The Next American Frontier
The economy hasn’t been brought to its knees by government deficits , excessive regulation, inadequate investment , or greedy labor unions. The problem lies in the very structure of American industry.
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THE WORLDWIDE RECESSION THAT BEGAN IN 1981 will end eventually. Some say it already has ended. But the underlying problems of the American economy will not come to an end with the next upturn in the business cycle, unless American industry undertakes some basic changes in its organization of production. Unemployment will remain high. Millions of jobs in the nation’s basic industries will never return. And the American standard of living will continue to decline.
Between 1920 and 1970, business, labor, and government hewed to a set of organizing principles—originally called “scientific management”—in which tasks were simplified, ordered according to pre-established rules, and carefully monitored. These principles were put into effect by a new class of professional managers. High-volume, scientifically managed industry, producing standardized goods, generated vast economies of scale and levels of wealth unparalleled in history.
The management era ended for America around 1970. Its decline began, ironically, just as many Europeans were coming to view the mastery of high-volume production as the “American challenge,” which Europe had either to emulate or to succumb to. Gradually the economic cycles began to follow a downward trend, and over the next decade America’s industry was progressively idled.
The proportion of U.S. manufacturing capacity employed in production, which had reached 86 percent in 1965, averaged around 80 percent during the 1970s, and fell to less than 70 percent by 1982. Only 3.5 percent of the labor force was jobless in 1969, but thereafter unemployment climbed persistently, reaching almost 11 percent last year. By the 1980s, the core industries of the management era—steel, automobiles, petrochemicals, textiles, consumer electronics, electrical machinery, metal-forming machinery—were in trouble.
Productivity growth slowed from an average yearly increase of 3.2 percent between 1948 and 1965 to an average of 2.4 percent between 1965 and 1973. The rate of growth then dropped to 1.1 percent between 1973 and 1978, and in 1979 American productivity began actually to decline. Meanwhile, productivity growth in Japan and several Western European nations stayed relatively high. After 1965, American real incomes slowed their long climb. Between 1965 and 1981, the average U.S. worker’s real wages declined by one fifth. The American engine of prosperity had stalled.
Standardized production had brought America unparalleled wealth. True, our national well-being was interrupted by a depression and by periodic recessions. But these were interruptions, nothing more. Standardized production always restored prosperity, consistently exceeding previous levels, consistently achieving more efficiency and greater volume.
As the trusted formula has ceased to work, America has been ready to embrace any explanation but the most obvious: the same factor that once brought prosperity—the way the nation organizes itself for production—now threatens decline. Everywhere America has looked, it has seen the symptoms of its economic impasse, but it has been unable to recognize the actual causes because the roots of the problem are so deeply embedded in our business enterprises, labor unions, and government institutions.
Government regulation served as a convenient rhetorical scapegoat in the 1980 presidential election, but offers no real explanation. Environmental laws indeed require firms to invest in new equipment, but those requirements have imposed only modest costs. During the 1970s, the U.S. steel industry spent an average of $365 million annually to reduce pollution and improve worker safety—about 17 percent of its annual capital investment during the decade. Of this cost, 48 percent was subsidized by state and local governments through industrial-development bonds. Spending by European steelmakers was of an equal magnitude. During the same period, Japanese steel manufacturers spent substantially more for these purposes.
Safety regulations also add some costs to operations, but the reduction in accidents has meant savings in time and expense that go far to offset these extra costs. Overall, capital expenditures on pollution control and safety combined have never exceeded 6 percent of industrial investment, and can be blamed for at most around a tenth of the slowdown in productivity.
Nor do government deficits explain any major part of the problem. There is no evidence that deficits have been nearly large enough to discourage private investment and economic growth substantially. Indeed, through much of the 1970s, the governments of West Germany, Japan, and France maintained a much larger public debt in proportion to the national economy than did the U.S. government.
Inadequate capital formation has not been the problem either. Between 1965 and 1980, even in the face of inflation, the country continued to invest about 10 percent of its gross national product in plant and equipment; for the period between 1977 and the present, the rate is more than 11 percent, and early last year it reached 11.7 percent—its highest level since 1928. Indeed, investment in manufacturing as a percent of the total output of goods increased substantially—from 10.8 percent between 1960 and 1964 to 14.8 percent between 1973 and 1978. This level of manufacturing investment was not significantly below that of America’s foreign competitors.
Other proposed explanations also have failed. U.S. investment in research and development declined from 3 percent of gross national product at the start of the 1970s to 2 percent at the start of the 1980s. But this decline stemmed mostly from the slowdown in publicly financed defense and space programs, which affected American industry only indirectly. In any event, the decline in America’s productive growth actually began in the late 1960s, well before any cutback in research expenditures. Nor can responsibility be placed on escalating energy prices. The oil shock affected all nations, many of which, including Germany and Japan, were much more dependent on imported energy resources than was America. Even more to the point, America’s economic decline pre-dated the oil embargo, in 1973.
Nor can the blame be put on the inevitable drop in output from America’s mines, on the slowdown in the movement of American labor out of agriculture, on the entrance of women and young people into the labor force, or on unfair trade practices by foreign manufacturers. Even taken together, these explain only a small part of our gradual, steady economic decline relative to other leading industrial nations. They overlook the worldwide reorganization of production and America’s failure to adapt to it.
The central problem of America’s economic future is that the nation is not moving quickly enough out of high-volume, standardized production. The extraordinary success of the half-century of the management era has left the United States a legacy of economic inflexibility. Thus our institutional heritage now imperils our future.
AMERICA’S RELATIVE DECLINE HAS BEEN ROOTED in changes in the world market. Prior to the mid1960s, foreign trade did not figure significantly in our economy. Only a small proportion of American-made goods were traded internationally; an equally small amount of foreign production entered the United States. This situation changed dramatically.
In 1980, 19 percent of the goods Americans made were exported (up from 9.3 percent in 1970), and more than 22 percent of the goods Americans used were imported (also up from 9.3 percent in 1970). But even those figures understate the new importance of foreign competition. The most telling statistic is this: By 1980, more than 70 percent of all the goods produced in the United States were actively competing with foreign-made goods. America has become part of the world market.
American producers have not fared wrell in this new contest. Beginning in the mid-1960s, foreign imports have claimed an increasing share of the American market. By 1981, the United States was importing almost 26 percent of its cars, 17 percent of its steel, 60 percent of its televisions, radios, tape recorders, and phonographs, 43 percent of its calculators, 27 percent of its metal-forming machine tools, 35 percent of its textile machinery, and 53 percent of its computerized machine tools. Twenty years before, imports had accounted for less than 10 percent of the American market for each of these products.
