Gilder explains the true meaning of the microcosm with his uniquely poetic prose:

As Peter Drucker said. “What one man can do, another can do again.” Distilling discoveries of science, a set of technologies, and a Philosophy of enterprise, the microcosm is far too big for any one country. Even its products are mostly made of ideas—waves that suffuse the mindscape of the world. (p.127)

The vital importance of ideas in all aspects of the microcosm, including hardware, is a central theme of the book:

Computer hardware thus is another form of information technology like books, films, and disks. The value resides in the ideas rather than in their material embodiment. The chip design is itself a software program. Even the design of the computer’s plastic chassis and keyboard may well have begun as a software program. Like a book, a spreadsheet financial package, even a film on a videocassette, a microchip design is conceived and developed on a computer screen and takes form in a storage device that costs between 80 cents and $2 to manufacture. The current dominance of such products in the world economy signifies the end of the industrial era and the onset of the age of the microcosm. (p. 159)

Consider debate over handset exclusivity: Those who insist that AT&T be forced to relinquish its exclusive rights to the iPhone ignore the fact that the iPhone is not so much a device as a brilliant idea—actually, a cluster of innovations made possible because AT&T was willing to partner with Apple on the risky venture of developing the expensive device and bringing it to market. Speaking of ideas made reality, I can’t wait to get my hands on a Microsoft Surface!

http://www.youtube.com/v/rP5y7yp06n0

The Wall Street Journal reports today that student loan borrowing for college “in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion,” with the average student borrowing $13,172 to pay for college. So it should come as an enormous relief that one Internet start-up, StraighterLine, has essentially made the university fully virtual, offering classes for just $99/month.  While this may seem like a boon for students, especially the millions of Americans for whom even community college tuition seems an insurmountable obstacle to climbing up the economic ladder, such “e-Learning” offerings are already, predictably, coming under attack by entrenched interests in “Big Ed” (the professoriat!) as the “media-software–publishing–E-learning-complex.”

In Washington Monthly, Kevin Carey explains why “The next generation of online education could be great for students—and catastrophic for universities.” In a nutshell, the story is the same basic theme of Chris Anderson’s book Free!: digital distribution of information will ultimately drive costs down to zero. Carey shows how universities are essentially facing the same sorts of pressure from disruptive innovation as newspapers—except with more capital costs:

Colleges are caught in the same kind of debt-fueled price spiral that just blew up the real estate market. They’re also in the information business in a time when technology is driving down the cost of selling information to record, destabilizing lows. In combination, these two trends threaten to shake the foundation of the modern university, in much the same way that other seemingly impregnable institutions have been torn apart. In some ways, the upheaval will be a welcome one. Students will benefit enormously from radically lower prices—particularly people like Solvig who lack disposable income and need higher learning to compete in an ever-more treacherous economy. But these huge changes will also seriously threaten the ability of universities to provide all the things beyond teaching on which society depends: science, culture, the transmission of our civilization from one generation to the next. Whether this transformation is a good or a bad thing is something of a moot point—it’s coming, and sooner than you think.

Carey tells the the fascinating tale of StraighterLine, whose founder, Burck Smith, predicted the rise of digital higher education in his graduate thesis at Harvard’s Kennedy School of government in 1999. He predicted that we would look back from 2015 and see that:

Technological change was the spark that ignited the wildfire of change. Like a hole in a dike, cheap and instantaneous Internet-based content delivery and communication nibbled away at barriers to institutional competition… . Suddenly, a student seeking an introductory statistics course could choose from hundreds of online courses from anywhere in the world… . Feeling the effects of low-cost competition, site-based education providers started cutting course costs and prices to attract students.

Carey’s tell would resonate well with anyone who’s read George Gilder’s brilliant works Microcosm and Telecosm, about how innovation in general and digital economics radically drive down costs.

Even as the cost of educating students fell, tuition rose at nearly three times the rate of inflation. Web-based courses weren’t providing the promised price competition—in fact, many traditional universities were charging extra for online classes, tacking a “technology fee” onto their standard (and rising) rates. Rather than trying to overturn the status quo, big, publicly traded companies like Phoenix were profiting from it by cutting costs, charging rates similar to those at traditional universities, and pocketing the difference. This, Smith explained, was where StraighterLine came in. The cost of storing and communicating information over the Internet had fallen to almost nothing. Electronic course content in standard introductory classes had become a low-cost commodity. The only expensive thing left in higher education was the labor, the price of hiring a smart, knowledgeable person to help students when only a person would do. And the unique Smarthinking call- center model made that much cheaper, too. By putting these things together, Smith could offer introductory college courses à la carte, at a price that seemed to be missing a digit or two, or three: $99 per month, by subscription. Economics tells us that prices fall to marginal cost in the long run. Burck Smith simply decided to get there first.

