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U.S.

TECHNOLOGICAL,ECONOMIC, AND SOCIALDEVELOPMENT FOR THE21sT CENTURY

Amitai Etzioni

In the late 1970s, the United States became a member of a rather new and smallcategory of countries, properly defined as the underdeveloping countries, whoseeconomic development had slipped into reverse gear. The United Kingdom hasbeen the other leading member of this category.

Among the indicators of eroding economic strength, one of the most promi-nent was productivity. From 1948 to the middle sixties, output per hour in theUnited States grew by about 3.2 percent per year, a rate that came to be consid-ered normal (Productivity Perspectives, 1980, p. 9). John Kendrick's (1961)data indicate, in fact, that U.S. productivity had been increasing significantlysince 1800. During the period from 1965 to 1973, however, growth in productiv-

Research in Public Policy Analysis and Management,Volume 4, Pages 241-270.Copyright @ 1987 by JAI Press Inc.All rights of reproduction in any form reserved.ISBN: 0-89232-663-8

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ity slipped to 2.4 percent per year, and in 1973-82 it fell to 0.9 percent per year(U.S. Bureau of Labor Statistics, 1983, p. 4). Growth in total output and, evenmore markedly, in output per worker, also slowed. Annual growth in real GNPaveraged 3.9 percent from 1960 to 1970. It slowed to 3.1 percent from 1970 to1980; during 1980-84 it was 2.7 percent (U.S. Bureau of Census, 1986, table724).

The measures to productivity have large fluctuations from year to year,reflecting the periodic swings in the level of economic activity. However, a gen-eral downward trend in productivity growth is clearly discernible. GNP per em-ployed worker increased by 1.9 percent per year from 1963 to 1973, but by ameager 0.1 percent per year from 1973 to 1979 (Economic Report of the Presi-dent, 1980 p. 85). This latter rate of growth is estimated to be well below notonly that of Germany and Japan but also that of France (2.7%), Italy (1.6%) andeven the U.K. (0.3%) (Ibid.). Further signs that all was not well initially in-cluded high inflation, high unemployment, and high interest rates; later a largepublic debt and trade deficit; and throughout, low savings.

Due to the quest for more social growth and greater harmony with the environ-ment, not all observers were against slower (or even no) economic growth; re-cently, though, there has been increased concern with the causes ofunderdevelopment and a search for possible ways to redevelop. The major eco-nomic analyses applied in this search have been of the macroeconomic, aggre-gate, input-output kind, emphasizing the decline of inputs (e.g., capital perworker) and the resulting decline of output (e.g., GNP per capital). Here, a dif-ferent line of analysis is suggested, one which draws heavily on developmentaleconomics. If the U.S.A. is to redevelop, the theory and experience of devel-oping nations may contain a lesson. This approach is more descriptive of thestructures involved, rather than aggregate and analytic. For example, it asks notonly how much capital sustained economic growth requires but also how thiscapital is to be distributed among various sectors. Development theory stressesthe need for preparing the infrastructure and capital goods sector before massconsumption of goods and services is undertaken (Hirschman, 1958; Rostow,1971). Otherwise, consumption quickly eats up the necessary productive assets.While there is no agreed-upon list of what elements make up the infrastructure(or "social overhead capital"), most theories of economic development includetransportation and power. Reviewing both case studies of economic developmentand the history of the U.S.A.'s initial development, we culled out a list of sevenelements: R&D (innovation), human resources, capital goods, transportation,communications, power, and financial/legal institutions. The inclusion of eachelement is justified below. There is, however, nothing sacrosanct about the list.Some elements treated here as one might be subdivided, while others might becombined into one category. This is but a preliminary working list. Recently,three of the seven-R&D, human resources, and capital goods-have come tothe forefront of a national dialogue concerning the revitalization of the Americaneconomy. Therefore, this paper will highlight these three elements. Fuller

u.s. Technological, Economic, and Social Development for the 21st Century 243

discussion of the remaining elements can be found in An Immodest Agenda(Etzioni, 1983).

I. A FUNCTIONAL-STRUCTURAL MODEL OFDEVELOPMENT

The list of elements is, in fact, a list of functional needs, a conceptual model thatone main school of sociology has evolved. The model suggests that to survive,any specific societal system must attend to a specific set of needs. In the contextat hand, this leads to the hypothesis that if a fairly high level of economic devel-opment and growth is to be sustained there are seven needs that must be "an-swered" adequately and in some rough coordination with each other. If one ormore are neglected, development will be strained, and the nature of the strain canbe "derived" from the neglected needs. If several elements are week or deterio-rated, economic development may cease if not go into reverse.

This line of analysis, however, does not imply that historical change is incom-patible with maintaining the system, just because the same needs require atten-tion. While high development requires the service of all seven elements, substi-tution of items that are functionally equivalent-which serve the same need,albeit in different ways-is quite possible, indeed, historically common.

A functional model of a car provides an analogue. A car cannot be said to"need" wheels, gasoline, and water. It needs a way to reduce friction with theground; wheels or air jets may serve. It needs a propellant; gasoline diesel oil,alcohol, or some other fuel may serve. And it needs a cooling mechanism; wateror air may serve.

In the societal system, transportation illustrates this point. The functional needis to integrate local markets into a society-wide market, and to reduce the costand time of transit. However, waterways, railroads, and highways can all satisfythis need; indeed, historically, the United States first relied heavily on canals,later on rails, and still later on a highway system. (In contrast, airlines neverplayed a significant role in transportation of goods and raw materials.) The need,thus, is not for canals or rails or highways, or a specific mix of these items, butfor a nationwide, expeditious transportation, a need to which the historical re-sponse has varied over time. Is this to say that it makes no difference which itemanswers the transportation need? The obvious answer is no; it does make a differ-ence. The more efficient an item (in cost per unit of output), the more effectivethe system, all other things being equal.

A. Stages of Development and Reversal

Our hypothesis is this: (a) The seven needs of economic development werewell attended to during the first industrialization of the U.S., roughly from the

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1820s to the 1920s; the result was a much higher capacity to mass-produce con-sumer goods and services. There were many times when the element serving onefunctional need lagged behind those serving others (e.g., the development of anational financial system lagged behind the increase in the labor force, and be-hind education in general and vocational education in particular), but in general,these differences triggered effective efforts to narrow them. (b) After two "inter-ruptions," the Depression and World War II, during which this productive ca-pacity was first in part idle, then used for war, the golden age of mass consump-tion set in (1950-1975), encompassing massive increases in private, public, andsocial consumption. (c) In the golden age of consumption, not only did the pub-lic sector grow and politicization of the private economy increase (these develop-ments are sometimes referred to as intervention in private decision-making andthe revolution of entitlements), but also, insufficient resources were dedicated tothe seven elements serving the functional needs of economic development, bothto maintain specific items and adapt them to changing environments. Deferredmaintenance is illustrated by deteriorating bridges and railroads. Lack of adapta-tion is apparent in lack of response to changing markets in automobile produc-tion, and above all, to the drastic change in the cost of energy. The result: inabil-ity to maintain the system, i.e., underdevelopment. The following paragraphsprovide a quick overview of the seven needs, the items which, historically, metthem, and their recent condition.

B.

Research and Development, Innovative Capacity

The Need

Economic growth is propelled not merely by larger "inputs," increases in theavailable amounts of the productive elements, but also by combining them innew, more efficient manners. Hence the role of innovation, which in turn is fedby research and development, is central. The shifts from both hand tools tomechanization, and from the use of muscle power to high-energy inputs requiredtechnological innovations. Indeed, some leading researchers, such as EdwardDenison (1974) and John Kendrick (1980) have pointed out that new knowledgeoutweighs all other factors in contribution to economic growth.