America’s declining share of the world market has been particularly dramatic in capital-intensive, high-volume industries. Since 1963, America’s share of the world market has declined in a number of important areas: automobiles, by almost one third; industrial machinery, by 33 percent; agricultural machinery, by 40 percent; telecommunications machinery, by 50 percent; metal-working machinery, by 55 percent.
The globe is fast becoming a single marketplace. Goods are being made wherever they can be made the cheapest, regardless of national boundaries. And the most efficient places for much mass production are coming to be Third World countries.
The International Labor Office estimates that every year between 1980 and 2000, 36 million people will enter the world labor force, and 85 percent of them will be from developing nations. The newly integrated world market will put many of them to work at America’s old specialty of high-volume, standardized production.
Over a period of only fifteen years, many of the world’s developing countries have begun to specialize in capitalintensive production. Their production costs are lower than those of the United States, both because their workers are content with lower real wages and because some of these countries have better access to cheap materials. Moreover, the demand for many standardized commodities has been growing faster in developing nations than in industrialized nations, whose citizens already possess these products; and it is often more profitable to manufacture them within these growing markets than it is to ship them there.
One important trend is often overlooked: the hourly output of workers in these newly industrialized nations is catching up to the output of American workers, simply because they are beginning to use many of the same machines. Developing countries have been able to buy (from international engineering and capital-equipment firms) the world’s most modern steel-rolling mills, paper machines, and computerized machine tools. The growth of large-scale retail outlets in industrialized nations has given developing countries an efficient way to distribute their wares. Korean television manufacturers, for example, have gained a sizable share of the U.S. television market by selling to no more than a dozen large American department-store chains.
By the mid-1960s, Korea, Hong Kong, Taiwan, Singapore, Brazil, and Spain were specializing in simple products—clothing, footwear, toys, and basic electronic assemblies—that required substantial amounts of unskilled labor but little capital investment or technology. Between 1970 and 1975, Korea’s exports of textiles increased by 436 percent, Taiwan’s by 347 percent, and Hong Kong’s by 191 percent.
Japan’s response was to shift out of these simple products into processing industries, such as steel and synthetic fibers, that required substantial capital investment and raw materials, but used mostly unskilled and semiskilled labor and incorporated relatively mature technologies that were not subject to major innovations. Between 1966 and 1972, the Japanese steel industry increased its steelmaking assets by more than 23 percent a year. As its own steel needs began to level off in the early 1970s, Japan increased its exports of raw steel. It invested in more than fifty finishing facilities in developing countries in order to expand its market share.
By the mid-1970s, Korea, Hong Kong, Taiwan, Singapore, Brazil, Spain, and Mexico had followed Japan—shifting their export mix toward the basic capital-intensive processing industries. All told, these developing countries increased their share of world steelmaking capacity from 9 percent in 1974 to 15 percent by 1980.
As less-developed countries moved into steel production, Japan reduced its domestic steelmaking capacity and became a major exporter of steel technology—engineering services and equipment. Japan moved its industrial base into more complex products, such as automobiles, color televisions, small appliances, consumer electronics, and ships—industries requiring considerable investment in plant and equipment as well as sophisticated new technologies.
At the same time, Malaysia, Thailand, the Philippines, Sri Lanka, India, and other poorer countries were taking over the production of clothing, footwear, toys, and simple electronic assemblies. Workers in these countries earned, on average, no more than $25 a month.
By 1980, Korea, Hong Kong, Singapore, Brazil, Spain, and Mexico had increased their production of complex products such as automobiles, color televisions, tape recorders, CB transceivers, microwave ovens, small computers, and ships. Korea already has the largest single shipyard in the world; and with its salary rates averaging only one third those of major Japanese shipyards, Korea may surpass Japanese tonnage in five years.
Almost all of the world’s production of small appliances (whether Panasonic, Philips, General Electric, Sony, Zenith, or an obscure brand) is now centered in Hong Kong, Korea, and Singapore. Components and product designs are bought from major companies; financing is arranged through Japanese, U.S., and European banks; and distribution is handled through large retailers, such as Sears, Roebuck, or through the established distribution channels of large Japanese or American consumer-electronics companies.
The trend is becoming clear enough. First, America’s basic steel, textile, automobile, consumer-electronics, rubber, and petrochemical industries (and the other high-volume industries that depend on them) are becoming uncompetitive in the world. Second, now that production can be fragmented into separate, globally scattered operations, whole segments of other American industries are becoming uncompetitive. Whatever the final product, those parts of its production requiring high-volume machinery and unsophisticated workers can be accomplished more cheaply in developing nations.
Automation, far from halting this trend, has accelerated it. Sophisticated machinery is readily moved to low-wage countries. Robots and computerized machines further reduce the need for semiskilled workers in high-volume production (except for workers with easily learned maintenance and programming skills). For example, robots in the automobile industry are replacing workers at more semiskilled jobs, such as welding and spot welding, than unskilled jobs. Meanwhile, automated inspection machines are reducing the cost of screening out poor-quality components—thereby encouraging firms in industrialized nations to farm out the production of standardized parts to developing nations.
WHAT BEGAN IN THE 1960S AS A GRADUAL SHIFT became by the late 1970s a major structural change in the world economy. Assembly operations were being established in developing countries at a rapid clip, and America’s manufacturing base was eroding precipitously. The recession of the past two years has stalled growth around the globe and plunged several developing nations into near bankruptcy. But it is important to distinguish these short-term phenomena—brought on by a temporary oil glut and high interest rates—from long-term trends that have been growing for two decades and surely will resume.
Other industrialized nations have faced the same competitive threat. Since the mid-1960s, European industries have faced an ever-greater challenge from low-wage production in developing countries. And since the late 1970s, Japan has been challenged as well. Japan is no longer a low-wage nation—the real earnings of Japanese workers are approaching those of their European and American counterparts.
Japan, West Germany, France, and other industrialized countries have sought to meet this challenge by shifting their industrial bases toward products and processes that require skilled workers. Skilled labor is the only dimension of production where these countries retain an advantage. Technological innovations can be bought or imitated by anyone. High-volume, standardized-production facilities can be established anywhere. But production processes that depend on skilled labor must stay where the skilled labor is.
The fate of British industry over the past twenty-five years illustrates this new reality. Britain has consistently led the world in major technological breakthroughs, such as continuous casting for steel, monoclonal antibodies, and CAT-scan devices. But because British businesses lacked the organization and their workers lacked the skills necessary to incorporate these inventions into production processes quickly enough, the British have reaped no real competitive advantage from them. These inventions were commercialized in Japan and the United States.
