today, the Times, the New York Daily News and the Los Angeles Times. And on that opposition hangs a story – perhaps the story of Boston and northern California’s economic development of the last sixty years.

The present-day fate of New England goes back to an argument at the Massachusetts Institute of Technology in the ’50s about that material from which semiconductors, well understood locally from wartime work on radar, were to be manufactured in the years ahead. Dogma held that it would be germanium; silicon crystals would be too difficult to purify to the required degree.  Robert Noyce, an MIT-trained physicist, thought otherwise.

When MIT declined to tenure him, Noyce decamped, first to Philadelphia, then to the Shockley Semiconductor Laboratory, in Mountain View, California.  Silicon leadership went with him – to Fairchild Semiconductor and Intel, each of which he co-founded, And eventually to Silicon Valley, centered around San Jose, which the two firms spawned. New England never developed a vigorous industry in silicon chips. By the end of the ’70s, savvy venture capitalists had begun migrating to Palo Alto’s Sand Hill Road.

Similarly, when Bill Gates dropped out of Harvard College, in 1975, to found a little software company called Microsoft, he repaired first to Albuquerque, N.M., , then to his native Seattle. Plenty of entrepreneurial software development was going on in Cambridge, including the first spreadsheets, but proximity to microprocessor developers in California, Intel in particular, gave Microsoft a decisive edge.  Microsoft networking software eventually swallowed whole Massachusetts’ minicomputer industry.

The Internet, on the other hand, remained a powerful economic engine in New England well into the ‘’90s, thanks largely to the influence of MIT’s J.C.R. (Jack) Licklider, of Bolt Beranek and Newman and the Pentagon’s Advanced Research Project Agency.   But the advantages that came with having been present at the creation largely evanesced with the rise of Google in Palo Alto.  Harvard Students started Facebook, but had to move to Silicon Valley to find developers. Marc Andreessen, the browser inventor-turned-venture capitalist told The Economist last autumn that recently “there has been a massive brain drain from Boston to the Valley, which has all but gutted Boston as a place for high-tech entrepreneurship.”

It may be so.  But IBM has bought some twenty Massachusetts companies recently and built one of the world’s largest software facilities in Littleton. And Boston still has its great universities, not just Harvard and MIT, but Boston University, Boston College, Tufts, Northeastern and Brandeis universities and a host of smaller institutions. It’s no surprise that Microsoft, Google and, most recently, Amazon, have set up or plan to set up laboratories in Cambridge as listening posts.

What remains commercially strongest in Boston today is health care. (Defense giant Raytheon Corp. has survived, too, along with a little nebula of smaller firms, thanks to a breakneck spree of acquisitions led by CEO Dennis Picard.) The biotech and pharmaceutical presence here, too, can be traced to a couple of key decisions:  first, MIT’s willingness in 1982 to accept Edwin (Jack) Whitehead’s gift of an affiliated but self-governing research institute (Harvard and Duke earlier had turned him down); then, MIT professor David Baltimore’s decision, as Whitehead Institute director, to hire cryptographer Eric Lander away from the Harvard Business School, where he was teaching entrepreneurial finance (days) and learning molecular biology (nights)

Lander’s collaboration with MIT geneticist David Botstein produced an explosion of powerful insights in what we now call bioinformatics – and assured, at least for a time, the continuing leadership of Boston’s universities and hospitals in medicine. Where once Raytheon’s headquarters dominated the region’s celebrated Rte. 128, today a biopharmaceutical giant (the UK’s Shire plc) is completing a research campus for human genetic therapies business.

Now this is not exactly a new story.  in The Americans: The National Experience, historian Daniel Boorstin described New Englanders as “the Versatiles,” and traced the region’s adaptability to its nearly total early dependence on the sea.  “The sea leads everywhere,” Boorstin wrote, but it demands quick decisions and a willingness to jettison unprofitable cargo. Yankee traders were famous for their willingness to take advantage of unexpected bargains wherever they were to be found, to sell the ship itself if it could not go on with profit. “Captain and supercargo had unfettered discretion to shift investment, to convert the voyage from one purpose to another, to give up and return home, whatever promised most.”

Or, as the Boston Fed’s Lynn Brown put it at the end of her essay, “As I look back over the past thirty-five years, I am struck, first, by New England’s ability to adapt to changing circumstances and,  second, by how quickly and unexpectedly circumstances can change.”

.                                xxx

EconomicPrincipals has made its maiden appearance in Bulgarian. Albert Ward translated The GPT That Dares Not Speak Its Name, a weekly from early 2009 that connected economic historian Nathan Rosenberg’s seminal notion of general-purpose technologies with the cluster of financial innovations that had called attention to themselves so memorably the year before.  Strength to his arm, as he spreads the good news around the globe.