7. IMPLICATIONS FOR SPACE INDUSTRIES
1. The circumstances described and speculated about in this chapter derive in part from interviews with top management, engineering, and research personnel at: Aerospace Corporation, Aerospace Industries Association, Air Research and Development Command, Aviation Week, Boeing Airplane Company, Convair Astronautics Division of General Dynamics Corporation, Douglas Aircraft Company, Jet Propulsion Laboratory, Lockheed Aircraft Corporation, McKinsey and Company, National Aeronautics and Space Administration, North American Aviation, Inc., The RAND Corporation, Resources for the Future, Stanford Research Institute, Thompson Ramo-Wooldridge, Inc., Systems Corporation of America, and Technical Operations, Inc. In spite of the wide-ranging experience of the persons interviewed it is likely that some important aspects of the problem have been overlooked or looked at in too limited a perspective. In part, of course, this is due to the ambiguity of the concept of "firms involved in space activities," an ambiguity sensed and shared by all our respondents. However, there was enough congruity of opinion and examples to indicate that, while not all of the pertinent problems may have been covered, certainly an important portion of them were.
2. For background, see W. Paul Strassmann, Risk and Technological Innovation, Cornell University Press (1959). The author extends earlier speculations of Thorstein Veblen and Joseph Schumpeter on the impact of innovation upon our economy. Entrepreneurial initiative and risk are treated in a modern context applicable to space enterprise. [-56-]
3. Space firms have been loud and clear in their complaints that they have been forced to reinvest an increasing portion of company profits to finance the accelerating rate of technological development. Dr. Murray L. Weidenbaufti, in an address on "'.Uhe Economics of the Aircraft Industry" (prepared for the Northwest Education Workshop, l')Boeing Airplane Company, Renton, Washington, July @i, 1959), pointed out that the aircraft industry was plowing back 62 per cent of its profits -- and faced a prospector increased expenditure upon space vehicles. Elsewhere a corporation official estimated that his company spent $1 million on a government contract for which they were awarded $50,000. A leading space firm claims it is reinvesting one half of its profits into company financed exploratory research. See also Aircraft Industries Association (now Aerospace Industries Associated of America Incorporated), "Statement to the Secretary of Defense -- Summary" (internal mimeographed document), Jan. 22, 1958, pp. 5-7; and Aerospace Industries Association of America Incorporated, AIA Annual Report , pp. 16-17. For a presentation that ties profit to adjustment problems, see Charles J. V. Murphy, "Business Strategies for the 1960's: The Plane Makers Under Stress," Fortune (June and July 1960). Certain space firms contend that a recent Air Force ruling disallowing overhead costs on precontract research further trims narrowing profits. See "Services Apply R & D Cost Restrictions," Aviation Week, Vol. 73 (Nov. 7, 1960), pp. 28-29.
4. The scientific research laboratory established at Boeing within the last two years is an example of this trend among large space firms. The laboratory's scientists and technicians are engaged in an array of problems related to the natural sciences: high energy conversion principles in electronics, radiation effects upon organisms, general relativity theory, the geophysical aspects of the inner planets, and a number of other space oriented studies. Basic research programs ate company financed and tend to avoid classified contracts. Boeing objectives are to do original research in areas of probable future importance to the firm and to establish a link with the scientific community here and abroad. (See Boeing 1959 Annual Report, p. 17.)
5. For background on aspects of corporate diversification particularly appropriate to the space industry situation, see H. Igor Ansoff, "So You Want to Diversity?" (DTFR-136, mimeographed paper presented before the Los Angeles Chamber of Commerce, June 23, 1960). [-58-]
6. The difficulties of small firm survival are argued in a paper delivered to the American Rocket Society (Sept. 28, 1960) by the vice president of the Atlantic Research Corporation, M. Lee Rice, "Business Aspect of Sounding Rockets." Rice concludes that "development of rockets for potential sale for sounding purposes by using corporate capital is, at best, a very risky enterprise." Prohibitive development and testing costs risk dollars and reputations. Since proposed cost-sharing on rocket
development "is largely dependent upon the total volume of business of any company, severe disadvantages are experienced by small companies under these conditions."
