Tales of a New America

by Robert B. Reich

  6

  Enterprises designed primarily to reduce the cost of mass-producing Big Ideas are organized into a series of hierarchical tiers, so that each superior can ensure that subordinates are acting according to plan. But enterprises designed to continuously discover and apply incremental advances have a relatively flat structure. Here it is far less important that workers follow preordained rules than that they gain new insights into how products or processes can be improved. Coordination is achieved both through common experience—working together long enough so that signals are relatively clear—and through common understandings about what sorts of small-scale refinements are likely to improve products and processes. There are thus few middle-level managers and only modest differences in the status and income of senior managers and junior employees. Individual performance cannot be monitored and evaluated through simple accounting systems, because the quality of work is often more important than the quantity. Tasks are often so intertwined, moreover, that it becomes impossible to evaluate them separately. Since each worker necessarily relies on many others, success can be measured only in reference to collective results.

  In this very different world of work, automation poses no threat to employment, as some liberals have feared. Computers are used less to reduce the cost of labor than to enhance its value. Rather than simplify and standardize jobs by preprogramming every task, computer-based information provides a means of expanding workers’ discretion. It gives workers more feedback about what they are doing and how what they do affects other aspects of the production process. Computerized data might reveal, for example, that a particular component, if slightly modified, could exactly meet the needs of a product on a different line, thereby reducing the number of parts that need to be produced overall. Or the data might show that one piece of equipment is using up a great deal of energy, and could be redesigned to be much more efficient. Or that with a slight alteration in pressure or composition, a batch of material could be put to very different end uses. These sorts of information help workers discover ways to improve product and process. They give them the means to use their imaginations—to experiment in rearranging the data to provide new insights into what is being produced and how it can be refined.4

  7

  Collective entrepreneurialism is not as unusual as it may at first seem. Rarely do even Big Ideas emerge any longer from the solitary labors of genius. Modern science and technology is too complicated for one brain. It requires groups of astronomers, physicists, and computer programmers to discover new dimensions of the universe; teams of microbiologists, oncologists, and chemists to unravel the mysteries of cancer. With ever more frequency, Nobel prizes are awarded to collections of people. Scientific papers are authored by small platoons of researchers.5

  Nor is collective entrepreneurialism the sole province of Japanese enterprise. Some corners of American enterprise, too, have long been premised on the ideal of collective entrepreneurialism. This is true for professional partnerships—lawyers, doctors, accountants, management consultants, architects, investment bankers—for which the value of the enterprise rests almost entirely in the knowledge and experience of its members. Within the most successful and innovative of these enterprises there is little hierarchy and few established routines; all members have a stake in improving the performance of the entire group.

  Collective entrepreneurialism also has characterized many small firms producing service-intensive goods. Coalitions of designers, engineers, fabricators, marketers, and salespeople and financial specialists race to get new product generations to market. A comparable pattern could be observed for a time in some of the notable geographic centers of technology-based production. In the late 1970s and early 1980s the areas around Route 128, which encircles Boston, and California’s Santa Clara County both represented diffused but often effective entrepreneurial networks. Technical specialists tended to be familiar with one another’s work and knew who to tap for help when a specific sort of problem arose. Firms and projects came and went, but the underlying network evolved and developed, at least for a time. Shared experiences were cultivated and preserved, and technological competence accumulated. (The divergence between private and social returns on these activities, however, eventually would threaten these learning communities, as will be recounted shortly.)

  But many Americans have continued to work in enterprises that conform to the standard pattern, in which drones mass-produce Big Ideas—be they automobiles or hamburgers. Why? If collective entrepreneurialism offers higher returns in the future, why would Americans cling to the old ways?

  Consider: In 1985, soon after the Reagan administration arranged for quotas on the importation of foreign steel, the U.S. Steel Corporation dropped plans for new investment in a Utah facility. Instead, it opted to import semifinished slabs from South Korea to feed its West Coast finishing mills. Soon thereafter it spent $3.6 billion to purchase Texas Oil and Gas Corporation, on top of the $6 billion it spent a few years before to buy Marathon Oil. In mid-1986 it dropped “steel” out of its name and became USX—with the last letter serving as an indelible reminder that what the corporation now stood for was unknown and unknowable. By that time energy accounted for two thirds of its revenues and all of its profits, and thousands of workers had lost their jobs.

  The ensuing political debate centered, as usual, on the benefits and the pains of economic change. Unionized workers, and not a few liberals, complained that U.S. Steel was abandoning steel, and so it was. They lamented the resulting unemployment of steel workers and the decline of traditional steel towns. On the other hand, conservative disciplinarians pointed out, correctly, that there was no future in making basic steel. South Korea’s Pohang Iron and Steel Company, for instance, operated one of the most modern mills in the world, which generated over 9 million tons of steel a year; Pohang’s workers earned an average of $2.50 per hour, or about a tenth of U.S. Steel’s pay scale.