Historical Illustration

The cotton gin, the power loom, and the sewing machine contributed to thedevelopment of the New England textile industry, a factory system that was fullydeveloped before the Civil War. The steamboat opened up the Great Lakes re-gion, and adaptation of the steam engine was the base of the railroads. The pro-cess developed by Henry Bessemer in England and, independently, by WilliamKelly in the United States, made large-scale steel production possible. A roughmeasure of America's growth in innovative capacity is the number of patents


issued for inventions: 544 in 1830,883 in 1850, 12,137 in 1870, and 25,313 in1890 (U.S. Bureau of the Census, 1975, Series W99).

Innovation was important to systems as well as to machines. Eli Whitney, atthe beginning of the nineteenth century, began to apply the principle of standard-ization and interchangeability of parts in the manufacture of firearms. The"Waltham System" advanced the factory production of textiles by bringing to-gether all the processes of spinning and weaving. Alexander Holley designed afloor plan that improved the utilization of Bessemer converters and which be-came the standard layout of American steel plants.

Engineering, before 1850 largely the province of the military, gained rapidlyin industrial importance in the latter part of the nineteenth century. RensselaerPolytechnic Institute, at Troy, New York, and the Columbia University Schoolof Mines pioneered in nonmilitary engineering instruction. In 1862, the MorrillAct furthered the "practical education of the industrial classes" by a grant ofpublic lands to each state for support of a school to teach agriculture and the"mechanic arts"; many state-supported schools of engineering resulted.

C.

Human Resources

The Need

Industrialization requires a labor force motivated, educated, and trained tostaff the new factories, offices, financial institutions, and laboratories. Theremust be a sufficient number of people to staff positions; people must be moti-vated to put up with the regimen of industrial work; and they must be providedwith basic and specific skills.


In the U.S., unlike many other developing countries, the very availability ofpersons was a major problem. Industrialization was not largely propelled by"surplus" farm labor; the large majority of the industrial millions were immi-grants. In 1790, the total population of the United States is estimated to havebeen less than 4 million; in 1860 it was just over 30 million; and by 1914 it hadrisen to almost 100 million. From 1860 to 1914, over 25 million immigrantscame to the United States, most of them from Europe.

Farm hands and immigrants had to be educated, acculturated, and trained.This was done rather effectively. By 1840, for instance, 90 percent of whiteadults are reported to have been literate, a higher rate than in most countries(Fishlow, 1966, p. 418). Expenditures on education grew from 0.6 percent onGNP in 1840 to 1.7 percent in 1900; since GNP was climbing rapidly, actualexpenditures increased thirtyfold (Ibid., p. 430). By 1920,83 percent of Ameri-cans age 5 to 17 were in school for at least some part of the year, and althoughonly about one in six graduated from high school, that proportion was increasing

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(U.S. Bureau of the Census, 1975, Series H41,599). Beyond elementary and-later-more advanced secondary and college education, was technical training.At first, curricula in civil and other branches of engineering were regarded as"inferior" by "cultural" colleges, but this did not stunt their development.Even in those early days, one way to overcome the snobbishness of "cultural"parts of colleges was to increase the theoretical, "basic science" part of engi-neering training, even though science had not reached a stage when it had manypractical implications.

In addition to technical education at the college level, specialized schools forspecific industries, such as textiles, were established, and vocational trainingwas introduced into elementary and high schools, with some support from thefederal government after 1917.

An industry is more than machines, materials, and workers; it is an organiza-tion and a management system of division of labor, authority, and communica-tion. This concept was introduced in a very preliminary fashion in the early tex-tile mills; later the ideas of "scientific" management, championed by FrederickW. Taylor in the 1890s, were introduced and advanced. A major corrective,viewing workers as persons and not as cogs, was introduced by Elton Mayo andother founders of the human relations school. It pointed to the importance oftaking into account the nonrational, personal relations between the foremen andthe workers. Workers' bonds to each other were also important; these could bemobilized to support production-or, if ignored and violated, could alienateworkers.

D.

Capital Goods

The Need

The other elements of the model constitute the infrastructure. Creating aninfrastructure suitable for a modem economy is essential if industrialization is totake off. However, before it can provide for a modem, growing economy, for anage of mass production and mass consumption, one other element must beadded: capital goods. These are assets that cannot themselves be consumed butserve in the production of consumer goods; they are the plants, their machinery,and equipment-steel mills, cranes, lathes, shipyards, assembly lines, and so on.

A society which consumes all or most of its product and does not set aside agrowing proportion of its savings for capital goods and the infrastructure will notindustrialize or will industrialize only to the extent that foreign investments andcontributions will carry it.


While before 1860 much of the American industrial effort was piggybacked onthe produce of field and forest, in the era that followed, new sources of powerand important innovations in iron and steel production were major factors in


making industry less dependent on growing things, and more dependent on min-erals and on capital goods. As historian Edward C. Kirkland (1969) has put it:"The age since 1860 may have been the 'age of coal and iron' or the 'age ofpetroleum' or the 'age of electricity.' It was unquestionably the 'age of the ma-chine' " (p. 300). Air-driven power drills and steam shovels were introduced in

the coal mine, and suspended rotary drills in the oil fields. The Bessemer Processreduced the cost of steel so that its widespread use became practical, and later theopen hearth process made it possible to use lower-grade ores.

While steel can be used to make both capital (producer) and consumer goodsearly in industrialization, much of it is typically used for capital goods, and thecapacity to make steel reflects a rise in capital goods. Hence the amount of steelproduced is often used as a gross measures of the potential of the capital goodssector. From 1860 to 1910 raw steel production had grown to 28 million tons(U.S. Bureau of the Census, 1975, Series P265).

The production of other capital goods also grew rapidly. The value of outputof industrial machinery and equipment increased from $99 million in 1879 to$512 million in 1910 (Ibid., Series, P353). In general, manufacturing productionmultiplied twelve times from 1860 to 1914 (Ibid., Series, PI7), and output perman hour in manufacturing doubled from 1869 to 1914 (Ibid., Series, 0685).

Another measure of industrial growth in the "age of the machine" was theincrease in the amount of capital invested in U.S. manufacturing facilities. From1850 to 1880 it grew from $533 million to almost $3 billion (Grant, 1973, p. 64).It reached $8 billion in 1900, then climbed sharply to nearly $40 billion in 1914

(Scheiber, 1976, p. 221).The importance of capital accumulation is emphasized in studies that rel.ate the

acceleration of industrialization to the increase in capital/output ratio. Between1850 and 1900, it grew from approximately 1.6:1 to 2.9:1; in the same period,capital per worker grew from about $2,100 to $5,000 or more (Slichter, 1961, p.

59).

E.

Transportation of Goods

The Need

A developed economy requires expeditious, large-scale movement of raw ma-terials, parts developed at different locations, and finished products. Materialand products in transit, like inventory, add to costs--not to production. All otherthings being equal, the slower and less reliable the transportation, the less devel-oped a country.


Initiation of industrialization was associated with the development of canals asan important means of transportation. Except during the winter freeze, canals

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could carry freight in larger volume, more quickly, and more reliably than roads,and they brought much lower transportation costs.

Even as the canals were built, railroads began to overtake them. Railroadscould be built where steep terrain or uncertain water supply made canals imprac-tical; and they could provide an integrated nationwide transportation system.Moreover, trains could run all winter and travel faster than mule-drawn canalboats.

The next round belongs to the motorcar, still quite insignificant in the begin-ning of the twentieth century. Only in 1916 did the Congress pass an act leadingto a national system of highways, which led eventually to mass trucking, offeringshippers new flexibility and speed, especially for short hauls. Still later, airfreight entered the transportation mix, playing a small but important role forlight, high-value shipments. In 1939, railroads carried 62 percent of Americanfreight ton-miles; trucks carried 10 percent; 18 percent moved on the Great Lakesand inland waterways; 10 percent went through pipelines; and 0.002 percent wascarried by air (Bureau of the Census, 1960).

