The Art of the Possible

I'm back for another stint blogging at The Art of the Possible. My first post for this run is "Left Opportunism and Crackpot Realism." Readers of this blog will probably also enjoy, especially, two recent posts by Jim Henley and Jackson on the questionable validity of the GDP as a metric.

Draft Chapter Twelve

Another draft chapter from the org theory project:

Chapter Twelve. The Cost Principle

A Boot Stamping on a Human Face...

...is OK, just so long as it's the left boot.

Matthew Yglesias quotes Daniel Kurtz-Phelan:

Yglesias occasionally assumes the bloggerish pose of an outsider screaming at the Establishment, but in its substance his preferred foreign policy is as Establishment as could be. What he offers is a livelier version of the sort of "liberal internationalist" platform that might be found in, say, a task-force report put out by a center-left think tank.

Yglesias responded:

To me, though, this is the point. My ideas really are basically the ideas that were at the core of the bipartisan, establishment consensus throughout the Cold War years. And they're ideas that could and should have been the key ideas of center-left think tanks in the post-9/11 world. But that's not what actually happened. Instead, a set of ideas that originally existed as a fringe right-wing position wound up being espoused not only by nearly the entire Republican Party but by a huge swathe of the broader establishment.

When Samuel P. Huntington wrote, in The Crisis of Democracy, of the United States as "hegemonic power in a system of world order," and argued that this hegemonic status depended on the U.S. being

governed by the president acting with the support and cooperation of key individuals and groups in the Executive office, the federal bureaucracy, Congress, and the more important businesses, banks, law firms, foundations, and media, which constitute the private establishment...

...he was talking mainly about a Cold War liberal establishment dating back to FDR and Truman. This is what I had in mind when I left this comment under Yglesias' post:

As a left-wing outsider, I'm struck by the similarities between the old liberal foreign policy establishment you're so nostaligic for and the neoconservative approach. Despite significant differences, you have more positions in common than not. The liberal foreign policy establishment agrees with the neocons that the U.S. should (it goes without saying) have the strongest military in the world, that the U.S. is the rightful guarantor of a corporate world order, and that the U.S. is the only power in the world that has the right to define as a "threat" either what some country on the other side of the world does within a few hundred miles of its own border, or the refusal to recognize the U.S. as hegemonic power. The liberal foreign policy consensus got us all the nasty shit Gabriel Kolko wrote about, like forcibly suppressing leftist resistance movements in former Axis-occupied territories and putting former Axis puppets back in power. It got us Korea and Vietnam (including the installation and subsequent overthrow of Diem, and the Tonkin Gulf incident). It got us Suharto, and endless other dictatorships of, by, and for the landed oligarchs and TNCs.

In short, your "liberal establishment" foreign policy, to the extent that it differs from that of the neocons, reminds me of Chomsky's quip about the liberal wing of the Nazi party that only wanted to kill half the Jews. While it's arguably an improvement, it's still utterly reprehensible.

Yglesias is a textbook illustration of the tendency Arthur Silber observed in "even the most intelligent of liberal-progressive writers and bloggers":

their seeming inability to appreciate the continuity and uniformity of American foreign policy over the last century, and particularly since World War II. It appears that their determination to turn virtually every episode in our national life, no matter how disastrous, into an opportunity for partisan advantage and electoral victory overcomes analytic abilities which can often be very insightful on more limited questions. This myopic slant proceeds, in turn, from a willingness to allow the demands of tribal political identity to trump a more dispassionate (and I would submit, much more accurate) assessment of how the current Bush administration differs from previous administrations -- and how it does not.

Alfred Chandler: A Critique

Alfred Chandler, like Joseph Schumpeter and John Kenneth Galbraith, was thoroughly sold on the greater efficiencies of the large corporation. Like them, he equted large size both to greater efficiency and greater innovativeness.

He argued that the modern multi-unit enterprise arose when administrative coordination "permitted" greater efficiencies. The chief efficiency of the multi-unit enterprise was a reduction in transaction costs: "internalizing," under administrative control, the activities that were previously conducted by free contract among a number of independent businesses.

Such an internalization gave the enlarged enterprise many advantages. By routinizing the transactions between units, the costs of these transactions were lowered. By linking the administration of producing units with buying and distributing units, costs for information on markets and sources of supply were reduced. Of much greater significance, the internalization of many units permitted the flow of goods from one unit to another to be administratively coordinated. More effective scheduling of flows achieved a more intensive use of facilities and personnel employed in the processes of production and so increased productivity and reduced costs. [Alfred D.Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge and London: The Belknap Press of Harvard University Press, 1977), pp. 6-7.]

In discussing the internal efficiencies achieved through large-scale production and internal hierarchy, Chandler's enthusiasm fairly jumps off the page:

Organizationally, output was expanded through improved design of manufacturing or processing plants and by innovations in managerial practices and procedures required to synchronize flaws and supervise the work force. Increases in productivity also depend on the skills and abilities of the managers and the workers and the continuing improvement of their skills over time. Each of these factors or any combination of them helped to increase the speed and volume of the flow, or what some processors call the "throughput," of materials within a single plant or works....

Where the underlying technology of production permitted, increased throughput from technological innovation, improved organizational design, and perfected human skills led to a sharp decrease in the number of workers required to produce a specific unit of output. The ratio of capital to labor, materials to labor, energy to labor, and managers to labor for each unit of output became higher. Such high-volume industries soon became capital-intensive, energy-intensive, and manager-intensive. [p. 241]

They achieved "economies of speed" from "greatly increasing the daily use of equipment and personnel." [p. 244] (Of course, Chandler starts by assuming the need for a capital-intensive mode of production, which then requires "economies of speed" to reduce unit costs from the expensive capital assets).

