Former Vice-President Walter Mondale, after reading Robert Reich's The Next American Frontier (Times Books, 1983) reportedly exclaimed, "This will do it for the Democrats!" If Mondale was right, if he and other Democrats buy Reich's plans for remaking U.S. industry, we are all in trouble.
A fine writer, Reich is nonetheless a dangerous one because he writes well without understanding a good part of what he writes about. That wouldn't matter if people like Mondale and Sen. Gary Hart (D-Colo.), both of whom want to be President, weren't taking his book so seriously. But since they are, and since their endorsement means that the Harvard lecturer's ill-conceived nostrums are going to be part of the coming campaign debate, the sooner these ideas are knocked down the better.
Reich, the director of policy planning at the Federal Trade Commission during the Carter Administration, makes two arguments in The Next American Frontier. First, he says, the old "managerial" systems that helped U.S. companies and industries dominate many markets during the age of mass production are in trouble. What we need, according to Reich's second argument, is something new, something he calls the "flexible system" economy.
Reich is half right. U.S. industry, some of it anyway, is in desperate shape. But his corrective notions are downright dangerous, based, as they are, on a deep misunderstanding of U.S. entrepreneurism and a naive infatuation with foreign industrial systems.
Reich has trouble explaining what "flexible system" companies look like, but he knows what he wants them to do. They will produce high-value-added goods; they will adapt quickly to changing economic conditions; and, above all, these marvelous companies will operate for the benefit, not of their investors, but of their workers.
Examples of these companies, however, are hard to come by. He suggests the carmaker A. B. Volvo, whose "international strategies . . . progressively . . . upgrade its Swedish work force." This compassionate flexibility contrasts with one of Reich's favorite examples of American "managerial" heartlessness, United States Steel Corp., which, he claims, ignored the long-term well-being of its employees by neglecting its basic business to acquire Marathon Oil Co.
Reich apparently knows little about his favorite flexible company, which, in 1978, offered to sell off 40% of the company for oil-exploration rights off the Norwegian coast. That deal collapsed, and the company later formed Volvo Energy to chase natural resources on a smaller scale. In 1980, Volvo pushed for a merger with Beijerinvest, a trading company best known for oil dealings, and, in 1982 it bought into Denver-based Hamilton Bros., a top-ranked energy exploration company with U.S. and North Sea holdings. If there is a difference between the "flexible" investment strategies of Volvo and the "managerial" investment strategies of U.S. Steel, Reich doesn't show us what it is.
And since when has Volvo shown the lightning-fast response to market forces promised for flexible systems? The company's newest sedan, the 760, required an astonishing 16 years to put into production and has gotten only a lukewarm reception. As for the superb workmanship Reich attributes to flexible systems, which are theoretically staffed by highly motivated workers instead of "resentful time servers," the 760 tested by Motor Trend magazine sported "a rattly windshield, rattly shifter, and strange noise in the left front door . . ." In addition, the turn signal and cruise control stalk snapped in half early in the test. The exhaust system mounting hardware failed twice. And the electric overdrive control came off in the test driver's hand.
Naturally, Reich also offers Japan as an example of what a society committed to flexible systems can accomplish, but even here he has to make excuses. In driving for economic growth, he concedes, the Japanese have neglected some fine points of democracy, including the rights of women and minorities.
He also admits that Japan experiences occasional expressions of political disagreement, as, for instance, over the new Tokyo airport. He does not mention that the 11 years required to build the airport were marked by riots, protests, and court actions, and that on the scheduled opening day in 1978, 14,000 riot police were unable to keep demonstrators from smashing the tower controls into rubble.
Nor does Reich report that, for decades, the Japanese neglected major elements of their infrastructure -- sewage and housing, for example -- to concentrate on the building of export industries. Japanese National Railways pushed through the thunderously noisy bullet train and then had to spend billions to insulate, screen, and compensate unhappy nearby residents. As for environmental health -- one of Reich's standards for quality of life -- the mercury poisoning of the village of Minamata was arguably the worst industrial/environmental disaster of modern times.
Yes, the Japanese have achieved miraculous economic growth, but they paid heavily for their miracle. More to the point, however, most of their successes resulted from practical innovations -- things like "just-in-time" inventories, quality circles, and statistical tracking for quality control -- which are already being used successfully in U.S. companies. Compared with these specifics, Reich's "flexible system" appears to be simply an abstraction, an idea without concrete examples.
If what Reich really means to describe with his "flexible system" label is a business that has adapted to competition in the international market, that is innovative, that looks beyond the next quarterly earnings report, that makes efficient and effective use of all its assets -- human and tangible -- then he doesn't have to go to Scandinavia or Japan to find one. There are better examples right here.
