Israel in the Age of Knowledge

August 8, 2001

Originally presented April 28, 1996. Published on August 8, 2001.

My parents were from Vienna and liked to tell this story:

Four pastry shops competed on the same street eking out a living, but the market demand was not sufficient to support four shops. So one shop brought in a management expert, and the next morning, there was a small sign in the window “Best Pastries in Vienna,” and they started to get a lot of curious pastry shoppers.

So the second shop brought in their own turnaround consultant and the next morning there was a bigger sign in their window, “Best Pastries in Austria.”

The third shop followed suit with a really big six foot high sign, “Best Pastries in Europe.”

Finally, the fourth shop owner decided that she needed to do something as well and the next morning there was a really big sign that took up the entire window, “Best Pastries on this Block.”

The moral of the story is that you don’t have to be the best in the world, you only have to be on the best in your neighborhood and you have to be in the right field.

In the Vienna of 1930, the right field was pastries. I grew up eating those Viennese pastries, but I don’t eat them anymore–not since my nutrition book came out.

In 1995, the right field is software. But you don’t have to be in the right neighborhood anymore. It doesn’t matter whether you’re in Vienna, or Massachusetts, or Tel Aviv, because the Internet is the great leveler, the great equalizer–everyone has ready access to the marketplace. A couple of Yahoos in California can be as prominent as Microsoft.

I was in Israel last Summer, and access to export markets used to be a big issue, but with the Internet, high tech and software in particular is booming, so Israel today has a GNP that is twice that of Saudi Arabia. Software and the intellectual content it represents exceeds the value of oil. I’ll come back to Israel in a moment.

Some of you remember the movie “The Graduate.” For some of you, it may be before your time but you remember the enigmatic advice that Dustin Hoffman received… I don’t remember the name of his character… I remember thinking at the time, plastics?? Even then I thought “computers” would have been better advice.

Today, the advice would be software. Some might say Internet, but in my view that is just another manifestation of software. After all, Netscape is a software company.

You’ve no doubt noticed the extraordinary value of software companies, including, not so incidentally Israel software companies. There is a great migration of American venture capitalists going to Israel and investing in Israel software startups.

One of the best things that has happened to the Israel economy was the influx of Russian immigrants–very talented and educated people–doctors, mathematicians. They weren’t able to get jobs, so they started software companies.

In my view, this is not a passing trend, it is not a bubble that’s going to burst, which is not to say that there will never be a correction or that none of today’s high flyers will crash, but what we are seeing today is a fundamental transformation of the nature of wealth away from commodities and toward knowledge, as embodied in intellectual property.

In fact, you can draw a reverse exponential curve where the y axis is the percentage of value of a product represented by natural resources and the x axis is time, and the percentage of value represented by natural resources is asymptoting to zero as we go forward in time, and every product and service is on the curve. Some are closer to zero than others, and some categories of products are moving faster than others as they move down the curve, but every product is on the curve, marching on down to nearly zero contribution from material resources and nearly 100% contribution from intellect.

Indeed, over the past twenty years the value of commodity resources, as measured in constant dollars, has fallen substantially, about 40 percent, and this trend is accelerating. So, sell short on your natural resource stocks. That will be my only stock tip for today.

Now, I’m not an economist but that doesn’t inhibit me from sharing with you economic opinions. Very few people are inhibited from expressing economic opinions. That is, I am sure, very frustrating to economists.

My own background is in signal processing and pattern recognition, and very few people express opinions about signal processing and pattern recognition. But everyone likes to express their economic views.

I’m reminded of the economics professor who year after year has the questions to his final exam stolen by his students, and explains why he’s really not upset about this. The questions are always the same anyway, he points out, it’s the correct answers that keep changing.

A lot of people feel that’s why economics differs from science. But if you pay close attention to computer science you know that the correct answers keep changing here, too.

Today, the correct answer to the question of how to advance economic competitiveness is to foster the creation of intellectual property, which is information, that is, sequences of 1’s and 0’s–one might say protected sequences of 1’s and 0’s that have economic value. And that has not always been the case in human history.

Now, what is fueling this extraordinary and in my view permanent shift to knowledge, to intellectual property, to software as the foundation of wealth and power in this second industrial revolution?

The answer in my view is Moore’s Law. Moore’s law is the driving force behind a revolution so vast that the entire computer revolution to date represents only a minor ripple of its ultimate implications.