  Another example from the opposite end of the industrial spectrum: In the 1970s the Zenith Corporation invested several hundred million dollars trying to implement a potentially revolutionary Big Idea: using lasers to play sounds recorded on a plastic disk. The lasers would “read” information encoded and compactly stored on the disk and reproduce sounds far more faithfully than conventional tapes or records. But by the end of the decade, Zenith had abandoned the effort. Production was simply too risky and expensive. Zenith opted to import videocassette recorders—a comparable but simpler technology—to sell under its own brand name. Sony, meanwhile, soon introduced the first successful minisized, laser-operated compact disk player, which swept the American market.6

  Both U.S. Steel and Zenith made rational calculations of the cost of pursuing a market and, following the logic of standardized mass production, opted out. In principle, however, each had other options. U.S. Steel could have eased out of steel and into new alloys and plastics that combine high strength with light weight. Or it could have moved into advanced ceramics that resist corrosion and heat, or into any number of other new materials that do what steel does but better or cheaper. In most of these areas, no foreign producer was yet ready to compete. U.S. Steel could then have maintained its marketing links to its customers making cars, buildings, and appliances; American automakers, for example, were beginning to turn to Japan for ceramic engines and carbon-fiber chassis. Had U.S. Steel moved in this direction, it could have retrained many of its workers—already skilled in making one kind of durable material—to meet the same needs with new products. It would have become U.S. Advanced Materials, a robust descendant of its former self. Zenith, likewise, could have regarded the laser disk not just as one potential product but as the wellspring of a stream of potential products flowing out of the collective experience gained by making the first—items like optical computer memories, disks containing information services, videodisks that could be erased and revised. In this way, Zenith too could have evolved as its work force, and its surrounding network of suppliers and customers,
also evolved.

  Yet neither firm followed any such path. What are we to conclude from this? One possibility is that the notions of high-value service-goods and collective entrepreneurship are pipe-dreams, and that the only realistic options for most American workers are protection, idleness, or wages as low as their competition abroad. Another possibility is that the managements of U.S. Steel and Zenith were simply too blind to spot the sources of future profits. Neither of these explanations holds true, however, for Zenith and U.S. Steel nor for the many other American companies who cling to the logic of standardized mass production and balk at a strategy of collective entrepreneurialism. The problem is rooted in a deeper dilemma, to be taken up in the next chapter.

  CHAPTER 11

  THE GENERAL THEORY OF GRIDLOCK

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  So long as the economy remains divided between a few entrepreneurs and many drones, the political choice can be neatly posed: How much should entrepreneurs be rewarded? How can drones be kept busy, and kept in line? American political leaders and citizens, with different notions of fairness and different preferences for social wealth versus social harmony, have long debated the proper balance. But if our future happens in fact to lie in a collective form of entrepreneurialism, in which these two species are no longer distinct, the issue is subtler, at once more challenging and less grimly divisive. The question becomes: how can we structure a political culture and an economic system that allows collective entrepreneurialism to flourish?

  Collective entrepreneurialism requires mutual investment. Owners continuously invest in workers by giving them training and experience in new technologies. Workers invest in one another by sharing ideas and insights. Workers invest in the overall enterprise by moderating their wage demands. Suppliers of materials and parts invest by committing to produce specialized components. Creditors supply capital without requiring a rigid projection of how the funds will be used.

  What distinguishes these types of investment from the standard form is that they rest primarily on trust. Each party trusts that its contributions will eventually be reciprocated, and that ultimately all will gain from the mutual commitments. Uncertainty and constant change make it impossible to fully specify roles or formalize obligations. Trust is required because reciprocal performance cannot be completely assured in advance through the legal device of contract. This—an essential characteristic of collective entrepreneurialism—is its greatest weakness. For in a system that primarily encourages individual exploits, trust is a particularly fragile commodity. This explains the difficulty in shifting away from standardized mass production.

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  In a system of stable mass production, most responsibilities could be delineated in advance. This meant that simple contracts could suffice to bind obligations. Drone jobs involved a limited number of repetitive activities that could be reduced to standard operating procedures. Suppliers delivered standardized parts and materials. Banks and other creditors could know with reasonable certainty how their money was to be used and what was to be produced. Shareholders could anticipate their risk and probable return. The communities to which these enterprises gravitated could expect a certain level of economic activity over a certain stretch of time. And because all the cars, steel sheets, or insurance policies that emerged from the enterprise were identical, consumers could be reasonably assured what they were buying and how it would perform.

