Economics, Revelation, Reality, and Computers
Herbert E. Striner
Herbert E. Striner is an economist with a bachelor's and master's degree from Rutgers University and a Ph.D. from Syracuse University, where he was a Maxwell Fellow. Since 1962, he has specialized in manpower and productivity problems and has served as a consultant on productivity to such corporations as IBM, PPG, and Saks Fifth Avenue, as well as to the U.S., Australian, Canadian, and Italian governments.
During a distinguished teaching career at American University, Washington, DC, Dr. Striner served as Dean of the College of Business and as Professor, a post from which he retired in 1989. He has also served at Johns Hopkins University, the Brookings Institution, the Stanford Research Institute, and the W. E. Upjohn Institute for Employment Research. In government, he has worked with NSF and the Department of the Interior. He has appeared frequently as a guest speaker before major business, governmental, and professional organizations and on such television programs as the McNeil-Lehrer Report and various NBC "White Paper" programs.
Dr. Striner has published five books and over 70 articles, including Regaining the Lead: Policies for Economic Growth (1984). This book focuses on a rethinking of U.S. economic policy as it relates to productivity and economic growth.
The economic policies of the current administration will lead, undoubtedly, to the loss of U.S. world leadership in the supercomputer industry. By the very early 1990s, unless there is a fundamental rethinking of our economic philosophy, the U.S. will cease to be a major competitor in the field of supercomputers. The implications for our industrial competitiveness will be tragic. We may certainly continue to produce Nobel Laureates. However, the ability to translate their gifted insights into technology and commerce will be held hostage by an archaic economic ideology.
Erwin Schrodinger (1952), a pioneer in quantum mechanics and Nobel Laureate in 1933, put it this way:
There is a tendency to forget that all science is bound up with human culture in general, and scientific findings, even those which at the moment appear most advanced and esoteric and difficult to grasp, are meaningless outside their cultural context.
Another Nobelist, the physical chemist Ilya Prigogine, in Order out of Chaos (Prigogine and Stengers 1984), observed:
Many results . . . for example those on oscillating chemical reactions, could have been discovered years ago, but the study of these nonequilibrium problems was repressed in the cultural and ideological context of those times.
Since the early 1980s, when I was a consultant on productivity with IBM, I gradually came to recognize that the problem of competitiveness is not an economic problem, it is a values problem. By that I mean the production decision starts with a set of perceptions, or values, reflecting what the decision maker thinks is right. In management there is a broad array of theories on how to manage an organization. But the resistance on the part of managers to move to a demonstrably superior system is almost always the result of personal values. This is equally true in the sciences. Werner Heisenberg (1974) commented on this:
Once one has experienced the desperation with which clever and conciliatory men of science react to the demand for change in the thought patterns, one can only be amazed that such revolutions in science have actually been possible at all.
Decisioning is anchored in a hierarchy of values that leads to assumptions and finally to policy. In the course of research in which I have been involved—cutting across diverse disciplines—I have observed that failure or success in policies and programs is rarely traced back to the personal
hierarchy of values that is the initial motive force of any decision. Our values significantly determine what we see as—and believe to be—reality.
Any perception of reality must be closely related to what actually exists, or we will be tilting at windmills. We are in trouble if what we perceive is only what we want to perceive and is far removed from a truer reality. This problem is not an easy one to deal with. In his book Vital Lies, Simple Truths: The Psychology of Self-Deception , Daniel Goleman (1985) put it well: "We do not see what we prefer not to, and do not see that we do not see."
Since the publication of Adam Smith's monumental work, An Inquiry into the Nature and Causes of the Wealth of Nations , in 1776, economists have been divided—often bitterly—over Smith's perception of the effectiveness of the so-called "free-market system." Parenthetically, even the word "free" is used effectively to imply that all other possible options are "unfree"—a perfect example of the fallacy of the excluded middle.
It is now critical that we examine the basic values and assumptions surrounding this long-standing debate—"critical" because if we are wrong in assuming the superior efficiency of the free-market system as compared with any other system, we may be, as they say in industry, "betting the store."
The U.S. economy is the largest free-market system in the world, so it is helpful to look at a few facts. Or, to put it differently, to look at a long-term reality somewhat differently from the one usually described by free-market enthusiasts:
• In 1970, among the top 20 banks in the world, based on deposits, six were from the United States. Four of them were among the top 10. By 1989, there were no U.S. banks among the top 20.
• In 1970, there were no Japanese banks among the top 10, and only two among the top 20—specifically, in 19th and 20th places. By 1989, all of the top 10 banks in the world were Japanese. Fourteen of the top 20 were Japanese. In 1989, the highest ranking United States banks were in 27th and 44th places. They are Citibank and Bank of America, respectively.