F. Communication Systems

The Need

Communication systems move symbols that contain information and controlsignals, as well as expressions of sentiments and values. Information is an im-portant input for productive decision making; expeditious movement of controland other signals, such as those from headquarters to plants, is vital for largescale organizations-national corporations, financial institutions, and markets.The communication of values and sentiments is as important. They help broadenpeople's horizons and loyalties from the village to the nation (and ultimately theworld); they also allow public policy makers to gauge what the populace willsupport, tolerate, or resist.


Improved communication technologies played an essential part in the processof nation building, as well as in the transmission of information and control sig-nals. Early communication depended on slow surface transport. The OverlandMail, established in the 1850s to provide fast mail and passenger service to theWest Coast, pared down the mail-coach trip from the Mississippi to SanFrancisco, but still required twenty-two days. A decade later, a message couldtravel the same distance by telegraph in a matter of minutes. Invented in 1836,the telegraph reached from the East Coast to St Louis by 1848, and spanned thecontinent in 1861. Toward the end of the century, the telephone advanced com-

U.S. Technological, Economic, and Social Development for the 21st Century 249

munication still further. By 1892, fifteen years after Bell patented the telephone,the telephone network reached from the Atl~tic coast to Chicago, and by 1900,almost 2 million miles of telephone line interlaced the entire country. Later thisnetwork would transmit not only voice but written messages, and radio made itpossible to address the whole nation at once.

G. Power

The Need

Oxen and buffalo will not do for a modern economy. Mass production requiresmassive, routinely available, reliable, easy to stockpile, highly concentratedsources of energy. These qualities suggest heavy and growing reliance on extra-human and extra-animal sources.


Early American factories depended primarily on water power, available at alimited number of sites. After 1840, the use of steam increased rapidly, and byabout 1860, steam had surpassed water as the chief source of power.

Through the l870s, electricity was used primarily for communication-for thetelegraph, for example, steam and water power continued to be the dominantpower sources for industry. With the introduction of central generating stationsin the l880s, electricity gained importance in transportation and industry. By1902, production of electricity was 6 billion kilowatt hours, and from then on itrose rapidly, reaching almost 57 billion kilowatt hours in 1920 (U.S. Bureau ofthe Census, 1975, Series S44).

H.

FinanciaI/Legal Institutions

The Need

Each of the elements of industrialization examined so far is affected by theencompassing society within which it is nestled. As Gustav Ranis (1968), Yale'srenowned developmental economist, put it, "In modifying the simplified view ofhow the world operates, we must take into account not only more realistic no-tions of the role of labor, factor substitutionability, and technological change,but also of the heretofore neglected changes in the institutional milieu withinwhich an economy operates." (p. 415).

Key among these factors are the financial/legal institutions, such as those thatcan amass large amounts of capital or regulate the amount of money in circula-tion; those that can condone, promote, or retard the development of corpora-tions, which are legal entities chartered by the state; and so on.

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In nineteenth-century America, the national financial system developed withgreat difficulty due to the low level of nation building. Without a nationwide,easily mobilized flow of capital, large-scale development is severely set back.Until savings were no longer dispersed in thousands of banks, inaccessible tolarge borrowers, specialists such as J. Pierpont Morgan, Edward Harriman, andJacob Schiff were required to improvise ad hoc the linkages to secure enoughcapital for large projects.

For twenty years prior to the Civil War, the paper currency consisted largelyof bank notes issued by local banks-in 1862, some 1,600 of them--operatingunder diverse state laws. After 1863, as the nation sought to resolve the divisionsaccompanying the war and the economic crises following it, a greater degree ofuniformity and national collaboration gradually evolved. In 1913 Congress es-tablished the Federal Reserve System, which provided a basis for nationalcoordination of banking activities.

Practically all economic historians of the United States stress the supportiverole of government-in the nineteenth century, primarily state governments-toward business in general and economic development in particular. Financialaid, direct and indirect, was common. Governments invested in railroads andother transportation facilities; they favored the banks, and the banks in turnfinanced railroads and industrial enterprises. Regulations that protected youngindustries were introduced. Lotteries were conducted and their proceeds used forthe construction of bridges, roads, and paper mills. Government franchises wereused to spur the building of bridges, aqueducts, and dams, and to protect buildersagainst damage claims resulting from consequent floods or diversions of water.

While the majority of the financial/legal developments between the 1860s andthe 1920s were basically favorable to industrialization, not all pointed in this di-rection. Public opposition to "combinations of capital" was so strong that theSherman Antitrust Act was passed unanimously by the House in 1890; in theSenate, there was only one dissenting vote. Many states passed their own anti-trust laws. While those laws were ineffectually enforced, and most corporationsworked their way around them, they had a nuisance value and illustrate populistmisgivings about the new industrial world. They did not stop or significantlyslow down industrialization, but they sniped at it.

II. THE SEVEN ELEMENTS: REVISITED

The accumulation of these seven elements between the 1820s and the 1920s, atan accelerated pace after the Civil War, provided the foundation for a strongeconomy. Part of its capacity was idle during the Depression, and committed tothe war during the post-Depression years. Only in the late 1950s, and especiallyin the following decades, did mass production of consumer goods and services


take place. Autos, appliances, TVs, the mass "production" of higher education,health, and social services, the affluent American and welfare capitalism, fol-lowed. It is the core thesis of the reindustrialization analysis that in this period,roughly from 1950 to the early 1980s, the seven elements were not properlymaintained or adapted to changing circumstances, and that consequently theeconomy deteriorated or became underdeveloped. Briefly revisiting the seven el-

ements makes this point.

A.

Innovative Capacity: Uneven Erosion

According to one wit, there is one file at the National Science Foundation for"rosy" R&D indicators, and another for gloomy ones. According to the politicalneed, one or the other is used to make the case for "our strong science and tech-nology" ("We are all to be proud of. ..") or to point out signs of decline andfall (" ...calling urgently for additional infusions of funds and talent").Whether this tale is true or tall, it reflects the ambiguous status of this sector.

One often-used indicator of innovative capacity is the proportion of GNP dedi-cated to research and development. As a percentage of GNP, total R&D expendi-tures fell from 3 percent in 1964 to 2.2 percent in 1978, then rose to 2.6 percentin 1984 (U.S. Bureau of the Census, 1986, table 1004). However, as R&D spe-cialist John Logsdon has pointed out, much of the decline from 1964 to 1978 wasdue to reductions in space and weaponry R&D, which is relatively costly; theoverall drop does not necessarily reflect an across-the-board decline in R&D ac-tivities (Logsdon, 1983). Similarly, the recent upturn in R&D expenditures doesnot reflect an across-the-board increase. Rather, it is attributable mainly to the

Reagan administration's military build-up.While neither percentage of GNP nor any other measure provides a reliable

yardstick for the health of innovation in the United States, several indicators aretroubling. For example, it is widely agreed that the pace of America's technolog-ical development has slowed. A Commerce Department economist found onemajor technological development in the United States during the 1970s: themicroprocessor, or silicon chip. In contrast, he listed at least six from the periodbetween the late 1930s and the late 1940s, including the transistor, nuclear

power, and synthetic fibers (Samuelson, 1980, p. 1283).America's position in the world technological market has grown more precari-

ous as other industrial nations, particularly West Germany and Japan, havepumped more and more funds into their own R&D. While America's R&D ex-penditures were falling relative to GNP (1964-78), West Germany's increasedfrom 1.6 percent of GNP in 1964 to 2.2 percent in 1978, and Japan's from 1.5percent of GNP in 1964 to 2.0 percent in 1978. By 1983, both countries hadcaught up to the United States, allocating about 2.6% of their GNPs to R&D. Ifone assumes that nondefense R&D expenditures add more to technical competi-tiveness than military R&D expenditures, then the U.S. lags far behind its com-

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petitors. In 1983 the U.S., with 1.9% of GNP for nondefense R&D, trailed bothJapan (2.6%) and West Gennany (2.5%) (National Science Foundation, 1985,appendix tables 1-2, 1-4). Studies by a U.S. Labor Department economist haveindicated that Gennany overtook the United States in 1977 as the leader in high-technology exports, and that Japan is likely to do the same (Samuelson, 1980, p.1283).