7. Consider the following example of one small firm's difficulty in realizing a profit from a technological development. It developed a special-purpose electronic component, and the government financed a $15 million production plant to provide the "profit base." This forced electronic design engineers into unfamiliar areas of production and business management. In this kind of complication, large corporations can afford to be more or less cooperative, since they can recoup excess research costs in profit renegotiation on other government contracts -- whereas small firms tend to be "uncooperative" because they have a very limited renegotiation base. (Based on an interview with a senior staff analyst of the RAND Corporation.)
Existing legislation which waives certain antitrust provisions to allow for the pooling of small firms for research and development activity may in practice be inappropriate or, realistically, inadequate to space enterprise. See Small Business Administration, Joint Small Business Research and Development Pools, Government Printing Office (1959).
8. For a discussion of the problems and issues in government contracting see J. Stefan Dupre and W. Eric Gustafson, "The New Public Administration: Problems and Benefits for the Contractor in Government by Contract"; and Victor K. Heyman "Problems and Benefits for the Government in Administration by Contract" (papers delivered at the 1960 Annual Meeting of the American Political Science Association, New York, Sept. 8-10, 1960). A classical essay on the contract system -particularly with a view toward the social implications -- is contained in Don K. Price, Government and Science, New York University Press (1954), Chap. 3, "Federalism by Contract."
9. For a discussion of these and related aspects see Charles J. Hitch and Roland N. McKean, The Economics of Defense in the Nuclear Age, Harvard University Press (1960), Chap. 12, "Institutional Arrangements to Promote Efficiency."
10. A good example of the difficult problem of deciding on the social value of a space proposal is embodied in the Bell Aircraft Company's argument for "the economic justification and sociological desirability of intercontinental travel by rocket ship. The progress and prestige of our nation depends upon our ability to find peacetime uses for the technological breakthroughs resulting from our multi-billion dollar space program." The Bell proposal justified travel at speeds of 7,000 m.p.h. in terms of the growing interdependence among nations and the rocket ship's contribution to enduring world peace. See Leston Faneuf, "Application of Space Science to Earth Travel" (paper prepared for the lecture series "Peacetime Uses of Space," University of California, Los Angeles, March 23, 1960), Bell Aircraft Corporation (1960); note especially the Introduction (by Dr. Walter R. Dornberger) and pp. 15-16. Those firms interested in the development of hypersonic craft also contend that the government should support the requisite research and development costs.
11. For the "government explore -- industry exploit" thesis, see Ralph J. Cordiner, "Competitive Private Enterprise in Space" (paper prepared for the symposium Peacetime Uses of Space, University of California, Los Angeles (May 4, 1960), General Electric Company, 1960). Reservations about this thesis in the light of historic experience are contained in Merle Fainsod and Lincoln Gordon, Government and the American Economy, Norton (1959), pp. 101-105, 657-658, 855-857, See also Clarke Newlon, "The Things We Stand For," Missiles and Rockets, Vol. 6 (April 18, 1960), p. 50; and see W. Allen Wallis, "Economic Growth: What, Why, How" (address given at the Loeb Awards Presentation Luncheon in honor of business and financial journalists, New York City, June 8, 1960), especially pp. 5-12 wherein reference was made to the British Government's sharing technological risk with contractors.
12. See Mark Massel, "Business Reserves for Post-War Survival" (Planning Pamphlets Nos. 19 and 20), National Planning Association (April 1943), Chapter 4,” policy issues," and particularly pp. 35-36. Corporate accounting structures and postures may be influenced by any of the following: contract relationships, tax structures, government regulatory functions, tariff considerations, labor relations, congressional relations, stockholder relations, potential competition, and an array of other economic and political factors. Corporations can adjust out-of-pocket and capital expenditures to show favorable cost and profit pictures in accord with the foregoing considerations.
13. A recent study contains a detailed analysis of how research chemists spend their time for scientific activity and scientific communication. See Case Institute of Technology Operations Research Group, An Operations Research Study of the Scientific Activity of Chemists, Case Institute of Technology (1958). Similar studies might afford a means of measuring efficiency in the allocation of scientific activities and permit an appraisal of space/non-space activities chargeable and not chargeable to government accounts.