• In 1970, 99 per cent of all telephone sets sold in the U.S. were manufactured by U.S. companies. By 1988, this share was 25 per cent.
• In 1970, 89 per cent of all semiconductors sold in the U.S. were produced by U.S. companies. By 1988, this share was 64 per cent.
• In 1970, almost 100 per cent of all machine tools sold in the U.S. were produced by U.S. companies. By 1988, this share was 35 per cent.
• In 1970, 90 per cent of all color television sets sold in the U.S. were produced by U.S. companies. By 1988 this share was 10 per cent.
• In 1970, 40 per cent of all audio tape recorders sold in the U.S. were produced by U.S. companies. By 1988 this share was one per cent.
Let's look at this long-run period from a slightly different vantage point, that of productivity gain. This is the fundamental indicator of competitive ability in a national economy. Looking at productivity figures for industrialized nations (Department of Labor 1990), I have divided seven major competitors into Groups A and B and compared their rates of productivity gain from 1973 through 1989. Group A consists of West Germany, France, Japan, and Italy. Group B consists of Canada, the U.S., and Great Britain. The basis for these groupings is the underlying economic philosophy vis-à-vis government and the private sector:
• Group A: West Germany, France, Japan, and Italy view active government involvement in the economy as either important or essential for achieving economic goals.
• Group B: the U.S., Great Britain, and Canada view government as a problem, best prevented from any involvement in the market system.
How do these groups compare in their 17-year records for average annual gain in output per employed worker? Group A's gain was 2.43 per cent; Group B's gain was 1.20 per cent. Group A's productivity gain was twice that of Group B's from 1973 through 1989. The difference is devastating for competitiveness, as the record shows. Interestingly, even if we do not include Japan's productivity gain, the remaining Group A countries exceeded the productivity gain of Group B countries by 86 per cent during the period in question (see Figure 1).
But few in our country would question the value of government investment in a limited number of cases. It was the Morrill Act of 1862, the so-called land-grant act, that in combination with state agricultural extension services played a key role, and still does, in producing the highest-productivity agricultural system in the world. It was federal government policies and funds during and immediately following World War II that produced the modern computer. The private aviation industry is the result of federal support for R&D that began in 1915 with the creation of the National Advisory Committee for Aeronautics. Federal expenditures for weather, safety, airport programs, and mail subsidies have been major factors in the growth of our national air transport system. But these, and other existing examples, are viewed as "legitimate" exceptions. The rule is that government is, for the most part, an interloper. The less government, the better is the current, prevailing ideology of the present administration in Washington. If this model remains the rule, however, there is no way for the United States to regain the competitive lead in the world economy.
Two factors account for what has been happening to cause the erosion of U.S. competitiveness.
First , the computer radically alters the time span in which decisions can be formulated, tested, and finalized. Decisions are, in reality, strategies. Supercomputers have completely changed the decisioning, or strategy-formulation, process. The country capable of introducing computers into the industrial process in the most effective manner gains in design and production capabilities. The ability to shorten design and production cycles is the competitive edge. Supercomputers that can simulate complex relationships are now the core of this process. I speak not only of complex design and production systems but also of marketing, communications, and financial systems. The link between computers and production has revolutionized the economics of long production runs, which has always underlain our concept of mass production and decreasing unit costs. The game now is shorter design and production
cycles, flexible manufacturing systems, and high-quality products at both the low- and high-price ends of the production line. The supercomputer is the vital ingredient in this new process. But between 1980 and 1990, the U.S.'s share of installed supercomputer systems in the world has gone from 81 per cent to 50 per cent. Japan's has gone from eight per cent to 28 per cent.
Development and production S-curves (growth curves) exist but in a time period so truncated that the time segment for decision making has become more critical than ever. And catching up becomes more difficult than ever. The time necessary for so-called long-run, natural forces of the marketplace to play out are foreshortened by a new model I will describe shortly.
This state of affairs is even acknowledged in U.S. government reports. Quoting from an International Trade Administration report (1990), we are told:
With adequate funding available due to the strong and visible presence of the government and the keiretsu along with a profitable domestic market, Japan reinvested in the production of all semiconductor devices. Japanese producers' aggressive capital and R&D investment policy enabled them to accelerate new product introductions; in fact, the Japanese were the first to market 64K and 256K DRAMS [dynamic random-access memory chips]. Early market entry is critical to memory device producers, since relative cost advantages accrue to the firm reaching a given production volume first. U.S. firms, faced with waning demand and Japanese pricing pressure, were forced to curtail investment.