This model of production resulted in the adoption of increasingly specialized production machinery, one of the main sources of the "asset specificity" by which Oliver Williamson explains the substitution of hierarchy for the market:

The large industrial enterprise continued to flourish when it used capital-intensive, energy-consuming, continuous or large-batch production technology to produce for mass markets. [p. 347]

Along with these changes, the large corporation also brought with it Taylorism and the deskilling of blue collar labor:

In production, the first modern managers came in those industries and enterprises where the technology permitted several processes of production to be carried on within a single factory or works.... In those industries, output soared as energy was used more intensively and as machinery, plant design, and administrative procedures were improved. As the number of workers required for a given unit of output declined, the number of managers needed to supervise these flows increased. Mass production factories became manager-intensive. [pp. 485-486]

Needless to say, anyone looking for even a smidgen of libertarian-left sympathy for worker empowerment or self-management in Chandler will be sorely disappointed. The man was a New Class technocrat to the core.

Chandler's account also resembled, with his assumption of managerial capitalism as the only possible response to objective technological necessity, the transposition of the Whig theory of history to the industrial realm. As Yehouda Shenhav describes it,

...[C]apitalists came to realize that they needed a much more systematic control mechanism for efficiency purposes.... The advent of the first integrated enterprises during the 1880s and 1890s "brought about" new problems, such as an increase in the volume of output, that "led" to the building of the first administrative systems.... To Chandler, "the appearance of managerial capitalism has been... an economic phenomenon", and not a political one.... Administrative systems were adopted as rational responses to problems of economic reality confronting capitalists. In Chandler's analysis, the development of systems had no reference to power, politics, and interests. Although Chandler was vague about agency ("led", "brought about"), he attributes the rise of business administration to employers' and managers' (alike) attempts to meet the strategic challenges facing them.... [Yehouda Shenhav, Manufacturing Rationality: The Engineering Foundations of the Managerial Revolution (Oxford and New York: Oxford University Press, 1999), p. 103.]

Chandler's Achilles Heel is his admission (although he does not recognize it as such) that achieving productive efficiencies through such "progressive" innovations required the preexistence of a high-volume, high-speed, high-turnover distribution system on a national scale.

...[M]odern business enterprise appeared for the first time in history when the volume of economic activities reached a level that made administrative coordination more efficient and more profitable than market coordination. [p. 8]

...[The rise of administrative coordination first] occurred in only a few sectors or industries where technological innovation and market growth created high-speed and high-volume throughput. p. 11]

The railroad and telegraph, and the central banking system, in Chandler's view, were what made possible this steady flow of goods through the distribution pipeline.

The railroad and the telegraph provided the fast, regular, and dependable transportation and communication so essential to high-volume production and distribution. [p. 79]

...[The local branches of the Second Bank of the U.S.] provided an administrative framework that permitted the transfer of funds and credit throughout the country by means of a series of accounting transactions between branches controlled and supervised by the Philadelphia headquarters. [pp. 30-31]

The primacy of such state-subsidized infrastructure is indicated by the very structure of Chandler's book. He begins with the railroads and telegraph system, themselves the first modern, multi-unit enterprises. [pp. 79, 96-121] And in subsequent chapters, he recounts the successive evolution of a national wholesale network piggybacking on the centralized transportation system, followed by a national retail system, and only then by large-scale manufacturing for the national market. A national long-distance transportation system led to mass distribution, which in turn led to mass production.

The coming of mass distribution and the rise of the modern mass marketers represented an organizational revolution made possible by the new speed and regularity of transportation and communication. [p. 235]

...The new methods of transportation and communication, by permitting a large and steady flow of raw materials into and finished products out of a factory, made possible unprecedented levels of production. The realization of this potential required, however, the invention of new machinery and processes. [p. 240]

In other words, the so-called "internal economies of scale" in manufacturing could come about only when the offsetting external diseconomies of long-distance distribution were artificially nullified by corporate welfare. With transportation costs fully internalized, reduced unit costs of production would have been more than offset by increased distribution costs at a very modest level of output. The prerequisites of large-scale production are an artificial state of affairs.

From Chandler's perspective, of course, all the above simply means that the state's role in creating centralized infrastructure facilitated the introduction of organizational forms that were inherently more efficient.

But despite his touching faith, there is in fact no such thing as generic or immaculate "efficiency." One method or another is only more efficient given a particular package of input costs that determine which inputs are to be economized on. Subsidies are subject to what might be called The Law of Conservation of Costs: costs can be shifted, but they cannot be destroyed. In other words, as the saying goes, There Ain't No Such Thing As A Free Lunch. The overall cost of a good from a giant factory two thousand miles away does not become less than that of a good from a small factory twenty miles away, just because part of the cost is collected by the IRS instead of by the retailer. If the total cost amounts to more than the product's worth, the product doesn't become a net social good because some items on the cost side of the ledger don't show up in retail price.

Chandler's version of history, turned rightside-up, can be restated thusly: transportation subsidies and internal improvements were primary in creating the low distribution costs and resulting artificially large market areas without which large scale production would have been impossible. Given the artificial inflation of this high-volume distribution system, and given the resulting artificial profitability of large organizations, hierarchy becomes necessary to manage those organizations. And given these artificial conditions, the pioneers of the multi-unit corporation did indeed come up with some great accomplishments. Their great feats of administrative innovation were a rational way of carrying out an inherently irrational task (but not necessarily the most efficient even for this, as Waddell and Bodek showed regarding the inefficiencies of the DuPont/Sloan system that Chandler makes so much of). But that is not, by any means, the same as saying that artificially cheap transportation is a public good because it "permits" administrative coordination which is absolutely more efficient than the market. Large size did not grow from the superior efficiency of large-scale organization; rather, the techniques of large-scale management were adopted as the least inefficient alternative given the large size which already existed as a result of artificially large market areas. No doubt some Gosplan apparatchiks also performed superhuman feats in making an inherently over-centralized and inefficient process as manageable as possible, given the impossible situation in which they were placed by the starting assumptions of a planned economy.

