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Brave new corporate world: an assessment of industrial policy.


Public concern with the dangers of corporate power reached a feverish pitch in the early 1970s. Bills designed to control perceived abuses were passed by Congress, establishing the Environmental Protection Agency (EPA) and the Occupational Safety and Health Agency (OSHA) and curbing the widespread practice of overseas bribery. This antimonopoly fervor peaked with the attempt to nationalize the oil industry, and with Congressional consideration of the Hart Deconcentration Act. Though these efforts failed, they placed the monopoly problem at the center of the liberal agenda.

Ten years later, worrying about monopoly seems quaint. The political ascendance of corporate reaction, combined with corporate "hired guns' from the University of Chicago and the American Enterprise Institute, have all but extinguished the antitrust movement. Nevertheless the basic tenet of twentieth-century liberalism--that capitalism can be reformed by wise state intervention--survives in the current school of industrial policy advocates. These neoliberals, an eclectic mix of lawyers, political scientists, labor and international trade economists, and a handful of politically active bankers and industrial capitalists, are providing the ideological bridge between academics and politicians for a new round of state intervention, much as an earlier group of intellectuals legitimized the macroeconomic finetuning advocated by American Keynesianism in the 1960s.

Conceding the debate on monopoly power to the right, industrial policy advocates tend to focus on the international economy. They emphasize the need to reorganize corporate management in the United States, with a view to enabling U.S.-based corporations to accommodate rationally to the changing structure of international trade. They argue that macroeconomic demand management is insufficient unless accompanied by mechanisms for dealing with change in industries, firms, and regions. The disturbing employment, profit, and growth statistics of the past fifteen years are seen as the consequence of corporate management's emphasis on short-run profits rather than long-run growth. For a variety of cultural and historical reasons, U.S. capitalism is said to be stuck with tax experts and "go-go' finance wizards at the economy's helm. Only prudent state intervention into the detailed functioning of the economy will prevent collapse under the weight of Japanese and third world imports.

Industrial policy appeals to many on the left as a sophisticated, activist response to reaction and economic crisis. At the end of the 1970s economists such as MIT's Lester Thurow and businessmen such as investment banker Felix Rohatyn began calling for state-led economic restructuring. While the views of these earlier advocates were criticized as being antidemocratic, more recent proponents of industrial policy--in particular Ira Magaziner and Robert Reich--have adopted a more democratic orientation.

After Reagan's anti-"big government' election swept many major Democratic politicans out of office and reduced the power of those who remained, the Democrats became a party "in search of ideas.' One of those ideas has been industrial policy. Robert Reich, Lester Thurow, and others were admitted to the inner circles of the Hart and Mondale campaigns. Indeed, the New York Times reported that, after reading Reich's The Next American Frontier, Mondale proclaimed: "This should do it for the Democrats in 1984.'

If the Democrats should succeed in deposing Reagan this year, a change in economic policy as sweeping as supply-side economics or the "New Economics' of the Kennedy-Johnson years may follow. Should the left applaud this? Should it "jump on the bandwagon'? Are there important criticisms to be mounted against this new version of liberalism?

Thurow's popular 1980 book, The Zero Sum Society, was the first coherent statement of the industrial-policy position. Like Robert Reich and others after him, Thurow put forward the thesis that the principal obstacles facing the United States in restructuring its economy are political, not economic. He pointed to the extensive degree of state intervention in the economy, both here and abroad. Inevitably, this intervention favors some industries over others. For Thurow, the main task is to adopt government policies that promote growth sectors, a process currently blocked by entrenched business and labor interests. New state policies are required to impose sacrifices on losers, assist winners, and end-run the zero-sum logic of current politics by redistributing some of the gains of winners to the losers.