Okay, now what is Moore’s law? How many of you are familiar with Moore’s Law? Moore’s law states that computing speeds and densities double every 18 months. In other words, every 18 months we can buy a computer that is twice as fast and has twice as much memory for the same cost.

Moore’s law actually is corollary of a broader law I like to call Kurzweil’s law on the exponentially quickening pace of technology that goes back to the dawn of human history–I mean not much happened in the tenth century, technologically speaking. In the eighteenth century, quite a bit happened. Now we have major paradigm shifts in a few years time? But that’s another speech.

But with regard to Moore’s law: Remarkably, this law has held true since the beginning of this century, from the mechanical card-based computing technology of the 1890 census, to the relay-based computers of the 1940s, to the vacuum tube-based computers of the 1950s, to the transistor-based machines of the 1960s, to all of the generations of integrated circuits that we’ve seen over the past 25 years.

If you put every calculator and computer for the past 100 years on a logarithmic chart, it makes an essentially straight line.

Computer memory, for example, is about 16,000 times more powerful today for the same unit cost as it was about 20 years ago.

Computer memory is 150 million times more powerful for the same unit cost than it was in 1948, the year I was born. If the automobile industry had made as much progress in the past forty-five years, a car today would cost about a hundredth of a cent, and would go faster than the speed of light.

Moore’s law will continue unabated for many decades to come. We have not even begun to explore the third dimension in chip design. Chips today are flat, whereas our brain is organized in three dimensions. We live in a three-dimensional world; why not use the third dimension?

Improvements in semiconductor materials, including the development of superconducting circuits that do not generate heat, will enable the development of chips, or I should say cubes, with thousands of layers of circuitry, which when combined with far smaller component geometries, will improve computing power by a factor of many millions. There are more than enough new computing technologies being developed to assure a continuation of Moore’s law for a very long time.

The implications of this geometric trend can be understood by recalling the legend of the inventor of chess and his patron, the emperor of China. The emperor had so fallen in love with his new game, he offered the inventor a reward of anything he wanted in the kingdom. “Just one grain of rice on the first square, your Majesty.” “Just one grain of rice?” “Yes, your Majesty, just one grain of rice on the first square, and two grains of rice on the second square, four on the third square, and so on.”

Well, the emperor immediately granted the inventor’s seemingly humble request. One version of the story has the emperor going bankrupt because the doubling of grains of rice for each square ultimately equaled 18 million trillion grains of rice. Another version has the inventor losing his head. It’s not yet clear which outcome we are headed for.

But there is one thing that we should take note of. It was fairly uneventful as the emperor and the inventor went through the first half of the chessboard. After 32 squares, the emperor had given the inventor about 8 billion grains of rice.

That’s a reasonable quantity of rice–it’s about one field’s worth–and the emperor did start to take notice. But the emperor could still remain an emperor, and the inventor could still retain his head. It was as they headed into the second half of the chessboard, that at least one of them got into trouble.

So where do we stand now? Well, there have been exactly 32 doublings of performance since the first operating computers were built in the 1940s. So where we stand right now, is that we’ve just finished the first half of the chess board. And indeed people are starting to take notice.

But now as we head into the rest of the nineties, and the next century, we are heading into the second half of the chessboard, and that is where things start to get interesting.

Moore’s law is providing us the infrastructure in terms of memory, computation and communication to embody all of our knowledge and methodologies and to harness them on inexpensive platforms.

It enables us to live in a world today in which all of our knowledge, all of our creations, all of insights, all of our ideas, our cultural expressions–pictures, movies, art, sound, music, books and the secret of life itself–are all being digitized captured and understood in sequences of ones and zeroes.

I speak to many different groups: computer scientists and engineers, librarians, musicians, magazine publishers, doctors, graphic artists, architects, researchers of different kinds. All of them, in diverse ways, are experiencing the same thing: the digitization of their knowledge bases, their methods and the expressions of their work.

Just to make the point, let’s consider one example in a field I’ve had some experience in, musical instruments. The percentage of value represented by natural resources and labor for instruments using the nineteenth century acoustic technology, such as pianos with their hundreds of feet of wire, and hundreds of pounds of metal and wood, is very high–it’s about 60 to 70%. For electronic musical instruments, which are basically computers, the figure is closer to 5% and in this industry, we are gradually replacing acoustics with electronics.

Consider pianos. And by the term piano, I am not referring to synthesizers, but rather to instruments that you put in your living room for your eight-year-old daughter to use while she’s taking piano lessons.