As Chandler himself admitted, the greater "efficiency" of national wholesale organizations lay in their "even more effective exploitation of the existing railroad and telegraph systems." [p. 215] That is, they were more efficient parasites. But the "efficiencies" of a parasite are usually of a zero-sum nature.

He also admits, perhaps inadvertently, that the "more efficient" new production methods were adopted almost as an afterthought, given the artificially large market areas and subsidized distribution:

...the nature of the market was more important than the methods of production in determining the size and defining the activities of the modern industrial corporation. [p. 363]

Despite all this, Chandler--astonishingly--minimizes the role of public policy in creating the system he so admires:

The rise of modern business enterprise in American industry between the 1880s and World War I was little affected by public policy, capital markets, or entrepreneurial talents because it was part of a more fundamental economic development. Modern business enterprise... was the organizational response to fundamental changes in processes of production and distribution made possible by the availability of new sources of energy and by the increasing application of scientific knowledge to industrial technology. The coming of the railroad and telegraph and the perfection of new high-volume processes... made possible a historically unprecedented volume of production. [p. 376]

Chandler's statement also reflects an unquestioned assumption that what Lewis Mumford called "paleotechnics" (i.e., the large-scale factory production of the coal and steam age--about which more in Part Four) were more efficient than the decentralized, small-scale production methods of Kropotkin and Borsodi. The possibility never occurs to this technological determinist that massive state intervention, at the same time as it enabled the revolutions in corporate size and capital-intensiveness, might also have tipped the balance between alternative forms of production technology.

Despite all the state intervention up front to make the large corporation possible, state intervention was required after as well as before in order to keep the system running. These great corporate paragons of efficiency were unable to survive without the government guaranteeing an outlet for their overproduction, and protecting them from market competition.

The ruling elites of the corporate-state nexus perceived, as early as the depression of the 1890s, that overbuilt industry could not dispose of its output, operating at full capacity, without government help. This problem was first addressed, as thinkers ranging from J.A. Hobson to Lenin to Schumpeter have described, through imperial adventure to secure foreign markets. The system, in Schumpeter's phrase, was "export-dependent monopoly capitalism." It gave rise to what W.A. Williams called "Open Door Empire," institutionalized through the Bretton Woods agencies of FDR and Truman, and remains the basis of U.S. foreign policy to the present day. (See, for example, Joseph Stromberg , "The Role of State Monopoly Capitalism in the American Empire").

Another approach to the problem of overproduction was the creation of mass advertising and consumer credit. Although this was somewhat less state-dependent than imperialism, it had a large state component. For one thing, the founders of the mass advertising and public relations industries were, in large part, also the founders of the science of "manufacturing consent" used to manipulate Anglo-American populations into support of St. Woodrow's crusade. For another, the mass advertising market depended heavily on the creation of the broadcast mass media, in which the state played no inconsiderable role. And finally, the state's own organs of propaganda (through the USDA, school home economics classes, and the like) put great emphasis on discrediting "old-fashioned" atavisms like home-baked bread and home-grown and -canned vegetables, and promoting in their place the "up-to-date" housewifely practice of heating stuff up out of cans from the market. This is the theme, for example, of Stuart Ewen, Captains of Consciousness: Advertising and the Social Roots of the Consumer Culture (New York: McGraw-Hill, 1976).

Jeffrey Kaplan described this, in a recent article, as the "gospel of consumption":

[Industrialists] feared that the frugal habits maintained by most American families would be difficult to break. Perhaps even more threatening was the fact that the industrial capacity for turning out goods seemed to be increasing at a pace greater than people’s sense that they needed them.

It was this latter concern that led Charles Kettering, director of General Motors Research, to write a 1929 magazine article called “Keep the Consumer Dissatisfied.” He wasn’t suggesting that manufacturers produce shoddy products. Along with many of his corporate cohorts, he was defining a strategic shift for American industry—from fulfilling basic human needs to creating new ones.

In a 1927 interview with the magazine Nation’s Business, Secretary of Labor James J. Davis provided some numbers to illustrate a problem that the New York Times called “need saturation.” Davis noted that “the textile mills of this country can produce all the cloth needed in six months’ operation each year” and that 14 percent of the American shoe factories could produce a year’s supply of footwear. The magazine went on to suggest, “It may be that the world’s needs ultimately will be produced by three days’ work a week.”

Business leaders were less than enthusiastic about the prospect of a society no longer centered on the production of goods. For them, the new “labor-saving” machinery presented not a vision of liberation but a threat to their position at the center of power. John E. Edgerton, president of the National Association of Manufacturers, typified their response when he declared: “I am for everything that will make work happier but against everything that will further subordinate its importance. The emphasis should be put on work—more work and better work.” “Nothing,” he claimed, “breeds radicalism more than unhappiness unless it is leisure.”

By the late 1920s, America’s business and political elite had found a way to defuse the dual threat of stagnating economic growth and a radicalized working class in what one industrial consultant called “the gospel of consumption”—the notion that people could be convinced that however much they have, it isn’t enough. President Herbert Hoover’s 1929 Committee on Recent Economic Changes observed in glowing terms the results: “By advertising and other promotional devices . . . a measurable pull on production has been created which releases capital otherwise tied up.” They celebrated the conceptual breakthrough: “Economically we have a boundless field before us; that there are new wants which will make way endlessly for newer wants, as fast as they are satisfied.”