The need to depend on innovations from other countries-thus giving theirproducts a leg up-seems to have increased. In the 1950s, according to an analy-sis by the Stanford Research Institute, 82 percent of the major inventions broughtto market were developed in the United States, but by the late 1960s, 55 percentoriginated here. This decline contributed to America's low productivity growthcompared to that of most other industrial nations (cited in Newsweek, June 4,1979, p. 58).

Aside from drawing a smaller slice of the GNP pie until the early 1980s,American R&D is believed to have suffered from disincentives due to excessiveregulation. Businesses are said to have had to allocate considerable resources tocompliance with these regulations, such as checking the toxicity of chemicalsand their carcinogenic effects. Funds and skilled personnel have been divertedfrom developing new products and from applied research to meeting mandatedstandards. This is sometimes referred to as "defensive research." A vice-president of General Electric stated in 1979 that about 12 percent ofG.E.'s $1.3billion R&D budget was absorbed by defense research (cited in Newsweek, June4, 1979, p. 62). Many of these expenditures seem highly justified from a humanand social viewpoint (just as some seem excessive), but at the same time, given asmaller R&D sector, defense work has further reduced the resources availablefor innovation. Moreover, for some finns, especially small ones, the high cost ofdefense research has made it (and thus innovation) appear economically notworthwhile, or has driven them to carry it out in other countries, thuscontributing to foreign R&D sectors.

Besides regulation, another source of disincentives, especially until 1978, hasbeen the tax system. Because modem R&D requires rapidly increasing sophisti-cation in facilities, R&D facilities become obsolete more rapidly than do plantand equipment used directly in production. Thus a relatively large investment ofhigh-risk capital is necessary.

Although this necessity affects even large manufacturing finns, it is muchmore significant for small, high-technology businesses, and for individual inno-vators who are trying to raise the money to develop and market their inventions.A 1976 study found that between 1953 and 1973, smaller businesses (those withfewer than a thousand employees) accounted for almost half the nation's innova-tions (National Science Foundation, 1977, appendix table 4-18). The NationalScience Foundation estimated that, during the same period, these finns producedmore than three times as many innovations per research and development dollaras did larger finns (National Science Foundation, 1977, Table 4-31). However,


the access of these small finDS to the capital needed to develop new productsdeclined precipitously through much of the seventies. The capital acquired inpublic markets by finDS with a net worth of less than $5 million is reported tohave dropped from $1.5 billion in 1969 to $15 million in 1975, and to have re-mained at a very low level through 1978 (U.S. Department of Commerce, 1979,p. 260). That more risk capital became available following the 1978 reduction inthe maximum capital gains tax suggest that, from the viewpoint of venture capi-tal, the tax was too high during most of the period under study.

Other reported R&D-related problems range from growing "scientific illiter-acy" among school pupils to a shortage of engineers and computer program-mers. Each of these has an "on-the-one-hand-but-on-the other"quality. True,schoolchildren should know more about science-but the effect of a lack of suchknowledge on the nation's innovative capacity and R&D yield is slow and indi-rect. And in the past, engineering shortages (and other such) soon were followedby gluts.

All in all, R&D seems (in areas other than communications and computers) tohave weakened over the period until recently. In the early 1980s there was anupturn in R&D expenditures as a percentage of GNP. Much of this can be attrib-uted to the military build-up. The future of this program, and particularly thefuture of the Strategic Defense Initiative, are in doubt. Even if these programsare scrapped, the recent upward trend in R&D may continue on the basis of in-creased civilian R&D expenditures. Political support for reinvesting in Americais growing. One example is Sen. Hart's proposed Strategic Investment Initiative,aimed at increasing investments in school, training, and research laboratories.Thus, while R&D has weakened over the period, there has been a recent upturnwhich is likely to continue.

B.

Human Capital: Signs of Weakness

There is no general agreement that the quality of human capital was lower atthe end of the postwar generation than it was at the end of the first century ofindustrialization, but there are some signs of weakening within the period understudy.

Demographics

One factor was demographic change. The average worker in 1984 wasyounger than in 1950. There were somewhat more minority workers in the laborforce, and many more women. (Between 1960 and 1984, the proportion of mi-norities among the employed rose from 10.5 percent to 12.3 percent; the propor-tion of women rose from 33.3 percent to 43.7 percent.) (U.S. Bureau of the Cen-sus, 1986, tables 680 and 684).

The influx of women and minorities is said to have diluted the labor force be-

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cause, on average, both groups were less well-prepared than white males. This isno aspersion on their innate ability, but reflects centuries of discrimination andless educational preparation as well as different psychological histories. More-over, proportionately more women than men go to work outside the homecompelled by economic pressures, not because they want to. A national surveyconducted by the University of Michigan's Survey Research Center in 1971found that 41 percent of the women questioned, compared to 26 percent of themen, would not work if they didn't need the money (Campbell, Converse,Rodgers, 1976, p. 291).

The tie between workers' background and productivity is also suggested byEdward Denison, a leading expert on productivity. He found that the introduc-tion of masses of less well-prepared persons into the labor force caused a reduc-tion in productivity, albeit not a major one (Denison, 1979, p. 35).

Education

A sizable segment of the graduates of America's schools are psychicallyunderprepared for the adult world. Data on the deterioration of education aresolid and well cited (see Etzioni, 1983). The root problem is not that millions ofhigh school graduates have great difficulty with reading, writing, and 'rithmetic;those all-too-common deficiencies are consequences of insufficient self-organization, of inadequate ability to mobilize self and to make a commitment.These graduates enter the adult world twice handicapped. They suffer from bothcontinued psychic underdevelopment and from the inadequate cognitive prepara-tion this underdevelopment helped to cause. The implications for the world ofwork are dual: many new workers do not have the capacity to cope with routines,rules, or authority. And since they had the same basic incapacity in school-dueas well to other factors ranging from school "overload" to "burned-out"teachers-they are deficient in cognitive preparation (both in ability to read,write, and compute, and in specific work skills, from reading a blueprint to deal-ing with a computer).

Motivation/Work Ethic

Among the most popular explanations for the decline in productivity growththroughout the 1950-80 period is the decline in worker motivation and thewaning of the work ethic. Productivity expert Edward Denison is "skeptical thata sudden drop in willingness to work is responsible for the recent retardation ofproductivity, whether that is dated after 1966 or after 1973." (Denison, 1979, p.134) He explains that his skepticism is

largely attributable to having heard similar generalizations all my life and having read them inthe works of observers who wrote long before my birth. It was well before I %7 that I wrote,"Like the supposed decline in the spirit of enterprise, there seems always to be a popular


belief that people are less willing to 'put in a hard day's work' than they used to be, but this isscarcely evidence." (Ibid., p. 166).

Denison's analysis leads him to conclude that "it is quite possible that a declinein work effort contributed something to the retardation of productivity, althoughthis has not been demonstrated; but it is unlikely to have been a major cause ofthe suddenly retarded growth. ..after 1973." (Ibid., p. 135)

The difficulty in assessing the changing quality of the labor force is, in part, ameasurement problem. Denison writes that an "inability to answer the simplequestion-how hard do people work-and to compare different places and dates,is probably the most serious gap in my measure of labor unit." (Ibid.)

This difficulty is further illustrated by two studies, conducted at roughly thesame time, early in 1981, that asked rather similar questions of highly similarnational samples of adult Americans. The first asked respondents to agree or dis-agree with the statement, "People should place more emphasis on working hardand doing a good job than on what gives them personal satisfaction and plea-sure." Two-thirds of Americans (64 percent) agreed, while a minority (20 per-cent) disagreed, and the rest expressed mixed feelings or no opinion. The secondasked, "Which do you think is more important in life: working hard and doingwhat is expected of you. ..or doing the things that give you personal satisfac-tion and pleasure?" While 38 percent stressed hard work, nearly half (49 per-cent) of adult Americans stressed personal satisfaction (14 percent evaded thequestion by answering "both equal") (Public Opinion, 1981, p. 25).