Six years ago, the percentage of pianos that used electronic technology was 4%. Today, it’s 60%, and again I’m not including synthesizers or portable keyboards. In two to three years, that figure is expected to hit 80%. So, if you take the industry as a whole, ten years ago, the value of musical instruments was 60% natural resources, today it’s down to 20% and in five years, it will be 10%.

Now with Moore’s Law as our road map, I’d like to share with you a few of lessons I’ve noticed in the 35 years I’ve been in this industry.

Lesson one is to always consider where we are on Moore’s path, to consider the pace of change. It’s not sufficient to target an invention at today’s needs using today’s technology.

Electronic technology is increasing at a geometric pace. Product lifetimes for electronic products average two years. For software, you’ve got 6 to 12 months and these periods continue to get shorter. Typically, it takes several years to develop a new technology, and another year or so to develop a product. Your product has got to make sense when its completed, not when the development program is started.

Fred Zieber, Senior Vice President of Dataquest, said that “Every electronic product being sold today is obsolete.” He said that five years ago, but it’s even more true today. The failure of an enterprise is frequently the result of a miscalculation is assessing the rates of change in either the technology, the market needs, the channels of distribution, or perhaps all of the above, or, incredibly, in the common failure to even consider that the world two years from now will be a very different place than it is today.

A second lesson is to determine what your real expertise is, to determine where you have a sustainable competitive edge and then forge a series of alliances. Don’t worry if the alliances are strategic or tactical, so long as they allow you to concentrate on where you can make a unique contribution.

A third lesson is that a good way to resolve a dispute is with an agreement that can be viewed, and that indeed does represent a win-win for both parties. A resolution that requires one side or another to admit a defeat may be too difficult and not be worth the time and trouble.

A fourth lesson is to harness the scientific and educational resources in your midst.

When I spoke to the Gartner Group last Summer with Shimon Peres last Summer, he articulated all of these themes very eloquently.

With regard to Moore’s Law, he spoke of a changing world where technology, particularly computer technology, is erasing borders.

Consider missile technology, which is one manifestation of computers and software, a missile does not respect borders.

Consider the Internet, another manifestation of software, The Internet represents a global market, where products and wealth flow across borders with great ease, which is of some consternation to tariff collectors.

With regard to the second lesson–knowing where one’s real expertise is–Israel is demonstrating its expertise in science and technology, through such scientific and educational institutions as the Weizmann Institute. This expertise is already very well manifest in the enormous impact Israel’s high tech sector is having on its own economy and that of the Mideast in general.

In terms of dispute resolution, we can view the current peace process as one where all parties have a stake and are already benefiting in terms of increased economic activity and cooperation.

With regard to the fourth lesson, I used to wonder some years ago why Tel Aviv and Israel was not a great software center like Massachusetts and Silicon Valley. But now that Israel is devoting more of its resources and brain power to its economy, and there is somewhat less requirement to invest such a large portion of these resources into the military sector, we are now indeed seeing Israel as one of the world’s leading centers for software development.

As a final note, I want to underscore the revolutionary nature of Moore’s Law Another revolutionary, Mao Tse Tung, said that power comes from the barrel of a gun.

And that statement was true when he said it. But he said it in the last possible decade that one could make that statement. Because through physical coercion you could control natural resources. If you could control natural resources and compel people to labor, you could control wealth. And while not providing the happiest or most productive or workers, it worked well enough.

The second industrial revolution, however, the one that is now in progress, is based on machines that extend, multiply and leverage not our physical but our mental abilities.

A remarkable aspect of this new technology is that it uses almost no natural resources. Silicon chips use infinitesimal amounts of sand and other readily available materials. They use insignificant amounts of electricity. It’s a fortunate truth of human nature that whereas labor can be forced, creativity and innovation cannot be.

But there’s something else Mao said that is true today, although not in the sense that he meant it and that is the desirability of permanent revolution.

The exponential progress being created through Moore’s Law and the move toward an economy based on knowledge and intellectual property is a permanent revolution.

It’s not just that densities of memory double and that computing speeds double, Moore’s Law constantly changes everything–the needs of the market the methods of development, the channels of distribution.

It is a continual paradigm shift, and to understand how to revitalize a company or a country with significant technology assets, one needs to understand how that technology will fit into not just the world of today, but the world one year from now, and two years from now, which will be very different.