Running overcapitalized industry at full capacity, in Chandler's account, meant keeping the distribution pipeline flowing, and the result was what contemporary thinkers call the "push" economy. His model of "high-speed, high-throughput, turning high fixed costs into low unit costs," and Galbraith's "technostructure," are (leaving aside their worshipful tone) practically identical to "push" distribution. Here's how it was described by Paul Goodman:

... in recent decades... the center of economic concern has gradually shifted from either providing goods for the consumer or gaining wealth for the enterpriser, to keeping the capital machines at work and running at full capacity; for the social arrangements have become so complicated that, unless the machines are running at full capacity, all wealth and subsistence are jeopardized, investment is withdrawn, men are unemployed. That is, when the system depends on all the machines running, unless every kind of good is produced and sold, it is also impossible to produce bread. [Paul and Percival Goodman, Communitas: Means of Livelihood and Ways of Life (New York: Vintage Books, 1947, 1960), pp. 188-89.]

The same imperative was at the root of the hypnopaedic socialization in Huxley's Brave New World: "ending is better than mending"; "the more stitches, the less riches."

One can't help thinking of Peter Drucker's maxim: "There is nothing so useless as doing efficiently that which should not be done at all."

Because of the imperative for large industry to operate on round-the-clock shifts, to spread the cost of its expensive machinery over the greatest possible number of units of output, the imperative of ensuring consumption and keeping the pipeline of goods open is equally great.

Integration of mass production with mass distribution afforded an opportunity for manufacturers to lower costs and increase productivity through more effective administration of the processes of production and distribution and coordination of the flow of goods through them. Yet the first industrialists to integrate the two basic sets of processes did not do so to exploit such economies. They did so because existing marketers were unable to sell and distribute products in the volume they were produced.

Central to the growth of the mass production, mass advertising, push economy was the change from demand-driven commodity distribution, with competition centered primarily on price, to an economy based on brand name specification and competition in cosmetic features. The older economy that the "push" distribution system replaced was one in which most foods and drugs were what we would today call "generic." Flour, cereal, and similar products were sold in bulk and weighed and packaged by the grocer. The producers geared production to the level of demand that was relayed to them by the retailers' orders. Drugs, likewise, were typically compounded by the druggist on-premises to the physician's specifications, from generic components. But in the twenty years before Borsodi wrote The Distribution Age, the ratio went from roughly 95% bulk to 75% package goods. [Ralph Borsodi, The Distribution Age (New York and London: D. Appleton and Company, 1929), pp. 217, 228] Under the new "push" system, the producers appealed directly to the consumer through brand-name advertising, and relied on pressure on the grocer to create demand for what they chose to produce.

It is possible to roughly classify a manufacturer as belonging either to those who "make" products to meet requirements of the market, or as belonging to those who "distribute" brands which they decide to make. The manufacturer in the first class relies upon the natural demand for his product to absorb his output. He relies upon competition among wholesalers and retailers in maintaining attractive stocks to absorb his production. The manufacturer in the second class creates a demand for his brand and forces wholesalers and retailers to buy and "stock" it. In order to market what he has decided to manufacturer, he figuratively has to make water run uphill. [Borsodi, p. 110.]

The consumer, under the new regime of Efficiency, paid four times as much for flour, sugar, etc., as he had under the old "inefficient" system.

Brand specification "lifts a product out of competition." [Borsodi, p. 162] Although competitive markets prevail to a large extent in the supply of raw materials for resale,

in the buying of finished products, the prevalence of brand specification has all but destroyed the normal basis upon which true competitive prices can be established. [Borsodi, pp. 216-217]

As Barry Stein described it, branding

convert[s] true commodities [i.e., goods essentially generic in nature] to apparent tailored goods, so as to avoid direct price competition in the marketplace. The distinctions introduced--elaborate packaging, exhortative advertising and promotion that asserts the presence of unmeasurable values, and irrelevant physical modification (colored toothpaste)--do not, in fact, render these competing products "different" in any substantive sense, but to the extent that consumers are convinced by these distinctions and treat them as if they were different, product loyalty is generated. [Barry Stein, Size, Efficiency, and Community Enterprise, p. 79.]

Competition between identifiable producers of bulk goods enabled grocers to select the highest quality bulk goods, while providing them to customers at the lowest price. Brand specification, on the other hand, relieves the grocer of the responsibility for standing behind his merchandise and turns him into a mere stocker of shelves with the most-demanded brands.

Bulk commodity distribution, today, prevails only in natural foods and other food-buying cooperatives. But its effect, where practiced, is to make "[c]ompetition... descend from the cloudy heights of sales appeals and braggadocio generally, to just one factor--price." [Stuart Chase and F. J. Schlink, The New Republic, December 30, 1925, in Borsodi p. 204.]

But that would be the worst nightmare of the oligopoly manufacturer and the advertising industry, as indicated by this quote from Naomi Klein:

At the anual meeting of the U.S. Association of National Advertisers in 1988, Graham H. Phillips, the U.S. Chairman of Ogilvy & Mather, berated the assembled executives for stooping to participate in a "commodity workplace" rather than an image-based one. "I doubt that many of you would welcome a commodity marketplace in which one competed solely on price, promotion and trade deals, all of which can be easily duplicated by competition, leading to ever-decreasing profits, decay, and eventual bankruptcy." Others spoke of the importance of maintaining "conceptual value-added," which in effect means adding nothing but marketing. Stooping to compete on the basis of real value, the agencies ominously warned, would speed not just the death of the brand, but corporate death as well. [Naomi Klein, No Logo (New York: Picador, 1999), p. 14.]

The overall system, in short, was a solution in search of a problem. State subsidies and mercantilism gave rise to centralized, overcapitalized industry, which led to overproduction, which led to the need to find a way of creating demand for lots of crap that nobody wanted.

Government tried in a third way to solve the problem of overproduction: the increasing practice of directly purchasing the corporate economy's surplus output, through massive highway and civil aviation programs, the military-industrial complex, the prison-industrial complex, foreign aid, and so forth.