The second factor has to do with the availability of investment capital. To exploit gains in decision time, massive amounts of capital, available both quickly and reliably over time, are essential. Normal market forces usually look for short-term returns on investment. Investment in processes and products with an eight- or 10-year payout compete poorly when there are good alternatives with a two-to-four-year payout. The level of funds and length of time needed to support a technological development of large magnitude, like supercomputer systems, is such that the free-market-system model simply can not compete. Why is this so? Because nations that are out-competing the U.S. have developed a more effective decisioning process based on a more realistic values system.
Even when U.S. companies undertake to join forces to meet the competition, unless government is ready to share responsibility for providing key aid—usually in necessary investment support—
private-sector initiative is insufficient. No better example of this exists than that of U.S. Memories.
In June 1989, seven U.S. electronics firms announced the formation of a DRAM production consortium that was named U.S. Memories, Inc. The objective was to increase our competitiveness in this area in competition with Japanese producers. However, in January 1990, this effort was canceled after an effort to raise required capital funding failed. Such consortia efforts in Japan, where a national goal of competitiveness is jointly arrived at by industry and government, are adequately funded on the basis of commitments undertaken by the Ministry of International Trade and Industry (MITI) and the Ministry of Finance.
In the race to recover after World War II, the devastated economies of Japan, West Germany, and France developed what I call the key-player model. The model is based on the following:
• a clear perception of an economic goal,
• determining the key ingredients and players necessary for achieving the goal, and
• the use of the key players in such a way as to balance economic and social goals rather than sacrifice any one significant goal in the process of achieving others.
This is not easily done but apparently has been done by some nations—the ones that are succeeding on the world scene. The model is not perfect, but it meets the test of being effective. It is this model that has replaced the free-market-system model that served the industrial world well since the Industrial Revolution of the 19th century.
A values system, or hierarchy of values, that eliminates one or more key players at the outset in effect predetermines that a large systems goal cannot be met. We in the U.S. have chosen to meet the competition with one key player absent, and the results have been apparent for all to see. We start from a false ideological premise. We tend to assume that unless our markets are free of the involvement of government, both efficiency in resource use and individual freedom are threatened. But such capitalist countries as West Germany, Japan, France, and Sweden testify to the fact that public and private sectors can have close, catalytic economic relationships while remaining healthy democracies. Their ability to compete effectively is hardly in question. Anecdotal evidence leads me to suggest that their production/design growth curves are radically different, as shown in Figure 2. The Nobelist Arno Penzias (1989) commented on this truncation in his book Ideas and Information , but only in the context of the increasing efficiency of modern laboratories. I am enlarging the concept to include the effects of a systems-decisioning model, the key-player model.
Using Japan as an example, the key-player model has worked in such different cases as the development of flexible machining systems, very-large-scale integrated circuits, biotechnology, and, of course, supercomputers. The supercomputer industry of today in Japan is the product of the long-term investments started by the government in the late 1950s. Beginning in 1957, MITI supported the planned growth by heavy subsidies, cooperative R&D, protectionist regulations, and an ingenious rental strategy. As was pointed out by Marie Anchordoguy (1990), IBM gained the right to produce in Japan only after agreeing to give the infant Japanese computer companies patent rights at low rates. By 1961—led by MITI—seven computer companies formed the Japan Electronic Computer Company (JECC). This company, with about $2 billion from the government, bought computers from Japanese companies and rented them to Japanese industry at rates below those of IBM in Japan. The interest rates were also well below market rates. Between 1961 and 1981, these policies built the Japanese computer industry. JECC paid computer producers before delivery, with no interest on the loan. Since JECC set computer prices and prohibited discounts, it guaranteed that competition could only be based on quality of both manufacturing and technology. During the same 20 years, the government invested about $6 billion in R&D, new equipment, and operating capital. This is how Japan "grew" its computer industry. Those who currently laud the state of
competition in Japan's computer industry are only looking at the peak of the iceberg. They have displayed their ignorance of the key role of government for almost 25 years.
Only government has sufficient long-term capital to supply certain needs of a modern industrial power. Only a key-player model can develop the intricate web of mechanisms calculated to support long-term industrial objectives. Increasingly, U.S. industry is locating facilities and off-shore production at foreign sites where other national policies recognize this fact of modern industrial life.
Public policies calculated to support industrial productivity and technology are not always the obvious ones, such as targeting R&D for special tax treatment. Radically shortening depreciation rates on equipment, supporting the capital needs of such ventures as U.S. Memories, Inc., increasing funds for scholarships and facilities at universities, as well as the direct investment in new areas where the alternative is to lose a vital competitive position, are a few additional means of achieving technological and productivity gains.