Productivity is the key concept in Thurow's analysis. He claims that investment as well as research and development in high-productivity industries are the essential forces behind productivity increases. The main constraints on the operation of these forces are barriers to the movement of capital and labor out of less productive areas. Thus, healthy growth requires the decline of some sectors and, in turn, the decline of someone's income. This creates a political constraint on an otherwise felicitous process of disinvestment. In Thurow's words, "Economic pains . . . are endemic whenever disinvestment occurs. Someone is worse off because of those disinvestments, and they have every incentive to appeal for government to stop or slow down the process of disinvestment.' (The Zero Sum Society, p. 82)

Thurow points to three ways to improve the situation. First, he argues that a less adversarial, more flexible workplace will improve productivity. Second, risky R&D projects, particularly in new production techniques, should be subsidized by the federal government. Finally, state measures are needed to bolster capital formation and investment. According to Thurow, the tax structure and the financial sector conspire to favor older industries, representing perhaps the greatest constraint on disinvestment. Long time-horizons and patient investors are needed to produce winners in world markets and productivity increases at home. He argues that the government should run a budget surplus and use it to finance a national investment program.

Following Thurow, Robert Reich of Harvard's Kennedy School of Government has argued for industrial policy. His two books--Minding America's Business, coauthored with business consultant Ira Magaziner, and The Next American Frontier-- have tried to answer many of the criticisms of Thurow's work. In addition to the increasing social irrationality of investment, Reich stresses industrial democracy and the importance of the changing international economy.

In Minding America's Business, Reich and Magaziner claim that the failure of macroeconomic policy in the 1970s was due to the increasing integration of the United States into the world economy. Whereas the sum of the value of exports and imports is now nearly 25 percent of the gross national product, it was less than 12 percent in 1969. This growing integration has exposed the inefficiency of many domestic capitalists vis-a-vis their foreign rivals. In turn, these rivals have captured a growing share of U.S. markets in steel, auto, and other industries, causing permanent layoffs in the core of high-wage industrial blue-collar occupations. Magaziner and Reich attribute these results to the inability of U.S. firms to improve productivity. Only such productivity improvements will deliver higher quality products at lower prices than rivals in other industrialized countries, while at the same time allowing for high-wage employment domestically.

Conservatives argue that capital shortages are the root cause of productivity problems in the United States. They claim that government tax and regulatory policies blunt incentives to save and invest and thereby lower the rate of capital formation. In fact, as Magaziner and Reich point out, U.S. aggregate investment has been at historically high rates over the past decade.

Period & Non-Residential Fixed Investment as Percent of GNP

1949-53 9.04

1954-57 9.58

1958-69 9.84

1970-73 10.42

1975-79 10.42

Source: U.S. Department of Commerce.

Magaziner and Reich argue that the trouble lies in the patterns rather than the rates of investment, i.e., current corporate and government policies make investment patterns socially irrational. On the corporate side, managers are being sent the wrong signals for evaluating investment opportunities.

Short-run gains are emphasized and cheap labor is valued more than improved productivity. In the public sector, policies affecting the economy are uncoordinated. In this view, the alternatives facing state policymakers are not intervention versus laissez-faire, but coordination versus anarchy. A conscious industrial policy is necessary to ease adjustment to change, equitably distribute losses, and deal with situations (infrastructure, research and development, and key "feeder' industries such as steel) where the public return on investment exceeds the private return.

Whereas Minding America's Business develops Reich's analysis of current economic problems, The Next American Frontier explores the historical roots of the dilemma facing today's policymakers. The first two decades of the twentieth century are seen as a period of crisis, as early social relationships between management and labor broke down under the strain of rapid economic growth and technological change. The social and institutional structure was transformed; the result was the rise of managerialism as philosophy, science, and metaphor. Reich believes that scientific management and its kin eventually pervaded all aspects of social life: "The logic of routine largescale manufacturing first shaped its original business environment and then permeated the larger social environment.' (p. 49)

Managerialism saw all problems, economic, political, and social, as amenable to technical solution. This system of privately coordinated economic planning culminated in the permanent mobilization that began during the Second World War. Business committees, organized along industry lines, were set up in each of the major government departments. The structure of strategic planning now operated in the firm, in industries as a whole, and in government itself.

Managerialism found its greatest success in standardized, high-volume production in capital-intensive manufuacturing. Insulated from foreign competition, and with stable markets and market shares, managers could focus on achieving economies of scale. Thus, the premise of managerialism's success in this era was a stable environment.