Obviously this is an area in which findings might vary considerably, and notmuch weight should be given to anyone study. Still, if the available studies areput back to back, a suggestion of change arises. The research firm ofYankelovich, Skelley and White, studying worker motivations, discovered twogroups of workers--old-values and new-values workers. Some of the differencesbetween the two groups are:

To the old-values group, external cues are everything. They derive their sense of how they'redoing and what they want out of life from the way people react to them. With new-valuespeople, the cues are internal. It's part of the focus on self. Second, the work and the job defineold-values people. The new-values people are defined by what gives them psychic kicks. ...

Third, respect for authority is almost automatic among old-values people. Skepticismabout authority and self-confidence is part of the new-values lifestyle--especially with respectto work. ...

Focus on the department, the company, a larger social unit are an expected part of life forthe old-values people. Focus on the self is the rule for the new-values people. (Skelley, 1980,

p. 17)

Daniel Yankelovich has called this new-values group the "New Breed." Hedescribes their different motivation:

For the New Breed, family and work have grown less important and leisure more important.When work and leisure are compared as sources of satisfaction in our surveys, only one out of

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five people (21 percent) states that work means more to them than leisure. The majority (60percent) say that while they enjoy their work, it is not their major source of satisfaction(Yankelovich, 1978, p. 49).

Yankelovich suggests that if the incentive system were changed from emphasison the "old" incentives, the carrot and stick of money/success and economicinsecurity, to greater reliance on "new" incentives revolving around the "preoc-cupation with self," the "new breed" might work as hard as the old one(Yankelovich, 1978, p. 50). However, as of the early 1980s, most corporationsseem not to have shifted reliance on to "new breed" incentives, although therewas a growing interest in Quality of Work-Life programs.

Some insight into the status of the work ethic is provided by comparative dataand by indications of changed habits and emerging problems. None by itself iscompelling, but together they help to illuminate the condition of America's hu-man capital.

Much has been written on the roots of Japan's economic success. While manyfactors contributed to this success, one major factor is that many Japanese work-ers simply work very hard, in fact much harder than many of their Americancounterparts. A recent report completed by Harvard Business School found thatJapanese employees in the private sector work on average 2100 hours a year; andwhile they receive 14.6 days of paid vacation, take only 8.2 days. U.S. employ-ees, on the other hand, work 1800 hours a year, and receive and take 19.6 dayspaid vacation (Malabre, 1986). Japanese employers in the U.S, compare Ameri-can workers unfavorably to Japanese in attendance, turnover, ability, andmorale, and also in their education and even language. While all the workers inJapan are fluent in their tongue, a Japanese manufacturer who opened a plant inLos Angeles found that 70 percent of its employees were "native Spanishspeakers"-and others spoke mainly Korean or Vietnamese (Kanabayashi,

1981).Concerning changed habits, a study of worker absenteeism by two Purdue

University researchers found that

perfect attendance is no longer necessary to keep a job or win promotions. In fact. ..com-pany policies that allow for more frequent absences provide a basis for greater satisfaction.Liberal leave policies and a decline in the work-ethic have made skipping work much lessrisky. Only supervisors who directly control schedules and promotions seem to induce faithfulattendance. In companies with sick leave and seniority systems, even the happy employeeshave little reason to work every day. (ligen and Hollenback, 1977, p. 159).

Other data indicate that rising thefts at work, vandalism, and alcoholism anddrug abuse on the job were serious problems by the end of the 1970s. Estimatesin the late 1970s indicated that roughly 9 percent of all employees stole regularlyfrom their employers and that 30 percent of business failures were directly attrib-utable to employee theft. The National Retail Merchants Association found that


while shoplifters took about 35 percent of all stolen goods, employees took 45percent. (The rest was considered "accounting error.") (cited in U.S. News andWorLd Report, Feb. 21,1977, p. 47).

An example of the effects of rising thefts, vandalism, and absenteeism hasbeen provided by the Ford auto plant at Mahwah, New Jersey. Ford executivesdescribe some sources of the plant's reputation for poor quality, which theyclaim was a main reason it was closed:

In 1978 and 1979, the troubles reached a climax. Late in 1978 it was discovered that a half-dozen employees were looting the plant. Members of the theft ring, which included securitypersonnel, had been driving a truck into the plant at night, loading it with parts such as radiosand electric motors for power windows, and driving out. (Carley, 1980).

Vandalism was continuing. Some workers would "get upset over somethingand they would take a drift pin (a heavy metal pin) and drive it right through thetrunk or hood," said a car repairman at the plant. (Ibid.).

Absenteeism soared. According to a director of the quality-assurance programat Ford, "20 percent of employees were out some days. That meant workers hadto be switched around on a day-to-day basis to fill gaps." (Ibid.)

Some workers turned to drugs. "You could walk through certain parts of thebody shop during the night shift (when many younger men work) and get highjust from breathing" the marijuana smoke, said one VA W official (Ibid.). Thenumber of companies that had formal programs to help employees with drug oralcohol dependence increased from only a few at the beginning of the decade toabout two thousand by 1979. (U.S. News and World Report, August 27, 1979,p.

61).Other studies have concentrated on the attitudes and activities not of worker,

but of American managers. Two Harvard Business School professors claim thata good part of the responsibility for economic problems falls on the manager'sshoulders. Robert H. Hayes and William J. Abernathy write of the "new mana-gerial gospel. ..that has played a major role in undermining the vigor of Amer-ican industry." (Hayes and Abernathy, 1980, p. 68) They continue, "Responsi-bility for this competitive listlessness belongs not just to a set of externalconditions but also to the attitudes, preoccupations, and practices of Americanmanagers." (Ibid., p. 70) Problems stem from what Hayes and Abernathy call"new principles" that "encourage a preference for (1) analytic detachmentrather than the insight that comes from 'hands-on' experience, and (2) short-termcost reduction rather than long-term development technological competitive-ness. ' , (Ibid.) They say that by preferring short -term returns, "servicing existing

markets" instead of creating new ones, and following a "management by thenumbers" strategy, managers have, in effect, sacrificed "long-term technologi-cal superiority as a competitive weapon. In consequence, they have abdicatedtheir strategic responsibilities." (Ibid.)

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As an example of the problem Abernathy and Hayes see, they cite a managerwho said, "In the last year, on the basis of high capital risk, I turned down newproducts at a rate at least twice what I did a year ago. But in every case I tell mypeople to go back and bring me some new product ideas." (Ibid., p. 72)Abernathy and Hayes argue that if companies are to maintain or recapture inter-national competitive status, more risks, not fewer, must be taken in innovativeproduction and market development.

A recent management survey likewise suggested that while U.S. workers areonly two-thirds as productive as their grandfathers were, the fault lies with man-agers, not workers. According to the study, 30 percent of a work day is lostthrough "scheduling problems, unclear communication of assignments, im-proper staffing and poor discipline." (Kearns, 1980).

The preceding overview has focused on internal indictators of the status ofhuman capital. These seem to suggest a growing weakness. The quality of hu-man capital is also affected by the prevailing societal mentality and by the educa-tional institutions (family and school), which have also turned less favorable tohigh economic growth (See Etzioni, 1983).