14. The RAND Corporation and the Operations Research Office, Johns Hopkins University, are particularly active in this area. Many offices in the Department of Defense are working on aspects of the problem, too.
15. See Herbert A. Shepard, "Social Change in Science and Engineering" (paper delivered at the Eighth Annual Engineering Management Conference held in Chicago, Illinois, Sept. 15-16, 1960).
16. In connection with this, see House Committee on Post Office and Civil Service, Manpower Utilization on Subcommittee, Personnel Procurement Costs of Selected Defense Contracts for Recruitment of Engineer and Scientists, Fiscal Year 1959, 86th Congress, Second Session, Committee Print According to an article reporting on the document (Frank C. Porter, "Recruitment Costs Draw Fire," Washington Post & Times Herald, Oct. 1960), job changing has become rife among technical companies because they tend to stockpile scientific talent in anticipation of contracts and to freeze salary levels. Trade shows have become a mecca of disgruntled employees seeking better jobs and hungry recruiters trying to steal competitors’ talent.
17. See "Migration of Top Engineering Talent to U.S. Alarms Foreign Governments," Product Engineering, (Aug. 22, 1960), pp. 15-16. Reports from Japan, Formosa, and England indicate that key projects are suffering delay because top engineering talent is being lured abroad.
18. Much of the information in this section is based upon a series of discussions with members of the Brookings Institution staff. Suggested works relating to the area include: Robert A. Dahl and Charles E. Lindblom, Politics, Economics and Welfare, Harper (1953); Marver H. Bernstein, Regulating Business by Independent Commission, Princeton University Press (1955); Merle Fainsod and Lincoln Gordon, Government and the American Economy, Norton (1948), Part 3, "Government as Regulator in the Public Interest"; Emmette Shelburn Redford, Administration of National Economic Control, Macmillan (1952).
19. For a discussion of law as means rather than ends in our political economy, see Eugene V. Rostow, Planning for Freedom: The Public Law of Capitalism, Yale University Press, pp. 3-9. The goals of legal action to fit a viable society are summarized on pp. 361-376.
20. See Merle Fainsod and Lincoln Gordon, Government and the American Economy, Norton (1948). Impetus of agrarian demands led to improved transport in roads and canals, and eventually to a land grant policy in railroad development (pp. 855-857). The transition from public aid to regulation in railroad, waterway, and airline development is briefly sketched on pp. 101-105, and the grounds and scope of public enterprise are outlined on pp. 657-658. Government subsidy to enhance commerce and public welfare -- particularly in the transport and power fields -- goes back to Alexander Hamilton. This involvement in the economic development of transport and power has inevitably led to regulatory measures in one form or another.
21. For a discussion of the legal problems involved in damages and liability, see Philip C. Jessup and Howard J. Taubenfeld, Controls for Outer Space and the Antarctic Analogy, Columbia University Press (1959), pp. 241-250. [-62-]
22. The history of the Muscle Shoals dam is indicative of the case studies that might be undertaken. Government development of nitrate technology in the 1920's and 1930's created active efforts on the part of industry to take over and operate the facilities. See Merle Fainsod and Lincoln Gordon, Government and the American Economy, Norton (1948), pp. 658, 705-713. Similarly, the Atomic Energy Commission has developed technologies, which it is charged by law to turn over to private enterprise as soon as a firm shows it is capable of taking over an industrial process and is able to sell at a "reasonable price." According to AEC officials, negotiations on take-over have taken place, but no transfer has been effected to date because of the very sticky economic problems involved. See the study by John Corham Palfrey, "Atomic Energy: A New Experiment in Government-Industry Relations." Columbia Law Review, Vol. 56 (March 19561 P. 368. The airlines and the Federal Aviation Agency may provide worthwhile analogies in terms of the regulation of safety, traffic control, and subsidized service and airport sites.