Essentially what Smith did was to unbundle content:

To anyone who has watched the recent transformation of other information-based industries, the implications of all this are glaringly clear. Colleges charge students exorbitant sums partly because they can, but partly because they have to. Traditional universities are complex and expensive, providing a range of services from scientific research and graduate training to mass entertainment via loosely affiliated professional sports franchises. To fund these things, universities tap numerous streams of revenue: tuition, government funding, research grants, alumni and charitable donations. But the biggest cash cow is lower-division undergraduate education. Because introductory courses are cheap to offer, they’re enormously profitable. The math is simple: Add standard tuition rates and any government subsidies, and multiply that by several hundred freshmen in a big lecture hall. Subtract the cost of paying a beleaguered adjunct lecturer or graduate student to teach the course. There’s a lot left over. That money is used to subsidize everything else. But this arrangement, however beneficial to society as a whole, is not a particularly good deal for the freshman gutting through an excruciating fifty minutes in the back of a lecture hall.

The analogy to newspapers is clear:

What happens when the number of students making that choice reaches a critical mass? Consider the fate of the newspaper industry over the last five years. Like universities, newspapers relied on financial cross-subsidization to stay afloat, using fat profits from local advertising and classifieds to prop up money-losing news bureaus. This worked perfectly well until two things happened: the Internet made opinion and news content from around the world available for nothing, and the free online classified clearinghouse Craigslist obliterated newspapers’ bedrock revenue source, the want ads. Suddenly, people didn’t need to buy a newspaper to read news, and the papers’ ability to subsidize expensive reporting with ad revenue was crippled. The result: plummeting newspaper profits leading to a tidal wave of layoffs and bankruptcies, and the shuttering of bureaus in Washington and abroad. Like Craigslist, StraighterLine threatens the most profitable piece of a conglomerate business: freshman lectures, higher education’s equivalent of the classified section. If enough students defect to companies like StraighterLine, the higher education industry faces the unbundling of the business model on which the current system is built. The consequences will be profound. Ivy League and other elite institutions will be relatively unaffected, because they’re selling a product that’s always scarce and never cheap: prestige. Small liberal arts colleges will also endure, because the traditional model—teachers and students learning together in a four-year idyll—is still the best, and some people will always be willing and able to pay for it….. Regional public universities and nonelite private colleges are most at risk from the likes of StraighterLine. They could go the way of the local newspaper, fatally shackled to geography, conglomeration, and an expensive labor structure, too dependent on revenues that vanish and never return.

The difference between newspapers and higher education is that, in education, the government ultimately holds all the cards through the power of accreditation:

Credits and degrees can only be granted by—and students paying for college with federal grants and loans can only attend—institutions that are officially recognized by federally approved accreditors. And the most prestigious accreditors will only recognize institutions: organizations with academic departments, highly credentialed faculty, bureaucrats, libraries, and all the other pricey accoutrements of the modern university.

Carey concludes by noting that government regulation ultimately threatens innovation and will likely protect “Big Ed” from competition, just as it has protected the Big Three auto manufacturers:

Smith’s struggle to establish StraighterLine suggests that higher education still has some time before the Internet bomb explodes in its basement. The fuse was only a couple of years long for the music and travel industries; for newspapers it was ten. Colleges may have another decade or two, particularly given their regulatory protections. Imagine if Honda, in order to compete in the American market, had been required by federal law to adopt the preestablished labor practices, management structure, dealer network, and vehicle portfolio of General Motors. Imagine further that Honda could only sell cars through GM dealers. Those are essentially the terms that accreditation forces on potential disruptive innovators in higher education today.

Carey’s story highlights not only what the future of universities might look like, but the dangers of subsidizing newspapers as well. Many who have bemoaned the demise of newspapers have called for indirect government support in the form of preferential tax treatment by relaxing non-profit rules to accommodate newspapers, letting newspaper subscribers deduct their annual newspaper spending or perhaps even borrowing from the French and giving income tax breaks to newspaper journalists—or direct subsidies like bailouts for newspapers or expanded public funding the model of NPR. The obvious problem raised by such proposals is the old Golden Rule: “He who has the gold, makes the rules.” Control necessarily follows funding.