C. Capital Goods: Growing Obsolescence

As far as one can tell, major segments of the capital goods sector were seri-ously undermaintained from the 1950s to the early 1980s. Plants, machines, andequipment in several key industries grew obsolescent and managers did not keeppace with the installation of new machines by competitors overseas. This seemsto be the case in such major American industries as autos and steel, as well asrubber, textiles, and, for different reasons, shipbuilding. One survey found thatat the end of 1978, although some industries had made considerable progress inmodernization during the previous two years, the proportion of technologicallyoutmoded plant and equipment was 26 percent in iron and steel, 25 percent inrubber, 18 percent in mining, and 17 percent in autos, trucks, and parts (Eco-nomic Dept. of McGraw Hill Publications, 1978, p. 7). Other industries, such aspetroleum and chemicals, showed stronger innovative signs. The manufacturerssurveyed reported that it would cost $126.4 billion to replace all technologicallyoutmoded facilities with the best new plants and equipment (Ibid., p. I). Sincethis figure excludes all nonmanufacturing industries as well as the manufacturerswho did not reply to the survey, the total outlay needed for modernization wouldobviously have been much greater.

It might be said that the decline of some industries and the rise of others is partof the adaptation of the economy to changing conditions. There is considerabletruth in this argument. For instance, in a world of rising oil costs it might servewell to "reduce capacity" in auto manufacturing and build up energy explora-tion. At issue is not drawing up a master plan but accepting the market's way ofadjusting to changed circumstances. At the same time, it is clear that on balancethe total American capital goods sector did not fare well between 1950 and the


early 1980s. Gross private domestic investment averaged 16.1 percent of GNP ofthe period 1971-80. However, a third of this investment (32.9%) went towardresidential investment (actually a consumption good) and inventory investmentby businesses, leaving only 10.8 percent of GNP for investment in structure andequipment. Of this amount, almost three-fourths (72.2%) went toward replacingdepreciated capital, leaving only 3.0 percent for investments in new structuresand equipment (Economic Report o/the President, 1983, p. 76). Also, a growingsegment of investment in capital goods has been dedicated to pollution abate-ment and safety.

In 1978, these expenditures amounted to $6.9 billion, more than 4.5 percent of the total in-vestment in the surveyed industries, with a projected increase to $7.3 billion for 1979. Forcertain industries the share in 1978 was higher: primary metals (12.6 percent); electric utilities(10.1 percent); petroleum (8.3 percent); and chemicals (7.8 percent). And these data omit theannual operating costs of complying with pollution abatement regulations. (U.S. Congress,Report No. 96-618, p. 70).

Stanford economist Michael J. Boskin writes:

The U.S. gross investment rate in physical tangible capital has fallen. ...Of our $386 billionof gross private investment in 1979, the bulk went into housing and replacement of wornoutcapital as well as into pollution abatement and safety programs; real net addition to plant andequipment was about $40 billion, less than 2 percent of GNP. (Boskin, 1980, p. 14).

While the proportion of investment in capital goods to GNP did not changemuch between 1950 and 1980, the labor force grew, and thus the capital availa-ble per worker declined. The capital/labor ratio is considered a better measurethan investment as a percentage of GNP, since it accounts tor growth in the laborforce as well as the change in the capital stock. Over the period 1951-80, thegrowth rate of capital/worker averaged 2.6 percent. From 1976 to 1980 it aver-aged 0.4 percent. While this is partly attributable to the low rates of investmentin the late '70's, it is mostly due to the increase in the labor force. Investment hasnot matched the rapid growth of the labor force, and the growth rate has fallen.(Economic Report of the President, 1983, p. 78).

In the 1970s, high rates of inflation reduced the incentive to invest in newplant and equipment. Depreciation of plant and equipment for tax purposes isbased on historic cost. As inflation pushes current replacement cost above his-toric cost, current depreciation allowances (and therefore current expenses) areunderstated, especially for long-lived investments, and current profits are over-stated. Thus the amount of tax paid is in effect increased, and dollars that wouldotherwise be available for investment are diverted into taxes. Indeed, between1965 and 1979, the average real economic rate of return on capital investment fornonfinancial corporations declined from 10 percent to about 5 percent. It in-creased to 8% in 1984, with the dramatic declines in inflation and the initial re-covery from the recession. (U.S. Bureau of the Census, 1986, table 890).

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Two other factors seem to have required additional investment. One was theneed to "rewire" American industry in response to the energy crisis. The secondwas the rise of competing nations that channeled much more of their GNP intocapital in general and capital goods in particular.

Although cross-cultural comparison can be misleading, it does suggest that theUnited States was lagging behind its major competitors in this sector. From 1971to 1980, while total U.S. investment was 19.1 percent of GDP, that of WestGermany was 22.8 percent and that of Japan 32.9 percent. (Economic Report ofthe President, 1983, p. 81).

D.

Transportation: Extensive Deterioration, Little Replacement

By the end of the 70s, the condition of American railroads was, despite somelocal exceptions (especially in the West and South), particularly poor. As muchas 50 percent of the track was estimated to be defective (Glickman, 1980).

Highways have not deteriorated nearly to the extent that railroads have, butfailure to maintain them properly is beginning to erode this important element ofthe American transportation system. Highways are designed to last only a certainnumber of years; federal highways, for example, were built to last 20 years, andan increasing number are reaching that age.

Now it is time to return to what might be called the horse-and-buggy industryproblem. The fact that this or that part of the transportation elementdeteriorated-for instance, the manufacture of horse-drawn carriages-is not thetroubling condition by itself. The trouble is that no new, efficient, functionallyequivalent item was introduced as the old ones weakened. This is evident if wereexamine the transportation mix: it continues to rely largely on rail, road, andwaterways, and these all weakened, albeit not evenly. True, some gains weremade by less reliance on particularly weakened rails and greater reliance on lessdeteriorated roads. But as these were both pointed downward-and are energy-inefficient-the total picture was a weakened system.

E.

Communications: A "Model" Sector

Just as transportation could well stand as a symbol of the problem of the U.S.economy, so the communications sector could well symbolize what a strongU.S. economy would be like (with some notable exceptions, especially that ofthe U.S. Postal Service). Taken as a whole, during the period 1950 to 1980, thecommunications industry showed steady growth. The value of its product in-creased from about $4.5 billion in 1950 to $102.8 billion in 1984 (U.S. Bureauof the Census, 1986).

Generally speaking, the parts of the communications industry that have grownmost since 1950 are those that have benefitted most, in decreased unit cost andincreased efficiency, from technological innovation. Three such developments

u.s. Technological, Economic, and Social Development for the 21st Century

261

revolutionized key segments of the communications industry and serve toillustrate the general thrust of this sector: large-scale integrated circuits, whichsharply reduced the cost of processing and storing messages; communicationssatellites, which offer efficient, high-capacity distribution of signals; and com-puter networks, which transmit messages and data instantaneously. As one ob-server noted:

If the motor car of 1950 had followed the same line of development as the transistor and itsmicro-circuit successors, it would now cost less than a cent and be the size of the thimble(Vedin, 1978, p. 16).

F. Power: Adaptation Lag

So much has been written about the changed energy world after 1973 that oneoften wonders if anything of merit can be added. For the purposes at hand, onlytwo statements need to be made. First, the U.S. has not shown, in the period1973-85, the commitment needed to come to terms with anyone of the numer-ous aspects of the problem. Second, energy (oil or BTU equivalent in othersources of power) has become significantly more expensive relative to othermeans of production in the 1973-85 period, compared to the pre-1973 era.

Of particular concern in the context of this analysis is the way the need to"rewire" most of the American economy, to introduce either more energy-efficient machines or machines that use sources of energy other than oil, affectsthe availability of capital for other purposes. Since most American machineswere designed, developed, mass-produced, and placed when energy-especiallyoil-was cheap, they tend to be energy-inefficient and often oil-dependent. Thisputs great pressure on producers (as well as consumers, as owners of autos, airconditioning, appliances, etc.) to replace machinery and equipment even if it isnot otherwise obsolete. This generates the need for large-scale capital outlays.For example, commercial jets by and large are not obsolete but must be replacedbecause they are fuel inefficient. Early in 1981, Delta Air Lines alone planned tospend about $7 billion over a IS-year period for fuel-saving planes (Pace, 1981).