Industrialized countries are therefore moving into precision castings, specialty steel, special chemicals, and sensor devices, as well as the design and manufacture of fiberoptic cable, fine ceramics, lasers, large-scale integrated
circuits, and advanced aircraft engines. Emerging industries such as these hold promise of generating new wealth and employment as their markets expand.
Some of these products or processes require precision engineering, complex testing, and sophisticated maintenance. Others are custom-tailored to the special needs of customers. The remainder involve technologies that are changing rapidly. All three are relatively secure against low-wage competition.
These product categories—precision-manufactured, custom-tailored, and technology-driven—have a great deal in common. They all depend on the sophisticated skills of their employees, skills that are often developed within teams. And they all require that traditionally separate business functions (design, engineering, purchasing, manufacturing, distribution, marketing, sales) be merged into a highly integrated system that can respond quickly to new opportunities. In short, they are premised on flexible systems of production.
Flexible-system production has an advantage over highvolume, standardized production whenever solving new problems is more important than routinizing the solution of old ones. The unit costs of producing simple, standardized products such as cotton textiles, basic steel, or rubber tires generally decline more with long production runs than with improvements in the production process. Manufacturers of these products therefore do well to emphasize large capacity, cheap labor, and cheap raw materials rather than flexible systems.
This does not mean that industrialized countries must abandon their older industries—steel, chemicals, textiles, and automobiles. These industries are the gateways through which new products and processes emerge. Rather than abandoning these older industries, other industrialized countries are seeking to restructure them toward higher-valued and technologically more sophisticated businesses—specialty steel, special chemicals, synthetic fibers, and precision-engineered automobiles and auto components. As this adjustment occurs, they can allow the lowest-skilled standardized segments of their production to migrate to developing countries.
Of all industrialized countries, Japan has made the most rapid shift from standardized production to flexible-system production, and rather than forsaking its older industries has accelerated their evolution. Japanese auto makers are experimenting with a variety of fuel-saving materials. They are developing complex manufacturing systems, and have reduced to eighty-four hours the amount of labor required to produce each car (in contrast to 145 hours per car in America). By the same token, Japan’s production of high-quality polyester-filament fabrics, requiring complex technologies and skilled labor, now accounts for 40 percent of its textile exports. Japan has substantially reduced its capacity to produce basic steel, basic petrochemicals, small appliances, ships, and simple fibers, while dramatically expanding its capacity in the higher-valued, more specialized segments of these industries. To accomplish this transformation, it has applied such innovations as process-control devices, fiber-optic cable, complex polymer materials, and very large-scale integrated circuits. Japanese companies are also packaging some standard products—copiers and typewriters, for instance—within technologically complex product systems, such as office communications and computer-aided manufacturing, which require custom design and servicing. In Japan’s flexible-system enterprises, the distinction between goods and services is becoming blurred.
Japan has reduced its capacity in the capital-intensive, high-volume segments of its basic industries by scrapping plant and equipment, by simultaneously investing in new high-volume capacity in Korea, Taiwan, Singapore, and Brazil, and by retraining workers for higher-skilled jobs.
West Germany and France are having more difficulty shifting their economies, but each country is making progress. Although the current recession has slowed industrial adjustment in both nations, Germany nevertheless has reduced its basic steel, chemical, and automobile-making capacity somewhat, and has shifted more of its production into specialty steel, pharmaceuticals, and precision machinery.
Even Taiwan and Korea are seeking to shift into flexible-system industries. Korea is now establishing a semiconductor research-and-development association, jointly funded by government and industry. Taiwan is building a science-based industrial park at Hsinchu.
For the United States, however, the shift has been slow and painful. The country has been far less successful than other industrialized nations in increasing its manufacturing exports to cover its increasing import bill. Recently, Japan and the nations of Western Europe have been selling America more manufactured goods than America has been selling back to them.
Sales of grain and coal and revenues from services have helped ease America’s trade imbalance. But these enterprises alone cannot guarantee our economic future. The most accessible coal will have been mined within the next few years; additional coal will be more costly to retrieve, not only in terms of machinery and equipment but also in damage to the environment and injuries to workers. Nor can grain exports be relied upon indefinitely; improvements in agricultural production will spread to the areas of the globe with favorable climate and soil conditions, and our soil will gradually become depleted.
Nor can we rely on services. The nation’s service exports depend on the vigor of its future manufacturing base. Approximately 90 percent of America’s income from services consists of the investment income of its manufacturing firms and, to a lesser extent, of individuals. But this income has declined significantly since the mid-1960s. In 1965, America received 3.6 times as much investment income as it paid out to foreign firms and individuals in dividends and royalties, but by 1978 the ratio of investment income to payments was 1.8 to 1. As foreign firms continue to gain strength relative to their American counterparts in merchandise businesses, this pattern will continue.
These trends pose a troubling question. If it is true that the economic future of countries lies in technically advanced, skill-intensive industries, why have American firms failed to respond by adopting the new products and processes?
The answer is that the transition requires a basic restructuring of business, labor, and government. A reorganization of this magnitude is bound to be resisted, because it threatens vested economic interests and challenges established values. The transition has been easier for Japan and for some continental Europeans, both because they never fully embraced high-volume, standardized production and because they have historically linked their economic development with social change.
As America has forfeited world industrial leadership to Japan, American business leaders have become obsessed with Japanese management. The business press daily praises Japanese practices such as the informal worker groups known as “quality circles,” said to encourage commitment, soften workplace conflict, and improve product quality. American management consultants advise business executives to convert to less abrasive forms of management, such as “Theory Z,” hailed as the key to Japan’s success.
The infatuation with Japan’s management technique obscures the point that flexible-system processes cannot simply be grafted onto business organizations that are designed for the production of standardized goods. Flexiblesystem production is rooted in discovering and solving new problems; high-volume, standardized production basically involves routinizing the solutions to old problems. Flexible-system production requires an organization designed for change and adaptability; high-volume, standardized production requires an organization geared to stability.
American business leaders are responding to the superficial novelty of Japanese management without acknowledging the underlying differences in the organization of production. They hope to upgrade their management techniques while retaining intact the old structure. Yet the answer lies not in new techniques but in a new productive organization, requiring a different, less rigidly delineated relationship between management and labor.