Parallel to these trends, the state also played a major role in cartelizing the economy, to protect the large corporation from the destructive effects of price competition.

American manufacturers began in the 1870s to take the initial step to growth by way of merger--that is, to set up nationwide associations to control price and production. They did so primarily as a response to the continuing price decline, which became increasingly impressive after the panic of 1873 ushered in a prolonged economic depression. [p. 316]

The process was further accelerated by the Depression of the 1890s, with mergers and trusts being formed through the beginning of the next century in order to control price and output:

the motive for merger changed. Many more were created to replace the association of small manufacturing firms as the instrument to maintain price and production.

In other words, trusts and mergers had less to do with internal efficiencies than with maintaining the scale of distribution that economies of speed depended on.

Chandler's account of the trust movement ignores one central fact: the trusts were less efficient than their smaller competitors. They immediately began losing market share to less leveraged firms outside the trusts. The trust movement was an unqualified failure, as big business quickly recognized. Subsequent attempts to cartelize the economy, therefore, enlisted the state. As recounted by Gabriel Kolko, the main force behind the Progressive Era regulatory agenda was big business itself, the goal being to restrict price and quality competition and to reestablish the trusts under the aegis of government. Although Chandler treats the post-WWI stability of oligopoly markets as the result of some natural weeding-out process, [p. 345] it was actually, as Kolko argued, because the Clayton Act's "unfair competition" provisions finally restricted price competition enough to make the world safe for oligopoly.

In short, as Richard Du Boff and Edward Herman point out, Chandler's treatment of the managerial corporation as a passive response to objective technological necessity leaves out a good many relevant issues. "Government is treated as an exogenous force, not as part of a symbiotic relationship with private capital...." Moreover, Chandler "effectively denies us the means by which we might assess the impact of the corporate system on the population at large and the social costs produced by the needs of that system." "...[T]here is no intimation that technology affords a potentially wide spectrum of choices...."

For example, Chandler notes Carnegie's concern almost exclusively with labor costs, but "does not discuss the implications for technological choices or the consequences for labor (wage rates, output requirements, unemployment)." [Richard B. Du Boff and Edward S. Herman, "Alfred Chandler's New Business History: A Review," Politics & Society 10:1 (1980), pp. 87-110.]

Chandler's entire body of work can be described, with little exaggeration, as an exercise in polishing the turd of Sloanism. Of course, he carefully neglects to mention GM's heavy reliance on federal highway spending and other subsidies to the car culture, or GM's getting its ass kicked by the Toyota production system.

Chandler's book on the tech industry is a telling illustration of just what he meant by "organizational capability." For Chandler, "organizational capabilities" in the consumer electronics industry amounted to the artificial property rights by which the firm is able to exercise ownership rights over technology and over the skill and situational knowledge of its employees, and to prevent the transfer of technology and skill across corporate boundaries. Thus, his chapter on the history of the consumer electronics industry through the mid-20th century consists largely of what patents were held by which companies, and who subsequently bought them. [Alfred D. Chandler, Jr., Inventing the Electronic Century (New York: The Free Press, 2001), pp. 13-49]

Galbraith and Chandler had things exactly backwards. The "technostructure" can survive because it is enabled to be less responsive to consumer demand. An oligopoly firm in a cartelized industry, in which massive, inefficient bureaucratic corporations share the same bureaucratic culture, is protected from competition. The "innovations" Chandler so prized are made by a leadership completely out of touch with reality. These "innovations" succeed because they are determined by the organization for its own purposes, and the organization has the power to impose top-down "change" on a cartelized market, with little regard to consumer preferences, instead of responding flexibly to them. Chandler's model of innovation is based, not on finding out what people want and providing it, but on inventing ever-bigger hammers and then forcing us to be nails. The large corporate organization is not more efficient at accomplishing goals received from outside; it is more efficient at accomplishing goals it sets for itself for its own purposes, and then using its power to adapt the rest of society to those goals.

Indeed (as Galbraith argued), "organizational success" requires institutional mechanisms to prevent outside society from doing what it wants, in order to provide the levels of stability and predictable demand that the technostructure needs for its long planning horizons. The Galbraith/Chandler view bears a striking resemblance to the Whig theory of history, or to Hegel's dictum that the real is rational: oligopoly capitalism is "successful" because it is the most efficient at achieving the ends of oligopoly capitalism. It's a bit reminiscent of the old doctor's joke that a dead patient is a "healthy tumor," or that "the operation was a success, but the patient died." Our society, unfortunately, has no shortage of such "successes."

Chandler starts out with the technocratic assumption that a centralized national economy with a centralized transportation system is a Good Thing, and defines "efficiency" in terms of the administrative mechanisms necessary to make it possible without interference from the market.

Chandler's version of "innovation" means, in practice, 1) developing processes so capital-intensive and high-tech that, if all costs were fully internalized in the price of the goods produced, consumers would prefer simpler and cheaper models; or 2) developing products so complex and prone to breakdown that, if cartelized industry weren't able to protect its shared culture from outside competition, the consumer would prefer a more durable and user-friendly model. Cartelized, over-built industry deals with overproduction through planned obsolescence, and through engineering a mass-consumer culture, and succeeds because cartelization restricts the range of consumer choice.

Chandler's corporation is a roaring success indeed, if we start with the assumption that society should be reengineered to desire what the technostructure wants to produce. Robin Marris described this approach quite well:

The "bureaucratic" environment of the large corporation... is likely to divert emphasis from the character of the goods and services produced to the skill with which these activities are organized.... The concept of consumer need disappears, and the only question of interest... is whether a sufficient number of consumers, irrespective of their "real need" can be persuaded to buy [a proposed new product]." [Quoted in Barry Stein, p. 55]

The marketing "innovations" Chandler trumpeted in Scale and Scope--in foods the techniques for "refining, distilling, milling, and processing"--were actually expedients for ameliorating the inefficiencies imposed by large-scale production and long-distance distribution: refined white flour, inferior in taste and nutrition to fresh-milled local flour, but which would keep for long-term storage; gas-ripened rubber tomatoes and other vegetables grown for transportability rather than taste; etc. Every you fill up your grocery cart with refined white flour, hydrogenated oils, and high fructose corn syrup, say a little prayer for the soul of Alfred Chandler.