23 .Senate Study No. 15 of the Subcommittee of, Patents, Trademarks, and Copyrights of the Committee on the Judiciary (prepared by Fritz Machlup), An Economic Review of the Patent System, 85th Congress, Second Session (1958), P. 79. A number of pertinent issues are also raised by Seymour Melman, "The Impact of The Patent System on Research;' reprinted in House Hearings Before the Subcommittee on Patents and Scientific Inventions of the Committee on Science and Astronautics, Property Rights in Inventions Made Under Federal Space Research Contracts, 86th Congress, First Session (August-December 1959), pp. 905974
24. Spokesmen for the space industries have pressed hard for proprietary rights in patents as an essential factor in commercializing technologies. See Aircraft Industries Association (now Aerospace Industries Association of America, Inc.), "Statement to the Secretary of Defense Summary," (internal mimeographed document; Jan. 22, 1958), pp. 5-7. See also the article defending industry's position by Congressman Erwin Mitchell (Chairman of Subcommittee on Patents and Scientific Inventions of the House Science and Astronautics Committee), "Patent Rights -- Path to Progress," Aerospace (Journal of the Aerospace Industries of America), August 1960.
The issue is also a major one for Congress. "How is the Constitutional mandate to promote science and the useful arts to be implemented under present conditions of the production of knowledge in nonprofit institutions and in industry?" See Senate, Study No. 11 of the Subcommittee on Patents, Trademarks, and Copyrights of the Committee on the Judiciary, The Research and Development Factor in Mergers and Acquisitions, 85th Congress, Second Session (1958), P. 60. The diverse patent policies of federal government agencies reflect in a sense the growing disharmony between the efficient production of new technological knowledge and the effort, through the patent system, to treat that knowledge under property relations." Ibid., p. 61.
25. It has been argued that the Russian economy benefits from a higher rate of technological payoff because invention is applied to an entire economic sector rather than a single company. This point is made in an introduction by Dr. Wassily Leontief of Harvard University, pp. 1-8 in Leonard S. Silk, The Research Revolution, McGraw-Hill (1960). Dr. Leontief considers the patent question an important element restricting the spread of technology in our economy. Under the patent system, the
market structure is affected by a diminished area of benefit, i.e., patents restrict the diffusion of new technology. Leontief says it is as if we had tolls on all our national highways.
26. These and related points were made by Richard L. Meier, drawing on his own experience as a research chemist in the synthetic rubber and plastic industries. See also Norbert Wiener, The Tempter, Random House (1959). The novel deals in good part with some forms of industrial patent warfare and is based on Wiener's extensive experience and knowledge of these matters.
27. A recent conference on space patents states as its purpose: "With the recent rapid developments in the field of space technology, it has become increasingly important to have answers to such questions as: How do you recognize a patentable invention? How do you protect it? What are the special requirements involved in patenting an invention useful in space? How do you manage and develop a patent?" (From a dittoed announcement by the University of California, Los Angeles, Conference on Space Technology, Discovery Identification, and Protection of New Ideas, September 30-October 1, 1960.)
28. For a comparative analysis of federal agencies' patent policies, see C, D. O'Brien and Gayle Parker, "Property Rights in inventions Under the National Aeronautics and Space Age of 195811 reprinted in House Hearings Before the Subcommittee on Patents and Scientific Inventions of the Committee on Science and Astronautics, Property Rights in Inventions Made Under Federal Space Research Contracts, 86th Congress First Session,(August-December 1959) pp. 789-811 . 1
29. See Ralph J. Cordiner, "Competitive Private Enterprise in Space" (paper prepared for the symposium "Peacetime Uses of Space,, University of California, Los Angeles, May 4, 1960), Ceneral Electric Company (1960), P. 9. Cordiner also argues (p.11) for extension of the voluntary agreementsprovision to cover space enterprise. (See Section 708, VOLUNTARY AGREEMENTS, of The Defense Production Act of 1950 as amended August 1, 1955, prepared by the General Counsel's Office, Office of Defense Mobilization.) For other proposals on mergers and pooling to develop rocket transport, see Leston Faneuf, "Application of Space Science to Earth Travel," (paper prepared for the lecture series, "Peacetime Uses of Space," University of it California, Los Angeles, March 23, 1960), Bell Aircraft Corporation (1960), p. 14.