G. Legal/Financial Institutions Turn Constrictive

In the golden age of consumption and social services, the institutional contextgrew less supportive to production, and more inclined to impose noneconomicpriorities on private market decision-making. The pace and scope of the govern-ment's regulatory apparatus, already discussed in the context of its effects onR&D, sinl.ilarly restricted all other economic activity. The number of regulatoryagencies grew from about a dozen before 1930 to 58 by 1979. By the late 1970s,completing the more than 4,000 different forms required to comply with federalregulations was said to be eating up over 140 million hours of executive andclerical effort each year (U.S. Executive Office of the President, 1978).

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Even if one fully grants the need to regulate, say, the safety of nuclear plants,or to require examination of the environmental impact of a new utility-if theprocess (including challenges in court) takes several years, the cost of regulationmultiplies. Suggestions for "fast tracking" failed, and up to the late 70s,deregulation was largely an idea in some intellectual's mind, tried out in a fewareas.

By far the largest part of the cost to business of paperwork, estimated in 1977at $25 to $32 billion a year, seems to have been caused by regulatory compli-ance. A study of this cost was conducted by Arthur Andersen & Co. for the Busi-ness Roundtable. Forty-eight Roundtable member firms provided information onthe incremental costs generated by six regulatory agencies or programs. Thesecosts totaled $2.6 billion in 1977, equivalent to about 16 percent of the compa-nies' after tax income, 10 percent of their capital expenditures, or 43 percent oftheir R&D costs (Arthur Andersen and Co., 1979, p. 14).

To complete the picture one would have to compare the role played by mone-tary policy (presided over by the Federal Reserve Board) and fiscal policy(formed by Congress and the various administrations) in this era to their role inthe first industrialization of America; all by itself that would require a very majorstudy. It is widely agreed that in the last decade, budget deficits and expansionistmonetary policies contributed to rising inflation, which in turn undermined thesources of investment (by undermining the motivation to save, the bond andstock markets, and public confidence, and by encouraging extensive credit useby consumers). But it does not necessarily follow that between 1820 and 1920either the banking system or Congress and the Presidents of the time followedwiser economic policies. Indeed, severe bouts of inflation and of recessionarybust were far from unknown. That over the century the economy did so well isprobably more because the interests committed to industrialization had a freerhand in those days than after World War II, and because the government, beingmuch smaller in size, scope, and powers, caused less damage even when its eco-nomic policies were no wiser.

As to the changes that occurred gradually from the 1950s to the early 1980s inthe financial and legal framework of the American economy, they seem to haveturned less accommodating, either because they increasingly promoted othervalues than economic growth and efficiency, or because the government grewbigger, more bureaucratic, and more restrictive.

III. AGENDA FOR REBUILDING AMERICA

Of the seven elements that accounted for the successful development of theinfrastructure and the capital goods sector in the first industrialization ofAmerica, we have found that by the early 1980s only one is still in vigoroushealth, the communications sector (with the notable exception of the U.S. PostalService). The transportation sector is particularly run down, with railroads,


bridges, and ports worse off than other weakened segments, and no major newmeans for transportation of goods. The energy sector has been causing numerouswell-known problems, not due to a maintenance gap, which characterizes manyof the other elements, but due to utterly insufficient adaptation of policies, tech-nologies, and investments to a new situation in the post-1973 era. The R&D sec-tor has been in decline for most of the period. Though it recently rebounded,civilian R&D expenditures remained weak. The human capital sector showssigns of decline, but not as clearly or severely as some of the other sectors. Legaland financial institutions turned against economic development in the era understudy, if an across-the-board generalization is to be made. The status of capitalgoods varies a great deal from industry to industry, with a fair number showingsigns of rising obsolescence, and relatively few showing new, vigorous replace-ment.

All this provides an agenda for reindustrialization: (a) investment in theinfrastructure and capital goods sector must be favored over consumption (in-cluding "investment" in residential real estate) if the foundations of a strongeconomy are to be restored; (b) the elements listed provide an outline for thefocus of reindustrialization-all but communications need to be strengthened; (c)there is no need to retrace the development of these elements, to restore the sameconcrete items, but the basic needs of economic development must be servedmore efficiently.

As we prepare to enter the 21 st century, a national debate has begun as to howbest to revitalize America's economy. At issue are competing conceptions ofboth what ails the economy and what prescriptions are called for. The advocatesof all the varying positions despair, albeit to differing degrees, of Keynesiantheory and policies based on it. All agree that in the American economy of recentyears, something more is amiss than unduly high readings on some indicators(e.g., inflation, unemployment), poor productivity growth, a growing deficit,and low savings, and that the problem is more severe than just one moredownturn of the age-old business cycle, soon to swing up again. All concur thatthe inflation of the late 1970s had not been merely or even mainly demand-driven(or OPEC-caused). All agree that the foundations of the American economy haveweakened and need shoring up.

The differences are best viewed as divergent conceptions of the proper rela-tionship between the polity and the economy, and where the levers for correct-ives are. The positions taken do not directly parallel those taken by political par-ties, or the conservative-liberal dichotomy. They may be arranged, forconvenience of presentation, on a continuum from laissez-faire conservative tomoderate-centrist to left-liberal.

A. Non-Targeted: Supply-Side Economics

The well-known laissez-faire, New Whig position is that what ails the econ-omy is mainly an excessive level of politicization, reflected not merely in the

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polity's use and allocation of an unduly high proportion of the GNP and in exces-sive regulation of private decisions but also in the revolution of entitlements, inattempts to deal with all social and many personal needs via the polity rather thanthe market.

The remedy that follows is to reduce the scope and intensity of the polity asmuch as possible, by releasing resources to the private sector, deregulating, andletting the market do its wondrous things. The most radical of the lot, such asProfessor Arthur Laffer, Congressman Jack Kemp, and Senator William Roth,hold that the revenue lost via monumental tax cuts will be restored by the highertax yield of a more productive economy. Other laissez-faire conservatives, sayMilton Friedman, are satisfied to cut back government expenditures and taxationdrastically, without assuming a proportionate gain in the economy and tax reve-nues.

In terms of the second defining issue, where the levers for change are, thisapproach is wholly nontargeted. It sees no need to direct aim, or guide the publicresources released to the private sector in any particular way. Indeed, freeingthem to go wherever the market will take them is the kernel of the approach. TheReagan administration has largely pursued the nontargeted approach, as shownby its recent tax revision.

B.

Targeted: Industrial Policy

At the other end of the spectrum is the notion that, far from being reduced, thepolity's role should be intensified. Here the diagnosis is that, compared to otherhighly successful economies, especially West Germany and above all Japan,American institutions provide insufficient guidance and support for the privateeconomy. The market, it is implied or openly stated, has shown its inability toinvest enough in new plant and equipment, in innovative and competitive capac-ity. Executives have grown risk-shy and dividend-happy. Steel mills, autoplants, the textile and rubber industries are crumbling. Computers face agovernment-orchestrated attack from Japan, while the response of Americancomputer firms is anemic and divided against itself.

According to this view, correctives are to be found in emulation of "Japan,Inc.," above all its MITI (Ministry of International Trade and Industry). Thesolution lies in government-guided collaborative efforts, in which business andlabor pull together, with government agencies and experts serving as the sourcesof analysis, tax incentives, capital, and informal if not outright control. Attemptsby the Carter administration, on its last legs, to turn around the U.S. auto andsteel industries according to the suggestions of tripartite committees were viewedas early-bird American industrial policy.

Beyond this, advocates of this highly targeted approach see the Department ofCommerce transformed into a Department of Trade and Development (or somenew agency, the Americanization of MITI) with a desk and a committee for each


industry, from ball bearings to industrial diamonds. The trade desk would ana-lyze the industry assigned to it-say, shoes-and determine whether it is a "win-ner" or a "loser," whether it has a promising future, in terms of productivity,

export-ability, technology/innovations, labor intensiveness, and other goodthings in life. "We must not only 'reindustrialize' but emulate the propermodel-which turns out to be West Germany or Japan. 'We have two ways togo,' an advocate of industrial policy warns, 'the way of the British or the way ofthe Japanese.' " (Wolin, 1981, p. 23).