THE BASIC PREMISES OF HIGH-VOLUME, STANDARDized production—the once-potent formula of scientific management—are simply inapplicable to flexible-system production. The distinct principles of flexible-system production are understood—perhaps intuitively—by many small, upstart companies in America producing new micro-electronic products and computer software or creating advertisements and films. They are also understood by a few highly successful larger companies— IBM and Hewlett-Packard, for instance. The same principles dominate many Japanese manufacturing and trading companies, and European producers of such items as precision castings, computerized machine tools, and customized telecommunications equipment.
The tasks involved in flexible-system production are necessarily complex, since any work that can be rendered simple and routine is more efficiently done by low-wage labor overseas. Thus no set of “standard operating procedures” locks in routines or compartmentalizes job responsibilities.
Skill-intensive processes cannot be programmed according to a fixed set of rules covering all possible contingencies. The work requires high-level skills precisely because the problems and opportunities cannot be anticipated. Producers of specialized semiconductor chips or multipurpose robots, for example, must be able to respond quickly to emerging and potential markets. Delicate machines break down in complex ways. Technologies change in directions that cannot be foreseen. The more frequently products and processes are altered or adapted, the harder it is to translate them into reliable routines. Again, if problems and opportunities could be anticipated and covered by preset rules and instructions, production could be moved abroad.
Finally, workers’ performance cannot be monitored and evaluated through simple accounting systems. In flexiblesystem production, the quality of work is often more important than the quantity. As machines and low-wage labor overseas take over those tasks that demand only speed and accuracy, workers’ skill, judgment, and initiative become the determinants of the flexible-system enterprise’s competitive success. Moreover, in devising and manufacturing such complex items as customized herbicides, titanium alloys, or computer-software systems, tasks are often so interrelated that it becomes impossible to measure them separately; since each worker needs the help and cooperation of many others, success can be measured only in reference to the final collective result.
For these reasons, the radical distinction heretofore drawn between those who plan work and those who execute it is inappropriate to flexible-system production. When production is inherently non-routine, problem-solving requires close working relationships among people at all stages in the process. If customers’ special needs are to be recognized and met, designers must be familiar with fabrication, production, marketing, and sales. Salespeople must have an intimate understanding of the enterprise’s capability to design and deliver new or customized products. Flexible systems can adapt quickly only if information is widely shared within them. There is no hierarchy to problem-solving; solutions may come from anyone, anywhere. In flexible-system enterprises, nearly everyone in the production process is responsible for recognizing problems and finding solutions.
In high-volume, standardized production, professional managers, staff specialists, and even low-level production workers typically get much of their training before joining the organization, and seldom venture far from a fairly narrow specialty. They move from one organization to another, but they remain within that single specialty.
By contrast, in flexible-system production much of the training of necessity occurs on the job, both because the precise skills to be learned cannot be anticipated and communicated in advance and because individuals’ skills are typically integrated into a group whose collective capacity becomes something more than the simple sum of its members’ skills. Over time, as the group members work through various problems, they learn about each other’s abilities. Like a baseball team, they practice together to increase their collective prowess. Their sense of membership in the enterprise is stronger and more immediate than any abstract identification with their profession or occupational group. They move from one specialty to another, but they remain within a single organization. The Japanese have been more successful than Americans in devising the newest generation of large-scale integrated circuits, because production entails complex and interrelated tasks that can only be perfected by a relatively stable team. Rapid turnover in U.S. companies has hindered this organizational learning.
The high-volume, standardized enterprise is organized into a series of hierarchical tiers. Flexible-system production suggests a relatively “flat” structure: in most firms that stake their success on specialized or technically based products, there are few middle-level managers, and only modest differences in the status and income of senior managers and junior employees. The enterprise is typically organized as a set of relatively stable project teams that informally compete with one another for resources, recognition, and projects.
Finally, because flexible-system production is premised on ever-changing markets and conditions, it is less vulnerable than high-volume production to shifts in demand. Its machines and workers are not locked into producing long runs of any single standardized good. For this reason, flexible-system enterprises have less need to diversify into several lines of business as insurance against declining demand in any one. Flexible-system producers thrive on instability. Too much stability, and they would gradually lose their market to high-volume, standardized producers in low-wage countries.
In all these respects, the organization of high-volume production is so fundamentally different from that of flexible-system production that the transformation is exceedingly difficult. Because the roles, experiences, training, and expectations of professional managers and workers in high-volume production differ so sharply from those that flexible-system production calls for, neither group is prepared to adapt smoothly to such a transformation. In fact, they are likely to resist it.
That is wffiat has happened. Because America’s blue-collar workers often lack the skills and training necessary for flexible-system production, they have clung to the job classifications, work rules, and cost-of-living increases that brought them some security under standardized production. By the same token, because America’s professional managers are ill equipped to undertake the necessary shift from high-volume production to flexible systems, they have resorted to various ploys designed to maintain or increase their firms’ earnings without new; productive investment. “Paper entrepreneurialism” of this kind merely rearranges industrial assets, while wasting the time and abilities of some of America’s most talented people.
PAPER ENTREPRENEURIALISM IS THE BASTARD child of scientific management. It employs the mechanisms and symbols developed to direct and monitor high-volume production, but it involves an even more radical separation between planning and production. Paper entrepreneurialism is a version of scientific management grown so extreme that it has lost all connection with the actual workplace. Its strategies involve generating profits through the clever manipulation of rules and numbers that only in theory represent real assets and products.
At its most pernicious, paper entrepreneurialism involves little more than imposing losses on others for the sake of short-term profits for the firm. The others are often members of the taxpaying public, who end up subsidizing firms that creatively reduce their tax liability. The others are sometimes certain of the firms’ shareholders who end up indirectly subsidizing other shareholders. Occasionally, the others are unlucky investors, consumers, or the shareholders of other firms. Because paper gains are always at someone else’s expense, paper entrepreneurialism can be a ruthless game. It can also be fascinating, and lucrative for those who play it well.
When the management era began to collapse, in the late 1960s, professional managers, seeking to limit the damage, turned to the tools they had at hand. The ideology of management control was so deeply ingrained that the instinctive reaction of professional managers was typically to define, even more precisely than before, the rules and working relationships within their firms, seeking thereby to solidify their control. But because the environment was changing so rapidly—with the entrance of new foreign competitors, new products, new manufacturing processes, and the opening of new global markets— the rules and controls had to be extraordinarily elaborate. They became even more intricate as the pace of change accelerated.
To coordinate the increasingly complex tasks of production, managers introduced complex techniques of “matrix management,” through which employees reported to several different managers for different dimensions of their work. (An employee engaged in, say, the marketing of refrigerators in South America would report to three managers—in charge of marketing, refrigerators, and South American sales, respectively.)