In Session 13, there are discussions of the industrial impact of the High Performance Computing Initiative, a project with which both Los Alamos National Laboratory and I have been involved. The discussions will deal with the likely benefits of a five-year increase of $1.9 billion for funding a high-performance computer system. One conclusion of the proposal for this project is that if we do not provide for this funding increase, U.S. market forces are not about to meet the competition that has developed in Japan as a result of past Japanese government support for their computer industry. The supporting evidence is clear. Between 1980 and 1990, the U.S. share of installed supercomputer systems in the world has gone from 81 per cent to 50 per cent, while Japan has gone from eight per cent to 28 per cent—a drop of 38 per cent matched by an increase of 350 per cent.
While the market for supercomputers is relatively small compared to the total computer industry market, less than one per cent of total revenues, this fact can be dangerously misleading. It's about as helpful as assessing the value of the brain based on its per cent of body weight. Only the supercomputer can do the increasingly complex simulations being called for by industry as design and production cycles shorten. And in financial and banking industries, only the supercomputer is capable of tracking and simulating world flows of credit, equities, and foreign exchange.
The problem confronting us is the conflict between economic reality and a values system that wants to believe in a form of revelation—the free-market-system model. This is nowhere better illustrated than in the
position taken by the current Chairman of the President's Council of Economic Advisors, Dr. Michael Boskin (1990). He states that he sees the signs of industrial decline as merely parts of a necessary process of free-market competition, which although "uncomfortable . . . makes us perform better." It was this same presidential advisor who observed: "It doesn't matter if we export computer chips or potato chips." This keen analysis is at odds with the Office of Technology Assessment. Their report Making Things Better (1990) states, "American manufacturing has never been in more trouble than it is now." And the reason is that the free-market-system model can not compete with the key-player model.
The key-player model exists in capitalistic countries. Basically, it is a far more effective form of capitalism than that which exists in the United States. I have described the evaluation of this newer model (1984), characterizing it as "Shared Capitalism," a system based on a cooperative values system rather than an adversarial one.
Values systems are almost always resistant to change. Placed in terms of Thomas Kuhn's insightful 1970 work, The Structure of Scientific Revolutions , normal science, that is, the piecemeal efforts to deal with anomalies, is not capable of major breakthroughs in thinking. Only paradigm changes can do this. Computers and new governance arrangements in other countries have produced a paradigm change for modeling industrial competitiveness. This new key-player model is more effective than the free-market model. But our values system prevents us from meeting the challenge. Clinging to an outmoded decisioning model is rapidly moving us into the ranks of second-rate economic powers. In every competitive system, the rule of success is this: change in order to cope, or lose out.
The great economist, Lord Keynes, in answering a critic's jibe when Keynes changed a position he had once taken, retorted, "When I see the facts have changed, I change my opinion. What do you do, Sir?" I have also found the following to be helpful: you can't be what you want to be by being what you are; change is required.
If each of us will urge, when the opportunity arises, that our nation use all of its key players in the game of global competition, we just may begin to turn the present situation around. This nation has been at its best when it has junked old solutions that were not working and struck out in new directions. That is the real pioneering spirit. I hope we still have it.
M. Anchordoguy, "How Japan Built a Computer Industry," Harvard Business Review68 (4), 65 (1990).
M. Boskin, quoted in New Technology Week , p. 12 (July 23, 1990).
Department of Labor, "Comparative Real GDP per Employed Person, 14 Countries, 1950-1989," unpublished BLS data (May 3, 1990).
D. Goleman, Vital Lies, Simple Truths: The Psychology of Self-Deception , Simon & Schuster, New York, p. 234 (1985).
W. Heisenberg, Across the Frontiers , Harper & Row, New York, p. 162 (1974).
International Trade Administration, "The Competitive Status of the U.S. Electronics Sector, from Materials to Systems," U.S. Department of Commerce report, Washington, DC, p. 100 (April 1990).
Office of Technology Assessment, Making Things Better: Competing in Manufacturing , U. S. Government Printing Office, Washington, DC, p. 3 (February 1990).
A. Penzias, Ideas and Information , W. W. Norton & Co., New York, p. 186 (1989).
I. Prigogine and I. Stengers, Order out of Chaos , Bantam Books, New York, pp. 19-20 (1984).
E. Schrodinger, "Are There Quantum Jumps?" The British Journal for the Philosophy of Science3 , 109-110 (1952).
H. Striner, Regaining the Lead: Policies for Economic Growth , Praeger Publishers, New York, pp. 97-125 (1984).