I should mention, in passing, that I risk charges of rhetorical excess or facetiousness in referring to the "push" model as "find[ing] a way to create demand for lots of crap that nobody wanted." Therefore, I will read Jeremy Weiland's caveat into the record:

In the parts where you address the management of consumer demand according to institutional interests, you're not suggesting that consumer demand plays no role in the decisions about what to produce, right? I don't mean to be so blithe but that seems patently false... the issue is that consumer demand is moderated and channeled into demand for things that corporations decide they can produce most profitably given a rigid institutional structure. The way you frame the issue seems extreme... as if there is no role for consumer demand, rather than a substantially neutered and manipulated one. Even with demand management, PR, advertising, etc. it seems obvious to me that there are still instances of new choices introduced by competitors from outside the established oligopoly responding to demand. It's simply that these choices would be more plentiful without statist intervention, right? I'm concerned your argument is too sweeping and ignoring a much more fine and important point - that consumers aren't just lacking choices but are being manipulated subtly.

That's a pretty good way of putting it, without all the snark. When I say the corporate economy tries to create demand for lots of crap that nobody wants, it's just a colorful way of saying that consumer demand is "substantially neutered and manipulated," that it's "moderated and channeled into demand for things that corporations decide they can produce most profitably given a rigid institutional structure."

Reciprocity and Privilege

I've got a two-part guest post at the P2P Foundation on reciprocity and privilege.

Kevin Carson on reciprocity in an (un)free market (1)
Kevin Carson reciprocity in an (un)free market (2): the problem of artificial scarcity

Check it out.

Book Review: Rebirth of American Industry

William Waddell and Norman Bodek in Rebirth of American Industry: A Study of Lean Management (Vancouver, WA: PCS Press, 2005).

Most of the material in this review will appear in a future version of Chapter Eight of the org theory book, and most of the rest in other chapters. All page numbers in brackets, unless otherwise noted, are from the book being reviewed.

Introduction

Most of the objectionable features of rule by MBAs that I discussed in Chapter Eight ("Managerialism: Irrationality and Authoritarianism in the Large Organization"--sorry, old version), especially their irrational approach to cutting costs and increasing productivity (which actually amounts to stripping the organization of human capital and other assets, and gutting its long term productive capability, in order to game the short term numbers and inflate their own stock options and bonuses), are strongly reinforced, in American corporate culture, by the Sloan management accounting system. That system is described, in unflattering clinical detail, by William Waddell and Norman Bodek in Rebirth of American Industry.

I owe Eric Husman a debt of gratitude for first drawing them to my attention, through enthusiastic endorsements at his blog. He blamed Corporate America's mismanagement on "the imposition of the DuPont definition of profit, the Sloan management method, and the Brown accounting method onto American industry."

In fact, Sloan and Brown were picked by DuPont and their methods reflect his definition of profitability, so all the evil essentially flowed from one man. At the end of World War II, with Ford Motor Company having faltered as Henry lost his mind, the DuPont/Sloan/Brown system stood at the pinnacle of the most important industry in the only country in the world left relatively unscathed by the war. Their system was adopted by every other American business for this bit of luck, not because of any inherent merit.

Of course I would argue (and later do) that it did have one inherent merit, from management's standpoint: it reinforced their careerist and pecuniary interests very nicely. I'd a hell of a lot prefer to be making Jack Welch's salary to that of his counterpart at Toyota.

The Sloan system (the common, short-form name) essentially transformed manufacturers into marketing companies with a manufacturing function.

Husman attributed American management's dumbed-down approach to Kwality and other similar fads, which I addressed in Chapter Ten, "Attempts at Reform from Within," to the fundamental contradiction of "trying to become lean with a Brownian accounting system."

That, like the "management by numbers" stupidity of Sloan "management", serves only the near-sighted and non-manufacturing-minded DuPont definition of profit. Deming was right: the idea that someone could graduate with an MBA and step into the front office of a manufacturer without ever having spent time on the factory floor is a fraud. It was a fraud allowed to flourish in a time when Sloan companies were competing against other Sloan companies: marketing vs. marketing. Once a Manufacturer stepped into the ring, they were doomed to fail. Unless they change their definition of profitability and the management and accounting systems that support that, the Sloan companies are not going to compete with a Toyota

Waddell and Bodek contrast the Sloan system to the Toyota Production System, or lean manufacturing, which measures profitability by revenue stream. If there's more money coming in this week than going out, the operation is profitable. Assets are of interest only when applying for a loan or liquidating the enterprise. Inventory that isn't bringing in real cash from outside is a cost, not an asset. The best way to reduce costs is to fully utilize equipment and reduce cycle time through increased flow, to avoid waste and rework through designing defects out of the production process rather than inspecting for quality after the fact, and to minimize inventory through just-in-time production. And these things are all achieved mainly with the help of the company's chief asset, its human capital.

The Sloan system (or DuPont/Sloan/Brown system), on the other hand, attempts to maximize Return on Investment (ROI), which translates into share value: i.e., the book value of the company divided by the number of shares. The larger the sum that could be raised by auctioning off the company's assets in the event of bankruptcy, the better managed it was. [pp. 68-69]

Pierre DuPont devised a system to be sure that the salvage value of the companies in which he invested was high. From one end of the country to another, GE and GM plants can be had for salvage value. [p. 108]

And corporate management's primary activity for the last twenty years has been living off the salvage value of the organizations whose assets it has gutted.