When the matrices became too complicated, resulting in endless conflicts and confusion, organizational-development consultants were called in to design and coordinate “project teams.” When this team structure had so muddled personal accountability that employees began to engage in buck-passing and bureaucratic gamesmanship, managers added still more controls: budget reviews, computer-based management-information systems, narrative reports on operations, monthly “flash” reports, formal goal-setting systems, and detailed performance-evaluation and incentive-compensation systems.
These ever-more-elaborate systems of managerial control brought with them additional layers of staff to devise the new rules and procedures, to design and monitor systems of performance appraisal, to referee the inevitable confusion over responsibility, and to mediate conflicts. Between 1965 and 1975, the ratio of staff positions to production workers in American manufacturing companies increased from 35 per 100 to 41 per 100. In certain industries, the jump has been even more dramatic. In electrical machinery, the ratio increased from 46 staff jobs for each 100 production jobs to 56 per 100; in non-electrical machinery, from 43 to 59; in chemicals, from 66 to 78. Companies with 2,500 or more employees have had a higher proportion of staff positions relative to production workers (44 per hundred in 1972) than companies with fewer than 500 employees (32 per hundred). The largest companies have the highest ratio of staff to production workers. By 1979, half of the employees of Intel—the microprocessor manufacturer—were engaged in administration. When an engineer wanted a mechanical pencil, processing the order required twelve pieces of paper and ninety-five administrative steps. It took 364 steps to hire a new employee.
This sudden proliferation of staff positions within American firms is particularly striking by comparison with firms in other nations. In the typical Japanese factory, for example, foremen report directly to plant managers. The foreman in the typical American factory must report through three additional layers of management. Until very recently, Ford Motor Company had five more levels of managers between the factory worker and the company chairman than did Toyota.
Bureaucratic layering of this sort is costly, and not only because of the extra salaries and benefits that must be paid. Layers of staff also make the firm more rigid, less able to make quick decisions or adjust rapidly to new opportunities and problems. In the traditional scientifically managed, high-volume enterprise, novel situations are regarded as exceptions, requiring new rules and procedures and the judgments of senior managers. But novel situations are a continuing feature of the new competitive environment in which American companies now find themselves.
The typical sequence now runs something like this: A salesman hears from a customer that the firm’s latest bench drill cannot accommodate bits for drilling a recently developed hard plastic. The customer suggests a modified coupling adapter and an additional speed setting. The salesman thinks the customer’s suggestion makes sense, but he has no authority to pursue it directly. Following procedures, the salesman passes the idea on to the sales manager, who finds it promising and drafts a memo to the marketing vice president. The marketing vice president also likes the idea, so he raises it in an executive meeting of all the vice presidents. The executive committee agrees to modify the drill. The senior product manager then asks the head of the research department to form a task force to evaluate the product opportunity and design a new coupling and variable-speed mechanism.
The task force consists of representatives from sales, marketing, accounting, and engineering. The engineers are interested in the elegance of the design. The manufacturing department insists on modifications requiring only minor retooling. The salespeople want a drill that will do what customers need it to do. The finance people worry about the costs of producing it. The marketing people want a design that can be advertised and distributed efficiently, and sold at a competitive price. The meetings are difficult, because each task-force member wants to claim credit for future success but avoid blame for any possible failure. After months of meetings, the research manager presents the group’s findings to the executive committee. The committee approves the new design. Each department then works out a detailed plan for its role in bringing out the new product, and the modified drill goes into production.
If there are no production problems, the customer receives word that he can order a drill for working hard plastics two years after he first discussed it with the salesman. In the meantime, a Japanese or West German firm with a more flexible, teamlike approach has already designed, produced, and delivered a hard-plastics drill.
As the bureaucratic gap between executives and production workers continues to widen, the enterprise becomes more dependent on “hard,” quantifiable data, and less sensitive to qualitative information. Professional managers concentrate on month-to-month profit figures, data on growth in sales, and return on investment. “Softer,” less quantifiable information—about product quality, worker morale, and customer satisfaction—may be at least as important to the firm’s long-term success. But such information cannot be conveyed efficiently upward through the layers of staff. Even if such qualitative information occasionally works its way to senior executives without becoming too distorted in the process, it is often still ignored. Information like this does not invite quick decisions and crisp directives.
Even quantifiable information becomes distorted as it moves up the corporate hierarchy, because it must be summarized and interpreted. Distortions also occur intentionally. Lower-level managers, dependent on senior managers for rewards and promotions, naturally want to highlight good news and suppress bad news. In reporting their costs, for example, they may seek to outmaneuver the accounting department (which determines how overhead costs are distributed among units) by shifting some overhead to another unit. Since lower-level managers are competing with other managers for scarce investment resources, they are likely to present overly optimistic estimates for the projects they seek to fund. Their forecasts may underestimate costs, overestimate market demand, and leave out certain expenses altogether. The planning systems that process these estimates become arenas for organizational gamesmanship.
PROFESSIONAL MANAGERS AT THE TOP OF AMERIcan firms have come to preside over a symbolic economy. The systems of management control that they initiated in the late 1960s in efforts to maintain profitability have become more intricate and elaborate as the global market has grown less predictable, requiring additional layers of managers and staff specialists. As the bureaucratic distance between senior managers and production workers has increased, the rules and numbers in which senior managers deal have become more and more disconnected from the everyday processes of productiondistorted by excessive reliance on “hard” data, by communication failures, and by gamesmanship.
Paper entrepreneurialism relies on financial and legal virtuosity. Through shrewd maneuvering, accounting and tax rules can be finessed, and the numbers on balance sheets and tax returns manipulated, giving the appearance of greater or lesser earnings. Assets can be rearranged on paper to improve cash flow or to defer payments. And threatened lawsuits or takeovers can be used to extract concessions from other players. Huge profits are generated by these ploys. They are the most imaginative and daring ventures in the American economy. But they do not enlarge the economic pie; they merely reassign the slices.
The conglomerate enterprise is one manifestation of paper entrepreneurialism. Before the late 1960s, American business enterprises generally expanded only into lines of business related to their original products. They moved into markets where their managerial, technical, and marketing skills could be applied anew, giving them a real competitive advantage.
