ANY TRAVELER to the industrial belt between New York and Milwaukee can see that our manufacturing sector is in trouble, but how -- he may ask -- have we fallen so far and so fast? Two new books from different sides of the Charles River at Harvard give us very different answers and, correspondingly, different solutions to the problem.
Robert Reich of the John F. Kennedy School of Government argues in The Next American Frontier that the problem lies in the inability of industry to shift to new products and new markets. His book sounds the drumbeat for induleft politicians as they gear up for the 1984 campaign.
On the more conservative right bank of the Charles, William Abernathy, Kim Clark, and Alan Kantrow of the Harvard Business School see things differently. The problem with basic industry is that it has failed to adapt to increasing competition, changing technology, and new product demands. To them, the solution to our difficulties can be found only through adjustments of management practices and labor relations. Obviously, their message has far less political sex appeal than Reich's and will fit less easily into 30-second commercials.
Reich argues we can no longer compete with newly industrializing countries in standardized products requiring high-volume production. We must convert immediately to industries utilizing "flexible-system" production technologies -- that is, to industries producing precision-manufactured, custom-tailored goods using rapidly-changing technology. Industries such as chemicals, steel automobiles, textiles, rubber, and electrical equiptment have been declining since the mid-1960s, Reich tells us, and have no hope for a renaissance. Left alone, these industries will hang on to low-technology processes, frantically engaging in "paper entrepreneurialism." Large numbers of workers will be displaced without hope for employment, and the industrial regions of the country will stagnate.
According to Reich, it is government's role to encourage a revolutionary shift toward high-tech in the manner of Japan and even Germany and France. Over and over, we are told that Japan and some Western Europeans have seen the light, but we have not. Unemployment, stagnation, declining rates of profit and productivity growth, and lagging standard of living are traced to the absence of an American industrial policy.
While Reich has correctly identified our need to move toward high-technology industries, his analysis of the urgency of such a movement is far from persuasive. German and French readers of his book will be amazed to read of their governments' apparent success in industrial policy. Since 1975, industrial production has grown even more slowly in France and West Germany than in the United States.
The industrial sector of the United States did not decline markedly from the mid-1960s to 1980. In fact, basic industry accounted for roughly 22 percent of our GNP in 1980, precisely the same share as in 1947. Our output per person remains above that of all but a few countries, such as Sweden and Switzerland (which have not exactly been refuges for the world's dispossessed over the 20th century). Reich's contrary conclusions are drawn from a period ending in 1979. Were he to extend his calculation to 1981, he would find that the United States has outperformed every major industrial country in the world except Japan since 1975. He discounts 1981-82 as a period of an "artificially" high dollar, but then fails to acknowledge the impact of an overvalued dollar on basic industries.
Abernathy, Clark, and Kantrow remind us that industries do not automatically pass through evolutionary stages from new technology through maturity to eventual decline. Their book draws heavily upon their recent study of the automobile industry for the National Academy of Sciences. While there is a danger in extrapolating from only one industry's experience, they are extremely persuasive in their diagnosis of at least this industry's ills. Serving a virtually protected U.S. market for large cars, the highly concentrated auto industry lost its dynamism as it organized simply to "get the metal out." Several generations of labor-management antagonism followed the early paternalism of Henry Ford with the result that workers succeeded in bargaining for very high wages and highly detailed labor contracts. Management failed to maintain work incentives in the auto plants, and as a result the concern for quality and productivity languished.
The 1970s have brought to the auto industry both the disruption of intense foreign competition and a new wave of technological and organizational changes. To Abernathy, Clark, and Kantrow, these forces combine to provide the U.S. companies with an opportunity to revive their empires. Management must adjust, not by simply retooling for smaller cars, but by providing quality at a cost that is competitive with foreign automobiles. They argue that the market has sent Detroit a clear signal and that the Big Three are now beginning to respond to this signal.
Reich, on the other hand, does not believe that markets provide sufficient signals for such a change. In fact, he has a thorough disdain for the market, rarely even using the word except in a derogatory manner. "Free markets," for example, are mythical. We are told that investment by market-oriented manufacturers necessarily leads to excess capacity unless they collude. Managers looking for corporate acquisitions or a lower cost of capital, are mere "paper entrepreneurs" who do not contribute to social product.
Nor do the authors agree on the possibilities for reforming labor relations in basic industry. Abernathy-Clark-Kantrow hold out hope for a change in management-labor relations that can have a "catlytic effect on the overall quality of manufacturing operations." While they do not prescribe wage moderation as part of this change, their data show that U.S. auto workers are paid 80 percent more per hour than their more productive Japanese counterparts. Reich agonizes over the painful wage cuts in the auto, rubber, and steel industries, failing to inform his readers that these wages had risen to levels 70 to 80 percent above the average U.S. industrial pay. These high wages are obviously part of the problem, but Reich ignores them. Such an analysis would not play well in Peoria -- or in Detroit and Pittsburgh.
What is the alternative to a thorough, slogging reform of management practices and labor-management relations in our basic industries? Reich tells us that it is a system of tax incentives designed to get dying industries to invest in human capital (their workers) and new technologies. In addition, he would establish regional development banks to laon money to dying industries for "restructuring." He fails to point out that past exercises in government-subsidized training have been far from resounding successes or that subsidized restructuring in Europe has turned inefficient automobile and steel companies into outright basket cases.
Both books ignore the larger cause of our industrial difficulties -- the disastrous macroeconomic performance of our economy since 1973. While U.S. industry is undoubtedly shifting to high-technology products, this shift is a gradual one. Most basic industries (but not all) can and will recover when the U.S. and world economies begin to expand again and the dollar recedes somewhat. Cries for industrial policy are likely to result in content-protection legislation for the automobile industry or huge loan guarantees for the steel industry. Abernathy, Clark and Kantrow demonstrate persuasively that open international competition is essential to rejuvenating Detroit. And past experience with loan guarantees in the steel or auto industry do not give us reason for believing that bureaucrats in Washington can allocate capital better than "paper entrepreneurs" in Wall Street. Nevertheless, everyone should read Reich's call for action to understand the 1984 presidential campaign. Unfortunately, far fewer will try to penetrate the Abernathy-Clark-Kantrow book because of its academic nature. Politicians more than one year from their next campaign would be well advised to make the effort.