The Sloan System on Inventory

Perversely, the Sloan system counts inventory toward this book value (a metric that works directly at cross-purposes to the lean system, which treats inventory as a cost).

With inventory declared to be an asset with the same liquidity as cash, it did not really matter whether the next "cost center," department, plant, or division actually needed the production output right away in order to consummate one of these paper sales. The producing department put the output into inventory and took credit. [p. 75]

This is referred to as "overhead absorption," which means fully incorporating all production costs into the price of goods "sold" to inventory, at which point they count as an asset on the balance sheet. [pp. 135-141] American factories frequently have warehouse shelves filled with millions of dollars worth of obsolete inventory, which is still there "to avoid having to reduce profits this quarter by writing it off." [p. 132]

The Sloan approach to inventory is very useful for massaging the numbers to appeal to those on the outside. In Chapter Seven, "Economic Calculation in the Corporate Commonwealth," I used Bob Nardelli and "Chainsaw Al" Dunlap as examples of Mises' hubris in proclaiming such confidence in the magic of double-entry bookkeeping as an instrument of entrepreneurial control of the corporation. Bookkeeping is a doubtful means for countering the principal-agent problem when the agent is keeping the books. After Dunlap left Nitec Paper, it turned out he'd used "creative accounting" ("expenses, inventory, and cash on hand had all been adjusted") to transform a $5.5 million deficit into a $5 million increase in profit. He did the same at Sunbeam, with the help of the magicians of Arthur Andersen. [Arianna Huffington, Pigs at the Trough: How Corporate Greed and Political Corruption are Undermining America (New York: Crown Publishers, 2003), pp. 62-65.] Such inventory jugglery, albeit to a lesser degree, is SOP under the Sloan system. In colorful language, it amounts to "goosing the numbers by sweeping overhead under the rug and into inventory." [p. 143]

By defining the creation of inventory, including work-in-process, as a money-making endeavor, any incentive to encourage flow went out the window. The 1950s saw the emergence of warehouses as a logical and necessary adjunct to manufacturing. Prior to that, the manufacturing warehouse was typically a small shed out behind the plant.... By the 1960s warehouse space often equaled, or exceeded, production space in many plants....

In one of the greatest ironies in American business history, the Chrysler Corporation at one point had over 400,000 finished cars in finished goods inventory. Not only did they report a profit that year, they rented the abandoned Ford plant at Highland Part--the birthplace of lean manufacturing--to store many of them.... Yet the professional managers, confident in their mastery of the Sloan model and their money making prowess, recorded the figures in the 'good' column and collected their bonuses. [p. 97]

The whole point of overhead and inventory jugglery is concealment.

Every dollar of overhead that is added to the cost of a product for inventory valuation purposes increases the incentive to produce in volume rather than eliminate waste....

The further the overhead gets from production, the more the rationalization passes from ridiculous to sublime. Donaldson Brown has everything, including the kitchen sink if the factory has one, thrown in....

The explanation for this--the reason accounting defends the status quo--is to match expenses with sales. If production is fairly level, the profits will look a little too bad when sales are down and a little too good when sales are up. Sloshing all of this overhead expense around flattens out the profit graph.

Of course, it's common sense that "the company actually is more profitable when sales are strong and less so when sales are down." But the Sloan system of juggling inventory enables management to fool the markets. Rather than the painful approach of driving "management and production to eliminate unnecessary costs," the Sloan system enables management to "leave the unnecessary costs in place--in fact, encourage them to grow--but smooth the profit (or loss...) graph...." [pp. 233-234]

On the other hand, the first stages of implementing lean production (the real thing, not the Jack Welch crap) show up as bad numbers.

When a plant has a Kaizen Blitz, and makes substantial improvements in cycle time, the short term financial numbers can get clobbered. Converting inventory to cash makes book profit look worse. [p. 130]

The Sloan System on Production Workers as "Direct Cost"

Besides its creative use of inventory, the Sloan system's other main defect is its definition of production labor as the primary "variable cost"; as a result, all "cost-cutting" and "efficiency" measures focus almost entirely on downsizing the labor force. This, despite (as I discuss in Chapter Nine, "Special Agency Problems of Labor") how vital, central importance of human capital to both the productivity of an organization and the organization's book value. Yet other intangibles, like "goodwill" and "intellectual property," are treated, oddly, as assets, on the grounds that they contribute to book value. Since inventory is as good as cash, and management salaries are a fixed rather than variable expense, management understandably filters out overhead when it comes to finding ways to cut costs; the overall effect is that corporate management automatically thinks of downsizing production workers, as the first and only alternative, when it comes time to reduce costs.

Brown's contribution was primarily that he could take this definition of ROI, look out over General Motors operations and envision islands of cost awash in a sea of assets. Those islands of cost were basically people. Well-supervised, they could turn one form of inventory into another with little of their time left over to detract from profits. Left uncontrolled, however, they could waste a lot of money with nothing to show for it. So "responsibility accounting" came to be, when each of those islands was deemed to be a cost center, which added up to plants which added up to divisions which added up to corporate. [p. 168]

...While Sloan, Brown and the rest may have looked out over the plants and seen islands of cost in a sea of assets, they knew that around the edges and lurking beneath the surface there were other costs in the form of overhead. The problem was that these costs, such as the costs of moving things around, fixing machines, inspecting parts, and supervising, were awfully hard to assign to a specific operation. They went along with everything in general, but nothing in particular. Without any means of directly assigning and controlling them, these costs were simply assigned percentages in the hope that they would stay reasonably in proportion to the direct labor costs which could be controlled, and that was good enough.