Reich attributes the current crisis in the U.S. economy to the increasing irrationality of managerialism in a new era of rapid technological change and international competition. The standard explanations of the crisis (over-regulation, deficits, capital shortages, oil shocks, declining R&D expenditures, entrance of woman and minorities into the labor force) are wrong because they "fail to take into account the worldwide reorganization of production and America's failure to adapt to it.' (p. 121)

Reich describes in detail the changes in transportation, communications, and international financial markets which, along with uneven wage levels, have created the two outstanding characteristics of the new international division of labor: the declining competitiveness of basic industry in advanced countries and the physical fragmentation of production. In such a world, high-volume, standardized production using semi-skilled labor is no longer an option for the United States.

Reich claims that such countries as Japan, France, and West Germany have adjusted to the new regime by shifting their industrial bases. These countries have moved into custom and technology-intensive products that rely on skilled labor (usually working in teams). Formerly separate business functions have been merged into integrated systems for quick response to changing conditions. Reich emphasizes the link between cooperation, flexibility, and productivity growth.

Reich refers to this as the "flexible system' of production. The strong commitment to managerialism in the United States has prevented the adoption of the "flexible system.' Instead, managers have adopted the strategy of "paper entrepreneurialism,' i.e., practices that merely redistribute, rather than create, wealth. He cites the rise of lawyers, financiers, and accountants over production managers within the corporate hierarchy as evidence of the growing speculative orientation of U.S. business. Conglomerate expansion, unfriendly takeovers, and "creative' accounting are typical paper entrepreneurial strategies. The collapse of the conditions supporting managerialism as a production-oriented culture has released finance and law from their once close association with production.

The challenge of the new international order has also been evaded by the political system. Like Thurow, Reich claims that government protection has not been tied to economic restructuring programs. Declining industries and regious wield disproportionate political power, encouraging preservation rather than adjustment. In addition, the United States has little in the way of labor training programs outside of the military, and public assistance programs reinforce racism by characterizing welfare as charity rather than as an investment in human development.

What can be done? Reich recommends altering the mix of tax incentives and subsidies to discourage paper entrepreneurialism; explicit quid pro quos for any government assistance to business; reverse depreciation of human capital to encourage policies that improve productivity rather than seeking low-wage labor; and risk-based unemployment insurance payments for employers to discourage frequent lay-offs. But in the final analysis, Reich pins his hopes on a brave new corporatist world to resolve the problems of the U.S. economy:

Business enterprises . . . will largely replace geographic jurisdictions as conduits of governmental support for economic and human development. . . . As a result, economic development programs and social services will be closely linked. . . . [All] citizens (and their dependents) will become employee/members of some business enterprise. . . . The work community will replace the geographic community as the most tangible American social setting. (pp. 248-49, 251)

In this new order, capitalists are assumed to adopt nonhierarchical relationships with their employees. To legitimize control, managers will offer substantial social services, lifetime employment, and educational and training benefits to their "citizen-members.' Given a real stake in the success of the firm, workers will respond by promoting adaptability, innovation, and productivity, the necessary components of competitiveness in the new international economy. Meanwhile, corporations will invest in new skill-intensive processes, while farming out standardized production to the periphery. U.S. workers, third world workers, and U.S. firms will all prosper.

Reich tells us in effect that capitalism can and will work if firms treat workers well and innovation is encouraged. The attraction of this vision is that it replaces the traditional altruistic ground held by liberals when arguing for more "welfare' and better treatment of the working class: social programs should be supported not because they are "humane' but because they promote economic growth. Development of human capital and civic virtue go hand in hand, in this best of all possible liberal worlds.

Much of the industrial policy position is very old wine in shiny new, high-tech bottles. Underneath the veneer of trendy policy language lie old liberal dogs that the left should let sleep rather than kick around yet one more time.

Reich's work would not be so objectionable if his policy recommendations were consistent with the body of analysis he presents. He shows that during the 1970s corporations stepped up union-busting, shifted production to the third world where repressive governments guaranteed low wages, increasingly engaged in speculation rather than production, and enlisted the federal government in self-serving protectionist and bail-out programs. Ironically, after blaming corporate mismanagement for economic decline, Reich proceeds to propose an expansion of the social role of private corporations. In the end, he is as trapped by his liberal assumptions as the corporate managers are in their "short-run' outlook.

