The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy

By Lester C. Thurow

HarperCollins 301pp $27.50

Empires fall. This usually happens as civilizations lose touch with what made them great. Think of a Europe that grew dumber and dumber over the five centuries following the fall of Rome. Along the way, literate parents failed to teach their children to read, and the region marched backward into ignorance and poverty. In his latest book, Building Wealth, economist Lester C. Thurow imagines medieval men and women fetching water from magnificent aqueducts and wondering how their engineer ancestors ever got so smart.

Are we losing our way as well? Thurow, the well-known author and longtime Massachusetts Institute of Technology professor, has always insisted that societies need to invest in schools and tools to thrive. Those that substitute shopping for investing, he warns, are heading the way of the late Romans. This is hardly a new line for Thurow. But in Building Wealth, he updates his thinking for the Information Age. And he makes a strong case that America will be hard-pressed to sustain the early lead it now enjoys over Europe and Japan.

Don't be fooled by the subtitle: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy. That's a marketing tag. Browsers who pick it up hoping to find out whether Internet stocks have peaked will be cruelly disappointed. Thurow, a big-picture economist if there ever was one, focuses on nations and regions in the sweep of history. In doing so, he puts together a recipe for national wealth. Not surprisingly, this onetime champion of European-style industrial policy stakes out a big role for government in education and infrastructure, as well as in research and development.

With Europe slumping through much of the decade while America races, it may seem a strange time to question the American model. Indeed, these early years of the digital revolution have been a showcase for America's strengths. When it comes to tearing down and building up companies, no one moves faster. Laggards such as Westinghouse succumb, freeing up brains and capital for newcomers, such as Yahoo! By contrast, Europe and Japan struggle to recast the likes of Siemens and Mitsubishi Motors and fail to produce new companies. All 25 of Europe's largest companies already were big in 1960; back then, a third of today's U.S. top 25, including Microsoft and Intel, didn't even exist.

But Thurow sees the cracks in an economy that's the envy of the world. He argues that America's power in innovation and enterprise is blinding the world to its severe shortcomings, principally its lack of schooling. For parallels, Thurow takes us back to the first industrial revolution. It was the British who triumphed in the steam age, nearly 200 years ago. They had a brilliant technology elite, leadership in steel and textiles, and bounteous capital markets. Yet in the following decades, while Britain's underclasses remained poor and ignorant, America was undertaking a radical experiment in universal education. By the end of the century, he writes, the U.S. was outproducing the British by employing literate workers to run the same technology.

Anyone who has read Thurow can see his argument closing in. He maintains that now more than ever no country can stay on top with an education system that, as he would have it, virtually abandons the two-thirds of its population that don't graduate from college. He recites familiar studies showing that the U.S. has tumbled to the bottom of the heap among industrialized countries in basic education.

And why does America put up with this? The elite trusts that its kids will catch up in college and cruise to the summit via America's peerless graduate schools. Meanwhile, voters in general, driven more by fear than hope, are inclined to spend tax dollars on jails before schools.

Such generalizations grate a bit, and Thurow fires them off at a dizzying rate. He sums up nations and civilizations in one or two words. Israel: brilliant, disorganized. Singapore: regimented. The Middle Ages: dark. Reading this book is like roller-skating with a brainy guide through a history museum. But he repeats enough so that you pick up his formula for wealth. It boils down to a mix of freedom, order, education, and investment, along with a healthy tolerance for risk.

And the winners? Each region, it turns out, is missing something. The Japanese shun risk and lack innovation; the Europeans hobble startups. But Japan and Europe boast better-schooled workforces than the U.S. This, says Thurow, should permit them to hone the technologies now pouring out of U.S. labs. In time, these rivals could improve upon America's crashing computers and buggy software, much as they bested the Ford Pinto.

Of course, there's a big difference this time around. The very stuff of this industrial revolution--information--travels everywhere almost instantaneously. Innovators at computers can cash in from practically any point on the globe. The trick for governments is to prepare more of their people for the information economy--and then to get out of their way as they coalesce into companies. Thurow makes it sound simple. But don't count on Americans tuning in to his message until the digital economy starts sputtering.

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