The conglomerate enterprises that mushroomed during the 1970s—multibusiness giants such as Gulf + Western, LTV, Textron, Litton, United Technologies, Northwest Industries, and ITT—are entirely different. They have grown by acquiring existing enterprises, often in wholly unrelated fields. Gulf + Western, for example, owns Paramount Pictures, Consolidated Cigar (one of America’s largest cigar-makers), Kayser-Roth (a major apparel-maker), A.P.S. (an auto-parts supplier), one of America’s largest zinc mines, Madison Square Garden, Simon & Schuster (publishers), Simmons (mattresses), the Miss Universe and Miss U.S.A. pageants, and a large sugarcane plantation. ITT (the world’s eighth-largest corporation) owns Wonder Bread, Sheraton Hotels, Hartford Insurance, Avis Rent-a-Car, Bobbs-Merrill Publishing, and Burpee Lawn and Garden Products.
Conglomerate enterprises rarely, if ever, bring any relevant managerial, technical, or marketing skills to the new enterprises they acquire. Their competence lies in law and finance. Their relationship to their far-flung subsidiaries is that of an investor. Indeed, many conglomerates function almost exactly like mutual funds, except that the staff at conglomerate headquarters presumably has slightly more detailed information about their subsidiaries than mutualfund advisers have about the companies within their portfolios.
Some conglomerates have come a step closer to mutual funds by becoming minority owners of a variety of other companies. Gulf + Western actually maintains a $536 million portfolio of stocks in sixteen companies. Financial advisers within conglomerates like these decide which stocks to purchase or sell according to precisely the same criteria that financial advisers to mutual funds employ. Like the mutual fund, the conglomerate organization does not create new wealth or render production more efficient. It merely allocates capital, duplicating—though awkwardly—the functions of financial markets.
The paper advantages of conglomeration extend beyond speculation and risk-spreading, however. Dexterous tax and accounting manipulations can extract paper profits from economically senseless acquisitions. Whenever a firm’s stock-market price falls below its book value (the assumed market value of the firm’s total assets, if they were sold off bit by bit), another firm can post significant gains on its balance sheet simply by acquiring the undervalued firm and consolidating the two sets of books. Thus, the acquiring firm’s earnings increase with minimal effort. As the American economy has declined, the stock of many companies has fallen to less than book value in this way. The stock market is not being irrational; companies like these are probably worth more disassembled than they are as continuing operations. But conglomeration does not redeploy these assets; it merely displays them more attractively on a new, consolidated balance sheet.
If the acquired firm has lost money in recent years, so much the better. The conglomerate that acquires it can use the losses to reduce its tax liability. Even if the assets of the acquired firm are purchased for more than their stated value in the acquired firm’s books, the game is still on—the acquiring company has a higher basis for depreciating its new assets for tax purposes. (The 1982 tax law has made this route somewhat more treacherous.) U.S. Steel’s purchase of Marathon Oil Company, for example, saved the steelmaker about $500 million in taxes in the first year and will save at least $1 billion more over the productive life of Marathon’s Yates oil field, since tax laws let the oil field be valued for tax purposes at a higher cost than the property represented in Marathon’s books. Because U.S. Steel can take new depletion deductions against this high-valued property, the Yates reserves are worth far more to it than they were to Marathon, which had already extracted what it could of the oil field’s tax-deduction potential. The field’s tax benefits were renewable through transfer, even if the oil was not.
Conglomeration has been proceeding at a breakneck pace. By 1972, 33 percent of the employees of America’s manufacturing companies were involved in lines of business totally unrelated to the primary businesses of their companies. In 1977, American companies spent $22 billion acquiring one another. In 1979, they spent $43.5 billion. That year, sixteen firms, each worth more than $500 million, were gobbled up, including Belridge Oil ($3.65 billion, bought by Shell Oil); C.I.T. Financial ($1.2 billion, by RCA); and Reliance Electric ($1.16 billion, by Exxon). All records were shattered in 1981, when $82 billion was spent on acquisitions. Du Pont paid a staggering $7.5 billion for Conoco; Fluor, $2.7 billion for St. Joe Minerals; and Gulf Oil, $325 million for Kemmerer Coal. The pace continued last year with U.S. Steel’s purchase of Marathon Oil for $5.9 billion.
Despite widely advertised concern over a capital shortage and calls for corporate tax breaks to spur new investment, firms bent on acquisition have seldom been deterred by price. Corporations have been paying premiums of 50 and even 100 percent over the market value for the stock of the companies they seek to acquire. Even during the “go-go years” of the late 1960s, when “funny money” fueled a short-lived merger explosion, premiums rarely exceeded 25 percent.
All this has been accompanied by some of the heaviest bank borrowings in history. Du Pont borrowed $3.9 billion to buy Conoco, at an interest rate close to 20 percent. Texaco negotiated a loan of $5.5 billion from an international consortium of banks led by Chase Manhattan. Fluor Corporation borrowed $1 billion to buy St. Joe Minerals—a debt equal to Fluor’s entire revenues for the first quarter of 1981.
As late as the early 1960s, “unfriendly” takeovers were virtually unheard of. Since then, they have become a standard strategy of paper entrepreneurialism. Fear of a takeover bid haunts America’s corporate boardrooms. In a 1981 survey of chief financial officers in America’s 480 largest industrial firms, 49 percent thought that their companies were vulnerable to a takeover; even of the remaining group, 38 percent said that they had developed formal plans aimed at thwarting takeover bids. The fear is well founded. Of the 249 firms that have faced unfriendly takeover attempts within the past three years, only fifty-two have successfully withstood the assault and remained independent.
The fear of takeover has generated an array of paperentrepreneurial strategies. Many targets of takeover bids, fleeing acquisition by a company unfriendly to their present managers, are running into the arms of another, more congenial firm. When WUI, an international telecommunications firm, learned that Continental Telephone Corporation was on its trail, it sought to be acquired instead by Xerox. Some target companies seek immunity by pre-emptively buying companies in the would-be acquirer’s own industries, so that antitrust laws block the acquisition attempt. Daylin, Inc., defending itself against W.R. Grace’s recent tender offer, sought to purchase Narco Scientific, Inc.—a maker of equipment in a product line so similar to Grace’s that Grace would be barred from taking over Daylin. One of the more bizarre—and expensive— defense strategies is for a target company simply to reduce its cash reserves and thus become less attractive to potential predators. This may explain J. Ray McDermott & Co.’s $758 million acquisition of Babcock & Wilcox, and Kennecott Copper Corporation’s $567 million purchase of Carborundum.
Increasingly, target companies are paying would-be acquirers high premiums to buy back blocks of stock that the acquirers have amassed. As a lawyer experienced in such tactics recently explained to The Wall Street Journal, “Look, I now have 7 percent or 8 percent of your stock. I’m not going after your company. But if you don’t buy back the block from me at a premium, I know five or six guys who are interested and could take you over.” This is the corporate equivalent of a demand for ransom. And paper entrepreneurs are generating large earnings from such threats.
