Lessons for the US Economy From Microsoft’s 50 Years in Business
Texaco. ITT Industries. Union Carbide. International Business Machines. Beatrice. Fifty years ago, in April 1975, these were among the largest companies in the United States by revenue, forming the upper crust of that year’s Fortune 500 list and familiar to every adult who read a business magazine or the daily newspaper. These are surely still well-known brand names for many Americans who lived through that era. However, ask the average young person on the street today to explain the business model of each of these companies and you may get a quizzical look.
Those of this current generation, however, certainly know Microsoft, which was founded 50 years ago this month. In April 1975, childhood friends Bill Gates and Paul Allen decided to start a company out of a garage in Albuquerque, New Mexico. They got into computer programming as kids and wanted to sell software for the emerging personal computing industry, which would soon take off and make the company and its founders household names. Today, three decades after Windows 95 launched, the company still has annual revenues of $211 billion and is one of the largest dozen or so companies in the U.S.
Microsoft’s rise from unknown startup to global brand over a few decades isn’t unusual; in our free market economic system, change is the only constant, as companies continually seek to better serve their customers. Out of the 20 largest U.S. companies today, only four are holdovers from Bill Gates’ garage days: Ford, General Motors, plus two oil and gas companies. If you go further back, the statistic is even more stark. Less than 10 percent of companies that dominated the Fortune 500 in 1955 are still on the list today. The rest have either gone out of business, merged into other companies, or simply fallen off as our economy has changed with the times.
Our economy certainly has transformed since then. In 1960, U.S. consumers allocated about 50 percent of their consumption spending to goods — tangible products that you can physically touch, own, and use. Today, spending on goods represents just 34 percent of consumption. Instead, the vast majority of consumer spending in our economy has shifted to services — intangible actions performed in exchange for money, like consulting and haircuts.
Accordingly, the most successful companies have adapted. While manufacturing represented about 25 percent of American jobs in the 1970s, today it accounts for just 8 percent. Meanwhile, despite the fact that manufacturing output is at a near-record high in the U.S., more than 80 percent of Americans now work in service-providing industries. American workers and companies have responded to these trends by moving up the ‘value chain’ — producing fewer cheap goods in favor of more advanced (and lucrative) services for domestic and international markets — which has largely been to our benefit. We have outsourced low-paying, labor-intensive industries as we have grown more prosperous.
As a result, the U.S. economy is now lapping the field, even compared to our traditional allies in Europe and Asia. 11 of the largest 20 companies in the world are based in America, including 5 of the top 10. In 2008, our economy was roughly the same size as the European Union’s; today, it’s almost twice as large. Average incomes are 74 percent higher in the U.S. compared to Japan and 37 percent higher compared to the European Union. And those trends seem on track to keep increasing in our favor.
What does this tell us? Compared to other ways of structuring economic activity, the American system works because it excels at the fundamentals. It fosters an economic environment that encourages competition; promotes innovation; embraces entrepreneurship and risk-taking; balances trade-offs; allows for creative destruction; and above all, promotes economic freedom. Our embrace of sound principles has made the American economy the envy of the world, even as other competitors emerge who don’t fully share our commitment to the free market, including China.
None of this is guaranteed to continue, however. As the Trump administration moves to implement significant tariffs — and Congress refuses to deal with runaway spending and a ballooning national debt — we must not forget what made America great in the first place and what keeps making us greater. Fifty years after Microsoft was founded in a garage, chances are the Microsoft of 2075 doesn’t even exist today. Meanwhile, some leading companies of today will likely no longer exist in 2075. That’s okay. If we maintain our commitment to the virtues of the free market, we will allow American entrepreneurs of tomorrow to continue innovating the future for years to come.
Roger Ream is the president of The Fund for American Studies (TFAS), a nonprofit educational organization that works with students and young leaders to promote the principles of free-market economics, limited government, and honorable leadership. He is also the host of the Liberty + Leadership podcast.
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