Commentary Magazine


Productivity and American Leadership, by William J. Baumol, Sue Anne Batey Blackman, Edward N. Wolff; Made in America, by Michae

The perennial debate over the position of the American economy in world affairs has lately intensified. The dominant contention these days is that the U.S. has fallen behind industrially, with practically all the arguments resting on grand theories of the rise and fall of nations or, at the other extreme, on more or less casual evaluations of current events. A refreshing contribution of an entirely different order appears in these two books.

The first, Productivity and American Leadership: The Long View, is grounded in history and in a statistical crystallization of trends in national production over the past 200 years. The authors find our country still basically robust, though possibly in need of revised government policies to ensure its continued leadership. The second, Made in America: Regaining the Productivity Edge, the work of nine teams of analysts, undertakes an in-depth investigation of current American managerial practices and unearths evidence of serious deficiencies; its outlook is commensurately much less sanguine. In part the two approaches are complementary, but the first book is by far the more successful work.

According to the authors of Productivity and American Leadership, a nation’s economic vigor depends fundamentally on its ability to sustain a high rate of productivity in the long run (as opposed to the ephemeral ups and downs of business fluctuations). As Baumol, Blackman, and Wolff describe it, it was a modest but sustained upward shift in productivity starting in the mid-1850′s that within a mere 100 years transformed economic conditions which we today would think of as “widespread abject poverty” into what people in those days would have called “a fairyland of incredible widespread munificence.” Since 1870, the authors find, the average growth rate in production per capita has been maintained at a bit more than 2 percent per annum. That is enough to have yielded an eleven-fold increase in the per-capita level of living—and enough to have thrust the American economy well ahead of its major trading partners.

The study views the “stagflation” disaster of the 1970′s, extending into the early 80′s, as merely “a short-term” deviation from this trend, denoting the end of an “extraordinary period of postwar growth” and presaging a return to normal. It was during these years that some “catching up” appeared on the international scene, enabling hitherto lagging countries to move up “toward the United States but not (necessarily) to surpass it.” Overall, in the decade just ended, the business expansion in America has exceeded the long-term growth rate by a record margin and roughly matched the pace of Japan—despite the latter’s start from a much lower level and its virtual national mobilization.

This is not to say that the authors find cause for complacency. To ensure our economic lead, or even to remain high among the leaders, may require significant changes in public policy, and to that end they offer a number of proposals. These include adjustments in the capital-gains tax to encourage savings and investment, eliminating the unproductive expenditures of government that now needlessly compete for resources with the private sector, strengthening the contribution of research and development by improving prevailing regulations, and paying more attention to the way other countries do things. For example, they write, “While Japan has an active and hard-working government office devoted to technology transfer, the U.S. government offers little that can be taken as a counterpart.” Up to now the U.S. has been doing most of the giving of technology and hardly any of the taking. Hence the authors would establish an official agency “to encourage the transfer of foreign technological developments to the American economy.”

In its recommendations Productivity and American Leadership unavoidably moves into partly or wholly uncharted territory. But that aside, it would be difficult to find a statement of substance beyond documented evidence. In this and other ways, the book can stand as a model, and—a rarity in economic tomes—one that is graced by perfectly lucid expository prose. In a discipline often riven by ideological conflicts, it seems as coolly objective as a study of this kind can possibly be. In fact, Baumol, Blackman, and Wolff admit that the results they came up with were professionally disappointing to them, for all three authors had been swayed by the pessimism that swept through the Ivy League during and after the 1970′s, and had put their dark thoughts about the American economy in writing. Only after probing more deeply did they discover they had been wrong.

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The authors of Made in America: Regaining the Productive Edge have done no such probing. The consensus academic view that the U.S. is in grave trouble, lagging in productive energy and mired in outworn managerial and production practices, seems to be taken for granted by all sixteen authors of this book—for Made in America is the product not only of the three economists whose names appear on the jacket but of the other thirteen members of the MIT Commission on Industrial Productivity as well, and from the text itself one gleans no clue as to who is responsible for what. The result is an institutionalized document with all the charm of a Department of Treasury brochure plugging savings bonds.

Yet despite its stylistic and ideological handicaps, Made in America does contain a signal contribution—the “industry studies” grouped in the 130 pages or so toward the end. These are derived from on-the-scene analyses of eight major manufacturing industries and include the results of personal inspections and some 550 interviews conducted by nine teams of researchers. The eight industries are automobiles, chemicals, commercial aircraft, consumer electronics, semiconductors, computers and copiers, steel, and textiles.