Even if the target company refuses to pay the ransom, its stock typically shoots up when Wall Street learns that a takeover may be afoot. Thus the paper entrepreneur can generate earnings simply by selling the block of stock in the open market. Bendix recently made $75 million after taxes by buying and then selling back 20 percent of the outstanding stock of Asarco. Gulf + Western announced in September of 1980 that it had made open-market purchases of large blocks of stock in two companies: a 7.4 percent interest in Oxford Industries, Inc., and a 10.4 percent interest in Robertshaw Controls Company. Two months later, both Oxford and Robertshaw bought back their shares, for a total of $2.1 million more than Gulf + Western had paid for them.
THE LARGEST GAINS FROM CONGLOMERATION LIE IN their potential for opening access to ready cash at low or no cost, while simultaneously avoiding or deferring income taxes. Financial conglomerates offer particularly rewarding possibilities along these lines.
Consider, for example, Baldwin-United—a company that until 1968 was known for the Baldwin piano, which it had been making since 1891. Piano sales were growing slowly, and the pressure from foreign competition was increasing. So Baldwin purchased a bank, twelve insurance companies, a savings-and-loan company, some mortgagebanking companies, America’s largest mortgage-insurance company, and America’s two largest trading-stamp companies. Many of these companies have been cheap sources of cash. The insurance companies have provided low-cost funds in the form of premiums; the savings-and-loan company has brought in deposits at low, passbook rates; the mortgage-banking and servicing companies have transferred billions of dollars in mortgage and real-estate tax payments from borrowers to lenders, while holding the funds for up to several weeks in the process; and the trading-stamp companies sell stamps to merchants, who give them to customers, who are unlikely to redeem them for months or years, if ever. Baldwin has further enlarged its earnings by avoiding or deferring taxes on these cash flows. Baldwin’s mortgage-banking acquisition had unrealized losses in its loan portfolio, which Baldwin then used against its overall earnings; Baldwin also deducts the commissions it pays to its brokers in the year paid, which occasionally generates large tax losses. With these ample deductions, Baldwin has been able to redeem the bonds that its mortgage-insurance company bought, with tax impunity. As a result of all these financial and tax ploys, Baldwin’s return on equity has increased from 13 percent to 31 percent since 1968, and its earnings per share have grown at a 20 percent annual rate.
Conglomerates offer no particular efficiency in allocating capital to its best use. Investors who wanted to buy into a particular bundle of industries could simply have bought stocks separately. American investors gain nothing from having the bundle prepackaged in the form of a diversified conglomerate. Indeed, conglomerates undermine the efficiency of America’s capital market by eliminating investors’ option to buy into Bobbs-Merrill alone, for example, without taking stock in all the rest of ITT’s hodgepodge of businesses.
Nor, as we have seen, do conglomerates serve any useful industrial purpose. Unlike earlier multidivisional firms, which featured some complementarity among operations, modern conglomerates are typically little concerned with the actual economic functions of the various subsidiaries, beyond the interest a landlord might take in a sharecropper’s labors.
Nor do they benefit employees. When one of a conglomerate’s businesses begins to falter, only capital assets are salvaged and redeployed. Workers typically are left to fend for themselves.
Thus modern conglomerates are economically sterile. Their only effects are to facilitate paper entrepreneurialism and to spare managers the need to stake their careers on anything so risky as a single firm trying to make products. The growffh of conglomerates illustrates managers’ discretionary power to serve their own goals, and reveals how far economic change since the end of the management era has separated managers’ incentives from socially productive results.
Paper entrepreneurialism does not rely solely on acquisitions, of course. Every month or so, another innovative paper ploy is unveiled. For example, many companies are now engaging in an expensive and financially empty exchange of new stock for old bonds. It works like this: A company that sold long-term bonds when interest rates were lower—and, thus, so was the yield, or “coupon,”the bond had to offer—still carries the debt on its books at the original face value, even though the outstanding bonds are in fact being traded on the market at a discount because they yield less per dollar of face value than new financial assets. {That is, the books may show debt of $10 million, even though the market value of the bonds has fallen to $7 million.) This debt bothers the firm’s managers, who want the balance sheet to seem as unencumbered by indebtedness as possible.
So investment brokers have gone into the business of buying up old bonds at their (low) market value and offering to return them to the issuing firm in exchange for new shares of common stock. By buying back its old bonds, the company can claim to have “retired” a deceptively large chunk of debt, based on the financially irrelevant face value of the bonds, and so managers are willing to pay the broker handsomely for engineering the swap.
The company makes a precisely offsetting trade—a certain market value of stock for an equal market value of bonds. The cost: millions in brokers’ fees and premiums. The only result: some gullible investors may be led to believe that the company has suddenly become less burdened by debt, and therefore more valuable. And the ruse is taxfree, treated as a non-taxable corporate reorganization so long as the broker handles the mechanics. Since August of 1981, more than a hundred such exchanges have swept at least $2 billion in debt from corporate balance sheets. Even U.S. Steel managed to use this ploy to report a profit for the depressed second quarter of 1982, despite its sizable losses in the steel business. Like other gimmicks, this one will go out of fashion in a year or two, when investors and the Internal Revenue Service catch on, and another innovation will replace it.
Paper entrepreneurs also display their virtuosity in “creative” accounting. In 1978, for example, when slumping car sales began to push Chrysler Corporation deeper into the red, forcing the auto maker to halt production at many plants and cut its dividends by 60 percent, the company still managed to project a fourth-quarter profit. Thanks to a little-noticed actuarial adjustment, Chrysler had merely changed the assumed rate of return on its employee-pension portfolio to 7 percent from 6 percent, reducing pension costs and adding about $50 million to its profits. This alteration was likely to escape the eyes of analysts and auditors, who are seldom trained in pension matters. Chrysler did nothing illegal. Indeed, it disclosed in a footnote to its annual report that it had made the actuarial change, although it did not state any figures.
Other methods of “earnings management” abound: showing certain transactions as collateral borrowings rather than as sales; overstating or understating inventories; failing to account fully for the effect of inflation on the value of inventories or profits; overstating the value of good will gained from a merger or acquisition; and understating the price paid for an acquisition. For example, GE paid about $2 billion worth of stock to acquire Utah International in 1976, but “pooling-of-interest” accounting rules let GE show a price of only $548 million on its balance sheet, Utah International’s $196 million profit in 1977 looked much better on $548 million than it would have on $2 billion.