30. For a discussion of the Supreme Court's "rule of reason," see Merle Fainsod, et al., Government and the American Economy, Norton (1959), pp. 455 ff. The Department of Justice, Antitrust Division, has taken the view that technological innovation is better assured under competition than under monopoly. See "Government-Sponsored Industry Research," Part I of the Report of the Attorney Ceneral, November 9, 1956, included as Appendix VI of House Hearings before the Subcommittee on Patents and Scientific Inventions of the Committee on Science and Astronautics, Property Rights in Inventions Made Under Federal Space Research Contracts, 86th Congress, First Session (August-December 1959), pp. 888-904. [-65-]
The issues at Senate hearings held last year are particularly pertinent to questions of technology and free competition. At these hearings the Attorney General reiterated his views in testifying that the international telegraph operations could find other ways and means to compete effectively without merging. See Senate Report of Proceedings, Hearings Held before the Committee on Interstate and Foreign Commerce, A Bill To Amend the Communications Act of 1934, As Amended, To Permit Consolidations or mergers of International Telegraph and Marine Carriers, and for Other Purposes, 85th Congress, Second Session (March 20, 1959). Pertinent material on the monopoly issue is contained in U.S. Congress, Congress and the Monopoly Problem; Fifty-Six Years of Anti-Trust Development, 1900-1956 (84th Congress, Second Session), and Mark S. Massel, "Competition and Monopoly," Economics and the Policy Maker: Brookings Lectures, 1958-1959, Brookings Institution (1959), especially pp. 146-148.
31. For a full discussion of problems and issues, including government industry contract relations, see J. Stefan Dupre and W. Eric Gustafson, "The New Public Administration: Problems and Benefits from the Contractor in Government by Contract" and Victor K. Heyman,” Problems and Benefits for the Government in Administration by Contract." (See Note 8 for full citation.)
32. See U.S. vs. Swift & Co., 286 US106,116 (1932). Justice Cardoza enunciated the doctrine in the Swift case: "Size carries with it an opportunity for abuse that is not to be ignored when the opportunity is proved to have been utilized in the past." The Court also said in 334 US131,174 (1948): "Size itself is an earmark of monopoly power. For size carries with it an opportunity for abuse."
For a discussion of parallel issues in atomic energy development, see Walter Adams, "Atomic Energy: The Congressional Abandonment of Competition," Columbia Law Review, Vol. 55 (February 1955), P. 158.
33. See Bernard Poirier, "Though Tariffs Are Tricky ... U.S. Firms Find Bonanza in Europe," Missiles and Rockets, Vol. 7 (Aug. 8, 1960), pp. 12-14.
34. Space probe rockets are being sold to Italy, for example. For a summary article on the potential markets in sounding rockets, see limarket is Growing at Home and Abroad," Missiles and Rockets (Oct. 3, 1960), pp. 2022. [-66-]
35. See Igor Ogatesoff, "Yen for Invention: Japanese Firms Step Up original Research, Aim to Lift Export Sales," Wall Street Journal, June 14, 1960, pp. I and 24. According to this article, it was the Sony Corporation in Japan that developed the tunnel diode -- a smaller, more efficient transistor. A Tokyo University scientist has also developed an inexpensive replacement for electron tubes known as a “parametron.” Both of these devices are usable in space satellite telemetry.
36. See Howard Simons, "World-Wide Capabilities for Production and Control of Nuclear Weapons," Daedalus, Summer 1959, pp. 385-409; and William C. Davidon, Marvin 1. Kalkstein, and Christoph Hohenemser, "The Nth Country Problem and Arms Control," (A Statement by the National Planning Association Special Project Committee.on Security Through Arms Control and A Technical Report) Planning Pamphlet No. 108, National Planning Association -(January 1960).
37. See Robert Solo, "Research and Development in the Synthetic Rubber Industry," Quarterly Journal of Economics, Vol. 68 (February 1954), pp. 6164; and Senate Monograph No. 1: A Study Made for the Subcommittee on War Mobilization of the Committee on Military Affairs, Economic and Political Aspects of International Cartels, 78th Congress, Second Session (1946), pp. 58-60.