Further, if flexible-system production were really profitable, why haven't U.S. corporations already made the transition? Reich blames the stupidity of managerialism, but in fact many U.S. corporations have maintained profitability precisely through paper strategies and capital flight.

Reich is looking for a connection between social welfare and capitalist efficiency of a kind that economists have posited ever since Adam Smith. But all these welfare/efficiency claims are at best based on deceptive half-truths. As Marx noted, capitalism does have progressive dimensions, but to argue that capitalism's positive aspects are inherent while treating exploitation, unemployment, crises, and extremes of wealth and poverty as aberrations is to indulge in the shallowest kind of liberal apologetics. It is just such an apologetic evasion of reality that lies at the heart of industrial policy.

That this is indeed the case is most clearly illustrated in Reich's discussion of multinationals. He defines two categories: "pure' and "national.' The latter are progressive, pursuing policies which institute flexible systems domestically. They maintain profitability in mature lines by moving them offshore, and use the resulting profits for domestic investment. These "national' multinationals live up to the true spirit of flexible systems:

Flexible-system enterprises exist in large part for the people who work within them. Of course, if the enterprise is successful, they also enrich their customers, suppliers, and stockholders. But one of their central missions is to enhance the lives of their employees. In a real sense they are a political community whose leaders are accountable to their members. (p. 257)

On the other hand, "pure' multinationals act only to benefit stockholders and managers, fleeing from one country to the next in pursuit of profitable branches, subsidiaries, and joint ventures without regard for the effects of capital mobility on workers. In contrast to "national' multinationals, they are neither formally nor informally bound to promote the living standards of any nation. U.S. multinationals are, of course, of the "pure' variety: thus they fail to live up to their role as the agents of their society. This is reflected in their investment strategy. The "pure' multinational attempts to preserve market shares in existing product lines by locating overseas, rather than concentration on improving skills and techniques in production and moving into new product areas, thereby preserving domestic, high-wage employment.

The implication is that the U.S. government should step in to prevent U.S. multinationals from pillaging the domestic economy. In effect, Reich is calling for the government to act as labor's representative. Basically, this recommendation stems from a totally distorted view of the success of other nations in regulating multinational corporate behavior. For example, German corporations play the Lander (provinces) off against each other to obtain tax breaks, just as U.S. corporations extract concessions from states and localities. The Japanese lifetime employment system applies to a small minority of workers and is purchased at the expense of poor working conditions and cyclical unemployment for the majority.

Reich calls for popular participation in his new corporatist world, as if workplace democracy were the inevitable result of economic development. He praises progressive multinationals in other countries as if they represented a higher order of development brought about by efficient managers, wise government leaders, and superior local culture. What is clearly missing in his analysis is any sense of the way capitalism really works, of the class basis of power, and of the role of struggle in determining policy.

With the fate of all workers in the hands of corporations, one might at least ask what the prospects would be for realizing full employment through industrial policy. Yet Reich makes absolutely no attempt to demonstrate empirically the prospects for employmemt growth in the sector of "flexible-systems' enterprises. We are left with a sneaking suspicion that the benefits of the new order can only be bought by the maintenance of a permanent underclass, as is the case in Japan.

Despite the current "economic recovery' (which still leaves millions of unemployed, many of whom once held high-paying industrial jobs, with little prospect for decent jobs in the future), the matter of industrial policy is a leading issue in this election year, and perhaps beyond. In judging its eventual fate, we should perhaps take a lesson from the experience of Keynesian economics. While Keynes's critique of capitalism was in some respects quite radical, he ultimately believed that if the right people were in possession of the right ideas, capitalism could be made to work for the betterment of all. Yet in practice only those policies that reinforced capitalist social relations survived in the peculiar economic theory and practice of U.S. Keynesianism. We suspect that industrial policy will face the same fate. As long as the country's basic power structure remains what it is, even the best of ideas will be twisted to benefit its beneficiaries.
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Author:McIntyre, Richard; Hillard, Michael
Publication:Monthly Review
Date:Oct 1, 1984
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