The more subtle, long-term problem with such subsidies is that they require some form of accreditation to determine who or what is eligible for government largess or tax breaks.  This creates essentially the same problem Carey predicts with universities: Established interests will lobby government to protect them from competition by radically cheaper, innovative business models based on new digital technologies. This, in turn, will both retard the development of education, and therefore the advancement of knowledge, and increase the problem of government control: The lower down what George Gilder called the “Learning Curve” we go in terms of figuring out how to make e-Learning inexpensive, the greater Big Ed will depend on government for protection. If that happens, academic freedom will become as meaningless as freedom of a press dependent on government funding.

As a practical matter, I wonder:

1. How services like StraighterLine will compete with free offerings of course materials through services like iTunes University, which offers a growing compendium of free college lectures (but not course materials, tests or tutoring)
2. When we’ll finally see e-Learning costs drop enough that an ad-supported model might become feasible. You may laugh now, but today’s $99/month could well be tomorrow’s $9.99/month—at which point advertising models might prove competitive, especially if advertisers can get the revenue boost of delivering personalized marketing to users.

A few gems from George Gilder’s 1990 masterpiece Microcosm: the Quantum Revolution in Economics & Technology as I work my way through the book:

Predatory Pricing. Gilder details how early microchip manufacturers created wholly new markets put Say’s law into action: supply creating its own demand.  Not only did these companies introduce new technologies, but they created demand by slashing the prices of those technologies by multiple orders of magnitude (10-10,000x) even before they figured out how to lower production costs enough to make even a small profit. While such practices would later give rise to charges of “predatory pricing” and “dumping,” Gilder explains:

Selling below cost is the crux of all enterprise.  It regularly transforms expensive and cumbersome luxuries into elegant mass products.  It has been the genius of American industry since the era when Rockefeller and Carnegie radically reduced the prices of oil and steel. (122)

The Learning Curve: Gilder explains the dynamic by which prices drop so consistently in innovative new industries:

Early in the life of a product, uncertainty afflicts every part of the process. An unstable process means energy use per unit will be at its height. Both fuels and materials are wasted. High informational entropy in the process also produces high physical entropy. The benefits of the learning curve largely reflect the replacement of uncertainty with knowledge. The result can be a production process using less materials, less fuel, less reworks, narrower tolerances, and less supervision, overcoming entropy of all forms with information. This curve, in all its implications, is the fundamental law of economic growth and progress. (125)

The Curve of the Mind: Gilder explains the broader implications of the Learning Curve to the competitiveness of the market economy, and how easily yesterday’s giants can become tomorrow’s easy prey:

Firms that win by the curve of mind often abandon it when they establish themselves in the world of matter. They tight to preserve the value of their material investments in plant and equipment that embody the ideas and experience or their early years of success. They begin to exalt expertise and old knowledge, rights and reputation, over the constant learning and experience of innovative capitalism. They get fat. A fat cat drifting off the curve, however, is a sitting duck for new nations and companies getting on it. The curve of mind thus tends to favor outsiders over establishments of all kinds. At the capitalist ball, the blood is seldom blue or the money rarely seasoned. Microcosmic technologies are no exception. Capitalism’s most lavish display, the microcosm, is no respecter of persons. (113)

Socioeconomic Empowerment. As Gilder explains, the revolution of the Microcosm drew on, and empowered, the a diverse array of the downtrodden, both native-born and foreign:

The United States did nor enter the microcosm through the portals of the Ivy League, with Brooks Brothers suits, gentleman Cs, and warbling society wives. Few people who think they arc in already can summon the energies to break in. From immigrants and outcasts, street toughs and science wonks, nerds and boffins, the bearded and the beer-bellied, the tacks’ and uptight, and sometimes weird, the born again and born yesterday, with Adam’s apples bobbing, psyches throbbing, and acne galore, the fraternity of the pizza breakfast, the Ferrari dream, the silicon truth, the midnight modem, and the seventy-hour week, from dirt farms and redneck shanties, trailer parks and Levittowns, in a rainbow parade of all colors and wavelengths, of the hyperneat and the sty high, the crewcut and khaki, the pony-railed and punk, accented from Britain and Madras, from Israel and Malaya, from Paris and Parris Island, from Iowa and Havana, from Brooklyn and Boise and Belgrade and Vienna and Vietnam, from the coarse fanaticism and desperation, ambition and hunger, genius and sweat of the outsider, the downtrodden, the banished, and the bullied come most of the progress in the world and in Silicon Valey. (114).