None of these ploys is illegal. Nor do they violate generally accepted accounting principles, which give firms wide latitude in reporting their earnings. Given the complexity of modern business practices and the uniqueness of each firm, more rigid accounting rules might actually lead to greater distortions. And that is the point. The set of symbols developed to represent real assets has lost the link with any actual productive activity. Finance has progressively evolved into a sector all its own, only loosely connected to industry. And this disconnectedness turns business executives into paper entrepreneurs—forced to outsmart other participants, or be themselves outsmarted.
All of this paper entrepreneurialism takes place against a background of mounting lawsuits. Professional managers in companies targeted for takeover are suing their predators. Shareholders are suing managers. Acquiring companies are suing the officers of the companies they have acquired. Purchasers of futures contracts are suing sellers who cannot meet the payments. The number of business lawsuits stemming from breach of contract, antitrust, or alleged “wasting” of corporate assets has increased fourfold since 1965.
ONE MUST BE CLEAR ABOUT THE PROBLEM OF PAPER entrepreneurialism in America. Paper entrepreneurialism does not directly use up economic resources. Every economy needs some paper entrepreneurs to help allocate capital efficiently among product entrepreneurs.
The problem is that paper entrepreneurialism has replaced product entrepreneurialism as the most dynamic and innovative occupation in the American economy. Paper entrepreneurs produce nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to products, not paper. As Lord Keynes recognized nearly fifty years ago, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Ours is becoming an economy in which resources circulate endlessly among giant corporations, investment bankers, and their lawyers, but little new is produced. Financial resources are kept liquid in order to meet the next margin call, to enter the next position, or to exploit the next takeover opportunity. They are not applied in earnest to any single undertaking, for fear that they will soon be needed for something else. There is scant investment in new products or processes, because such endeavors tie up resources for too long.
In 1979, RCA Corporation complained publicly that it lacked the $200 million that would be needed to develop a video-cassette recorder, although recorders are the fastest-growing appliance of the decade. RCA thereby ceded the video-cassette market to the Japanese. But RCA had no qualms about spending $1.2 billion to buy a lackluster finance company that same year. In 1979, U.S. Steel decided to scrap its plan for building a new steel plant. Instead, it began building a cash reserve to acquire some other, more promising company, such as Marathon Oil.
While business leaders are otherwise engaged, America’s industrial base remains wedded to high-volume, standardized production. Flexible-system production does not fit well into large conglomerate enterprises. The enterprises are too diffuse and fragmented to generate team spirit, too unwieldy and bureaucratic to accommodate novel approaches to new problems. Real-product entrepreneurs bridle at the red tape. Employees are discouraged from choosing unorthodox solutions. It is often difficult, from the mire of conglomerate headquarters, to identify unique customer needs. Big companies also tend to wait for markets to develop; they are not equipped successfully to pursue the markets that do not yet exist. Exxon’s plunge into the “office of the future” has been an unmitigated disaster. The company is losing money at a rate that would bankrupt almost anyone else—in 1980 alone, its office-equipment division lost $150 million on sales of $270 million. Industrial giants such as Monsanto, Ford, and Sylvania, which tried several years ago to develop their own commercial semiconductor operations, failed miserably and withdrew from this rapidly changing market. Other large companies—RCA, TRW, Westinghouse—have not done much better.
But perhaps the greatest cost is in human talent. Today’s corporate executives spend an increasing portion of their days fending off takeovers, finding companies to acquire, conferring with their financial and accounting specialists, and responding to depositions in lawsuits, instead of attending to their products. Indeed, approximately 40 percent of the chief executive officers of America’s largest firms have backgrounds in law or finance and rose to their present positions from company legal or financial staffs. This is in sharp contrast to the past. In 1950, only 13 percent of America’s key chief executive officers had legal or financial backgrounds. Most came up through the ranks from marketing, engineering, or sales.
Increasingly over the past fifteen years, the most sought-after jobs among business-school graduates have been in finance and consulting, where the specialty is rearranging assets and shuffling corporate boxes—and from where bright young MBAs have their best shot at becoming corporate executives. Only 3 percent of Harvard Business School’s 1981 graduates took jobs in production and 18.6 percent in sales and marketing, while 21.6 percent went into finance. Young people seeking quick affluence without much risk have turned to the practice of law, where America’s highest-paying entry-level jobs are found. In a recent survey, 24 percent of Harvard freshmen said they were planning a career in law; only 7 percent were going into science. In 1982, New York City’s largest law firms were paying their young recruits, fresh out of law school, $48,000 a year. In 1980, the median income for partners in New York’s largest law firms was $242,685, up 50 percent from 1975. Law firms can afford to pay these exorbitant salaries because legal fees keep rolling in.
Between 1940 and 1960, only about one American in 600 was a lawyer. Between 1971 and 1981, the number of practicing attorneys increased by 64 percent. America now has more than 590,000 lawyers—one for every 400 citizens. Over the same decade, however, there was only a 15 percent rise in the number of engineers, and a 25 percent rise in the number of laborers. Only about one of every 10,000 citizens in Japan is trained in law, while one out of twentyfive Japanese citizens is trained in engineering or science. More than 65 percent of all seats on the boards of Japanese manufacturing companies are occupied by people who are trained as engineers; roughly the same percentage of seats on American boards are taken by people trained in law, finance, or accountancy. Thus, in Japan, many problems that arise in business are viewed as problems of engineering or science, for which technical solutions can be found. In present-day America, the same problems are apt to be viewed as problems of law or finance, to be dodged through clever manipulation of rules or numbers.
Increasingly, professional education in America stresses the manipulation of symbols to the exclusion of other sorts of skills—how to collaborate with others, to work in teams, to speak foreign languages, to solve concrete problems—that are more relevant to the newly competitive world economy. And more and more, the career ambitions of America’s best students have turned to professions that allow them to continue attending to symbols, from quiet offices equipped with a telephone, a Telex, and a good secretary. The world of real people, engaged in the untidy and difficult struggle with real production problems, becomes ever more alien to America’s best and brightest.
Paper entrepreneurialism is both cause and consequence of America’s faltering economy. Paper profits are the only ones easily available to professional managers who sit isolated atop organizations designed for a form of production that is no longer appropriate to America’s place in the world economy. At the same time, the relentless drive for paper profits has diverted attention and resources away from the difficult job of transforming the productive base. It has retarded the transition that must occur, and made change more difficult in the future. Paper entrepreneurialism thus has a self-perpetuating quality that, if left unchecked, will drive the nation into further decline. □
This is the first of two articles about the American economy.