  In this stable world, there was little need for trust. Firms, workers, and investors shopped around for the best deal they could find, and then entered into contracts that specified precisely what each party owed the other. When commodities were more or less standard, parties usually could switch their allegiances at the end of the contract without disrupting the system. Drone workers who welded automobile parts together, for example, could leave the enterprise and find other welding jobs. Those who supplied the parts could supply the same parts to another firm. Consumers could try a competitor’s product; shareholders could put their money elsewhere; senior managers might come and go. The entire enterprise, and the network of relationships that surrounded it, was like a machine with replaceable parts.

  Stability broke down only with the advent of Big Ideas that rendered obsolete what had come before. The invention of the electric light bulb came as a rude shock to those who owed their livelihoods to the kerosene lamp. When a Big Idea like this emerged, contractual relationships had to be reordered. There were bankruptcies; those with specialized skills no longer in demand faced long periods of unemployment; purchasers and suppliers were inconvenienced. But stability was soon reestablished, as the Big Idea was translated into mass production. The light bulb soon became a standard, stable commodity. And this translation allowed a new set of expectations to be encoded in contract. Big Ideas, moreover, did not arise often enough to call into question the idea of an economy of individual agents united only by contractual obligation.

  3

  The enterprise that is continuously evolving through collective entrepreneurial efforts, however, is inherently unpredictable. Because it is not organized to repeat what it did before, parties can rarely rely on the past as a guide to the future. Responsibilities cannot be described in advance, within contracts and rules, because no one can anticipate precisely where the pursuit of markets will lead, or exactly what level and form of effort will be required. The cumulative effect of incessant incremental change is to continuously render former expectations obsolete. Suppliers, workers, financiers, and even customers are often leaping together into uncharted domains. The entrepreneurial network rests on imperfectly enforceable understandings that if one party contributes now, others will reciprocate in the future. And these understandings are based, in turn, on the conviction that collective enterprise offers richer rewards for each participant than does more individualistic endeavor.1

  Even were roles defined and predictable, it would be difficult to contractually establish individual obligations and expectations in a system of collective entrepreneurship. The value of what each party contributes to the enterprise, and what each derives from it, turns on what others also contribute. One party cannot simply switch allegiances after a time without imposing hardships on others who had relied upon the deserting party’s participation. The supplier of ball bearings customized for a particular purchaser, for example, must dedicate special equipment to making them, and train his workers to meet unique specifications. A profitable return on these investments depends upon how successful the purchaser is at putting them to use. Supplier and purchaser have a mutual interest in working together to develop the customized bearings, apply them to the new product, and perhaps discover other uses for them. Should the purchaser pull out, or suddenly insist on a much lower price, the supplier would lose much of his investment.

  Trust is by no means foreign to American enterprise, of course. Trust is apparent even in standardized mass-production enterprises when they face the vagaries of the business cycle. There is evidence, for example, that employers commonly maintain wages and employment during downturns in the business cycle at higher levels than a strict reading of supply and demand would warrant. Employers are eager to maintain workers’ loyalty, lest employees depart during upturns in the cycle. It is simply too expensive to find and train good employees with every uptick in the economy. Similarly, sellers often allocate scarce goods to steady customers when supplies are tight—rather than charge the customers higher prices—to reward and reinforce customer loyalty during downturns.

  These “invisible handshakes,” as the economist Arthur M. Okun has called them, help explain why wages and prices do not move smoothly up and down with the overall economy—and may also explain, incidentally, why inflation sometimes threatens even when the economy is lukewarm.2 For our purposes, the important point is that loyalty has its own economic value. Even traditional firms often find it prudent not to squander goodwill in pursuit of a single period’s profit. For enterprises embracing collective entrepreneurialism, the role of loyalty is more cen
tral still.

  4

  Trust is a brittle organizational adhesive, however. Even if each member of a common endeavor stands to gain from a policy of trust, the perception that any one member can do even better by exploiting the others’ trust tends to undermine the policy.

  Imagine, for example, that the chief executive of an American firm buys the idea of collective entrepreneurialism. He decides to invest in the production experience of the firm’s workers. Instead of relying upon a Japanese supplier for a complex component, this executive decides to produce it inside the firm. Since the Japanese supplier has already learned to produce the item cheaply while the firm’s work force has not, internal procurement will cost about $1,000 more per worker than buying it outside. But our enlightened executive looks upon this added expense as an investment in his firm’s workers. He figures that once his workers master the challenge of making this one component, they will be better equipped for further innovations. The firm’s capacity to innovate, adapt, and improve will be expanded. The manager estimates that the total present value of this learning will come to about $1,500 per worker. So the initial $1,000 investment—with a 50 percent return—is well worth it, and the company opts for internal production of the component.