A common characteristic of the industries selected is a substantial increase in competition from imports, mostly but not exclusively from Japan. This is the “catching-up” effect, duly noted also in Productivity and American Leadership, whereby America’s economic lead over its competitors was reduced through the 1970′s and into the early 1980′s. Part of this process was almost surely inevitable, as destined in its way as was the very much earlier overtaking of British industry by American. Part was due to our own managerial deficiencies, especially (but not only) the tendency to stress short-term gains over those requiring a longer-term perspective. Practically none was due to a weakness in American science or technology. But the MIT study also discloses another factor of much greater force: the deliberately predatory trade practices of the Japanese and, in a much smaller degree, of the Europeans.

In particular, the Japanese made use of a technique known as “oligopolistic price discrimination.” The tactic is essentially simple but potentially deadly. It requires, first, in the exploiting country, a monopoly or a combine of firms acting together like a monopoly. Second, it calls for protective tariffs to guard the home market against imports, or equivalent barriers with the same intent, all of which abound in Japan. These conditions enable the monopoly or oligopoly to charge in its own domestic market the very highest price necessary for yielding the greatest possible profits. Abroad, where the demand for its product is more “elastic” because of competition, the search for maximum profit requires a much lower price.

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The impact of the stratagem can be seen in our late-lamented consumer-electronics and still-shaky semiconductor industries. Both were spawned by American technological ingenuity and science: consumer electronics, as the MIT authors write, “was based on a sequence of technological developments that go back to Edison’s invention of the phonograph in 1877,” while the semiconductor industry took root with the invention of the transistor at Bell Laboratories in 1947. But auspicious beginnings proved insufficient for survival.

Initially there was technology transfer. In consumer electronics the Japanese managed this easily by obtaining licenses for the use of American patents and by gratefully accepting contracts from American firms “for hand assembly of simple products, then the manufacture of components, then for the production of complete systems.” So armed, they undertook independent production. The next step was to follow the “price-discrimination” model. In the shelter of their carefully protected home market the Japanese dutifully charged extremely high prices. Abroad, particularly in the United States, they not only accepted the very much lower prices necessary to meet competition, but went further and targeted first one and then another segment of the American consumer-electronics industry with fatally low prices.

The upshot was that from radios to videocassettes, the American industry was almost entirely obliterated. Repeated efforts to secure redress through “anti-dumping” laws proved unavailing. Meanwhile, European nations employed a variety of mechanisms to protect their own consumer-electronic markets, at first from the United States and later from Japan.

Roughly similar tactics were utilized by the Japanese in the market for semiconductors, where the effect was significant though not nearly so devastating as in consumer electronics. The American share of the world market was cut from about 60 percent in the mid- 1970′s, when the domestic industry was at its peak, to 40 percent in 1987.

But the decline lay as much in the unique organization of American industry as in Japanese tactics. In the United States, semiconductors are produced by two quite different kinds of firms: the so-called “captives” such as IBM, General Motors, and AT&T, which produce semiconductors exclusively for internal use; and the “merchants”—the numerous small entrepreneurial firms centered in Silicon Valley and similar enclaves elsewhere—who sell their output in the open market. The latter are notably pioneering and innovative, but also financially insecure and unstable; some have annual sales of less than $5 million. Frequently strapped for cash, they have proved eager to sell or lease their own new technologies, and quick to snatch other short-term profits when available. The Japanese have been equally quick to seize the opportunities thus offered and even to invest in pathfinding American firms—foreign investment being all the while generally forbidden in their own concerns.

The relatively tiny American makers, though imaginative and daring, have proved unable to cope with their Brobdingnagian rivals in product design, optimization of processes, or quality controls, let alone in financial resources or marketing. The way things have been going, the direction for American output is downward. Fortunately that direction need not remain unchanged. AT&T, for example, since its dismantlement and partial deregulation, has undertaken a variety of activities outside telecommunications, including production of computers, integrated systems, and work stations; according to recent announcements, it is now primed for marketing semiconductors. IBM has indicated a similar intention. Happily the two companies are among the world’s most innovative technological leaders.

The semicondutor and consumer-electronics industries qualify as “worst cases.” The remaining six industries studied by the MIT Commission, though similarly subject to “import penetration,” all participated with more or less vigor in the great upswing in American industry that began in 1983, and that is fully documented in Productivity and American Leadership. Even the woebegone automobile industry, though it still has much to learn from the Japanese, has managed to build some new plants or refurbish others that outdo their Japanese counterparts in productivity. Yet one would never know from reading Made in America that as the 1980′s closed, America’s national production per capita led its closest competitor—Japan—by as much as 20 percent, or that the actual difference in living standards between the two countries is much greater than that figure might suggest.

In short, Made in America needs to be read in the light of Productivity and American Leadership, with the former’s microeconomic analysis put in the context of the latter’s macroeconomic explorations. In that light one does indeed see grounds for serious concern about the American economy, but also much more solid grounds for prudent optimism.

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