He could look, for instance, to Apple Computer, Atex, Atari, Federal Express, Genentech, Wang Laboratories, Commodore Business Machines, Tandem Computers, or any number of other entrepreneurial U.S. companies. Many large U.S. businesses already have noted the success of these formerly small companies and are striving to imitate them in many respects.
Last year, the chairman of General Electric Co. told The Wall Street Journal that he was "trying to reshape GE . . . as a band of small businesses . . . to take the strength of a large company and act with the agility of a small company." Since 1981, IBM employees have been able to create their own "independent business units," essentially small businesses within IBM's fortress walls. Recently, such a group created a robotic system for industrial assembly work.
GE, IBM, 3M, and other large corporations have learned that to stay competitive and continue to grow, they must find ways to tap the entrepreneurial energies of the people who work for them. Reich wants the same results with his "flexible system" concept, but he would constrain entrepreneurs within an industrial policy administered by federal planners drawn from the ranks of corporate executives, union officials, and government regulators.
Reich's planners will see that enterprises deploy their human capital intelligently. They will ensure that businesses behave in a "socially just" fashion. Does a company want to move a plant? Either it locates in a socially advantageous location, or no plant financing is available. Does it want to change industries? Okay, but only if it retrains its workers according to government-approved standards. Every move by, presumably, every company in the United States will be judged by two criteria: economic advantage and social merit.
In theory, Reich's policy offers something for everyone: social regulation for liberals and entrepreneurial vigor for conservatives. Yet problems abound. Set aside the fact that these programs will, for the foreseeable future at least, be run by the same shortsighted bureaucrats and "paper-entrepreneurs" he castigates in the first half of his book. Reich still fails to account for psychological motivation and historical precedent.
His flexible-system industrial policy is about as flexible as a steel tourniquet and suggests that Robert Reich has never met a real entrepreneur in his life. Entrepreneurs operate in the middle ground, somewhere between the strictures imposed by corporate or bureaucratic organizations on the one extreme and total independence on the other. This middle ground allows people unhappy with existing institutions to create microenvironments of their own design.
Some of these people -- such as Stanford R. Ovshinsky, the self-taught physicist who invented amorphous semiconductors, and whose company, Energy Conversion Devices Inc., today works in partnership with Standard Oil Co. (Ohio) and Sharp Electronics Corp. -- are the "lonely geniuses and backyard inventors" that Reich chooses to dismiss. Others are perhaps less impressive than Ovshinsky, but they create goods, services, and jobs. Collectively, these people are responsible for the liveliest, most vital sector of the U.S. economy -- and Reich, who virtually denies their existence, offers them nothing.
Further, Reich ignores the bleak operating history of government efforts to play entrepreneur. Well-meaning British economic planners committed ?100 million to launch De Lorean Motor Co. in Northern Ireland. That money is gone now, as is much of the capital the French government lavished on the Telematique program, its effort to help French companies compete with the likes of Apple and Wang.
But the finest example of what you get with Reich's kind of planned industrial policy is Canadair, the Canadian government's gamble to save jobs by building a Lear-designed corporate jet. William Lear pronounced the project hopeless shortly after its inception, but Canadian planners wanted jobs. Last year, Canadair reported losses of $1.4 billion (Canadian), believed to be the worst in Canadian corporate history.
Give economic planners control of small business, and they won't produce a crop of socially minded Apples, Ataris, and Wangs. They will just build miniature versions of the Belgian steel industry: a lot of deficits, bloated payrolls, and unwanted products. In short, there will be more Canadairs and De Loreans.
It is simply impossible to ignore the a priori objections to government control of private enterprises: Bureaucracies are slow and inbred, and they select their leaders by every standard except ability to compete. External criteria, from racial hiring quotas to "fair" geographic distribution of resources, to whatever you like, although worthy of consideration, are not, as Reich believes, natural incentives to rapid economic growth.
Reaching political consensus on sensitive issues will remain the same long, sloppy, and painful process it has always been. Workers can and should help resolve questions of production and design within the company. But to engage workers, bureaucrats, and voters in every economic choice a business must make is to guarantee that U.S. companies will be consistantly outmaneuvered by their international competitors. Any country (and Japan is surely not one of them) that makes its every economic move wait upon the debates of politicians or the deliberations of bureaucrats can only stumble from one well-intentioned disaster to the next.
Reich's description of the American dilemma isn't bad, but his solutions only combine sophistry with wishful thinking. Reich doesn't understand how entrepreneurism works or what conditions are required to nourish it and keep it working. He is asking us to sacrifice real American strengths for imagined foreign virtues.