A Harvard sociologist topped it all when he declared Japan the winner, num-ber one. Professor Ezra Vogel finds Japan first not only in economic achieve-ment, but also in education (Japan scores high on international math tests), crimecontrol, equality of income distribution, environmental protection, and health(life expectancy in Japan is among the longest in the world). Above all, Japan issaid to offer a model for the United States to emulate in dealing with industrialproblems. Specifically, Vogel would have the United States learn from Japan byforming a "comprehensive" industrial and trade policy; by creating a nationalcenter of top administrators to implement that national policy; by turning ourlarge corporations and other "large organizations" into "something people en-joy," the way the Japanese loyally adhere to their corporations; and by increas-ing cooperation between government and business (Vogel, 1979).

Similarly, Frank A. Weil, lawyer, investment banker, and Assistant Secretaryof Commerce under Carter, called for a cabinet department for InternationalTrade and Industry with "the responsibility for gathering and developing a relia-ble and specific information base about all industrial sectors"; the departmentwould' 'shape trade policy, take the lead on tax policy as it relates to and affectsindustry, direct import and export controls." (Weil, 1980) (Other advocates ofindustrial policy include Gar Alperovitz, co-director of the National Center forEconomic Alternatives, Ronald E. Miiller, the author of Revitalizing America,and Ira C. Magaziner and Robert B. Reich in their Minding America's Business.)

The designated' 'winners" would be showered with government subsidies,loans, loan guarantees, tax incentives, a measure of protection from internationalcompetition (as in trigger price or import quotas), R&D writeoffs, and what not.The "losers" would be "sunset." The government might provide the losers'workers with' 'trade adjustment assistance" to help them move from parts of thecountry where the losers congregate (Detroit, Pittsburgh) to where the winnersroam (the Sunbelt, coal states), but basically the losing industries are to bedoomed, and government help is to be withheld.

This policy might be called' 'national planning," but as the term tends to raisefears of socialism, most of its advocates avoid the label. Instead, the term "in-dustrial policy" is in favor. It is quite appropriate, because the assumption is thatthe unit at which the levers of policy are to take hold is not' 'the economy," or amajor sector of it, but the specific industry. Also, "industrial policy" is the labelused for such detailed government planning and direction of corporate efforts inother countries.

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That such approaches may work in other lands does not mean that they aresuitable for the American society. Many elements that go into these efforts inother societies are not available in America, nor are they producible or desirableif producible. Take the growing tendency of U.S. executives to play it safe,while the Japanese are more prone to take risks and hence come up with moreinnovations. Our business schools, from Harvard to Stanford, are told to reworktheir teaching fast and train less risk-averse executives, ''as the Japanese do."But being risk-shy and profit-oriented runs deep in our business system. Itreflects, in part, our much greater reliance on the stock market to raise capital,while Japan uses more bonds. Stocks are more quickly dumped than bonds if the

corporation's earnings drop.Similarly, while Japan's government is knee-deep in allocating capital to in-

dustry, Americans consider such government intervention an anathema. Japan'sgovernment encourages banks to take risks by allowing investment in corpora-tions that have piled up debts eight or nine times their equity; U.S. banks aredelicately nudged by the Comptroller of the Currency not to exceed significantlya one-to-one debt/equity ratio, to protect investors. Before American executivesbecome significantly more venturesome, all these factors would need to be re-

versed.Even if this were done, attempts to "redo" American executives would face a

second set of factors, rooted in the American mentality, upbringing, andorganizational culture. The Japanese pattern is for an executive to stay with onecorporation for life; the loyalty expected is high, as is the corporation's commit-ment. Are American executives ready to submit to a highly paternalistic corpo-rate bondage? Is greater willingness to take risks worth that much less mobility

and flexibility?All this is not to say that U.S. executives could not become somewhat more

venturesome. But they would have to be encouraged in ways that are compatiblewith our own culture, mentality, and capital structure, not Japan's. More gener-ally, most of what goes under the name of industrial policy in other countries isalien, un-American; not in the McCarthyite sense, but in a technical sociologicalsense: not suitable for the American context.

Aside from being alien, industrial policy prompts other objections from crit-

ics:

We

do not have the analytic capacity to detennine correctly who will be awinner, who a loser. Our record suggests that we would misidentify in-dustries and sink vast amounts of public resources in tomorrow's Edsels

(McCracken, 1981)Our polity, in which government tends to be weak compared to business,labor, and local communities, especially when these work togethcr fortheir Chrysler, would tend to channel resources not to those who meritthem by some rational analysis, but rather to those who have political

2.


clout. Interest groups are a major factor in determining, for instance,where the United States places its military bases, builds highways, digs

waterways.The country is unwilling to accept more politicization, less reliance onthe marketplace.

3.c.

Semi-Targeted: Reindustrialization

At the center of the continuum, between laissez-faire, supply-side economicson the right and industrial policy on the left, is the conception that what ails thecountry is overconsumption (public and private) and underinvestment, resultingin a weakening productive capacity. Signs of deferred maintenance and lack ofadaptation to the new environment of expensive energy can be seen in most ele-ments that make up the infrastructure and capital goods sectors.

The suggested cure is semi-targeted: Release resources to the private sector,but channel them to the infrastructure and capital good sectors, away from bothpublic and private consumption. For example, if we cut government revenues by$50 billion through across-the-board cuts in personal income tax, the funds re-leased might well be used mainly to spur private demand for consumer goods andservices; little rejuvenation of productive capacity might occur. On the otherhand, if those resources are guided to the productive sectors of the economy-not to specific industries-.reindustrialization is much more likely to follow.Thus, if tax revenues are "lost," not just through tax cuts for individuals but inpart by allowing companies to take accelerated depreciation when they replaceobsolete equipment or replace oil-based or energy-inefficient equipment withequipment that is energy-efficient or that uses alternative energy sources, the re-leased resources will revitalize, without determining which specific industry willbenefit: steel or textiles, rubber or rails. The polity will set the context; the mar-ket will target.

Similarly, providing tax incentives for greater R&D expenditures spurs on allsuch efforts; it does not require any government trade desk or tripartite commit-tee to decide which R&D project is desirable. And if workers are provided withproductivity-based incentives, so they can share directly in renewed economicgrowth, Washington need not be involved in determining which group of work-ers is eligible or to what extent; this is best done by management and workerswithin each corporation.

Critics suggest that such reindustrialization will return the country to the nine-teenth century and focus on "basic" or "smokestack" industries rather than onpost-industrial high-technology industries. The prefix "re-" does point to a re-turn, but it should not be taken literally. A return to strong infrastructure andcapital goods sectors does not require a return to the same mix of specific indus-tries. The return implied is to higher investment and innovation in the productivesectors, not to anachronistic details.

268 AMITAI ETZIONI

On another count, though, reindustrialization must plead guilty as charged: Itdoes favor mitigating the criteria of "comparative advantage" with considera-tions of developmental economics, social sensitivity, and national security.Studies of developmental economics show that short-term import limitations areoften essential for developing a new industrial base; the same might hold for re-newing one. Social considerations provide many reasons why we should not ex-port all blue-collar work to Third World countries; to start with, we have plentyof unskilled labor of our own. National security requires us not to grow so de-pendent on imported coal, steel, and shipbuilding that we are unable to withstand boycotts or other supply interruptions.

Reindustrialization thus stands between supply-side economics and industrialpolicy; it is semi-targeted, and the context it seeks to advance is a stronger pro-ductive capacity.

ACKNOWLEDGMENTS

This much revised article draws on material previously included in An Immodest Agenda

(1983).

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