Without any direct link, all that could be measured with great confidence was the direct, easy to correlate part of the job: labor. It did not take much of a mathematician to figure out that, if all you really care about is the cost of performing one operation to a part, and you were allowed to make money by doing that single operation as cheaply as possible and then calling the partially complete product an asset, it would be cheaper to make them a bunch at a time.

It stood to reason that spreading set-up costs over many parts was cheaper than having to set-up for just a few even if it meant making more parts than you needed for a long time. It also made sense, if you could make enough parts all at once, to just make them cheaply, and then sort out the bad ones later.

Across the board, batches became the norm because the direct cost of batches was cheap and they could be immediately turned into money--at least as far as Mr. DuPont was concerned--by classifying them as work-in-process inventory. [p. 98]

Or, to put it in more colorful terms, "the typical factory went from Ford's flowing river of material to a Sloanesque oozing swamp..." The obsession with lowering direct labor costs, and direct labor costs only, caused costs from correcting defects and storing inventory to skyrocket.

This standard corporate approach to labor costs is the direct cause of what is called "dumbsizing." It treats human capital, which takes years to build up and years to acquire its network of human relationships and distributed knowledge, as a "variable cost" to be fired and rehired as often as demand shifts--and meanwhile treats management as a fixed expense to be paid in both fat times and lean. A major theme of Chapter Nine is that human and organizational capital--the human relationships, trust, and tacit knowledge of processes that take years to build up, and cannot rebuilt in a short time at any cost--are the reason a firm's equity is greater than the book value of its tangible assets. It really is capital, and a productive asset. "Dumbsizing" disrupts and mutilates this human capital, and guts an organization's long-term productive capability. It's understandable, when the Sloan system treats labor as "the biggest profit detractor [a] company [has]..."

Harold Oaklander, (a specialist on workforce reductions at Pace University, argues that "many 'cost-cutting' layoffs are actually counterproductive," because they interfere with "the firm's knowledge system." [Alvin Toffler, Powershift: Knowledge, Wealth and Power at the Edge of the 21st Century (New York: Bantam, 1991), p. 222.]

The Sloan system's "arrogant and demeaning" approach to people "assured that employee involvement in production would not happen." [pp. 152-153] An article at Wall Street Journal by Alex Markels and Matt Murray, "Some Call it Dumbsizing," quotes a laid off Kodak employee working for a Kodak contractor:

Kodak's layoffs have left its engineering group in Rochester, N.Y., overworked and demoralized, Ms. Ford contends. "They're burned out and they don't even care. When they send a job over here and we say, `It's going to cost you X,' they just say `Go ahead,'" she says....

Markels and Murry describe the effect on human capital:

Despite warnings about downsizing becoming dumbsizing, many companies continue to make flawed decisions -- hasty, across-the-board cuts -- that come back to haunt them, on the bottom line, in public relations, in strained relationships with customers and suppliers, and in demoralized employees. Sweeping early-retirement and buyout programs sometimes eliminate not only the deadwood but the talented, many of whom head straight to competitors. Meanwhile, many replacements arrive knowing little about the company and soon repeat their predecessors' mistakes.

A good example is Digital Equipment Corp., which eliminated hundreds of sales and marketing jobs in its health-industries group.

But in the health-industries group, the cutbacks imposed unexpected costs. Digital disrupted longstanding ties between its veteran salespeople and major customers by transferring their accounts to new sales divisions. It also switched hundreds of smaller accounts to outside distributors without notifying the customers....

Many Digital customers turned to International Business Machines Corp. and Hewlett-Packard Co., and so did some employees of Digital's downsized healthcare group. Mr. Lesica says some laid-off workers went to Hewlett-Packard and quickly set about bringing Digital clients with them. "That's another way DEC shot itself in the foot," he says....

The question is, to what extent are [payroll] savings offset by the new hires' lack of experience? Ms. Shapiro, the consultant, contends that a company is set back severely by the loss of "knowledge and judgment earned over the years. That's the stuff that gives you a real competitive advantage in the long run." Human-resources experts estimate that it typically costs $50,000 to recruit and train a managerial or technical worker....

"Direct labor is not a variable cost as a result of some mystic truth or a law of either nature or physics," Waddell and Bodek write.

It is a variable cost because management decided it would be so. Calling inventory an asset, while people are not an asset is also a distortion of the truth. [p. 207]

The Sloan system is at the heart of the American MBA curriculum, and the ruling paradigm in American corporate governance.

As leader of a Dana Corporation management study group visiting Japan, Bodek--who had been a frequent visitor to the country for many years and had become familiar with the Toyota Production System--let slip that he considered the ROI a faulty measure that Dana should abandon.

You would think that I just allowed the dam to break. Virtually every manager on the bus shot me down and made me feel like two cents. In one short moment I lost all credibility with them. The Japanese managers taught me that ROI was misleading because it leads you to focus only on the short-term, to the long-term detriment of the company.

A few months later, Woody Morcott, the next chairman of Dana, keynoted one of my Productivity "The American Way" conferences and told the audience that ROI was key, and the only important measure for his managers. I knew then why I had been so quickly shot down in Japan. [p. 65]

Sloan cost metrics, which focus almost entirely on reducing the "direct cost" of labor involved in every operation, have seriously skewed the direction of production technology.

...[M]anufacturing engineers... were directed more and more to focus only on direct labor savings. Machines that were more accurate or flexible could not be justified in a batch environment. Where Ford's engineers built machines to speed flow and assure quality, American engineers were pushed more and more into focusing on labor elimination technology. [p. 106]

As an illustration of the Sloan system's obsession with reducing the cost of every operation, regardless of its effect on the overall production process, was illustrated by the conversational stalemate between Ernie Breech (whom Eleanor Ford brought in in 1946 to impose GM methods on Ford) and a Ford manufacturing manager. Breech demanded to know the cost of mounting steering wheels, attempting to figure the "profit" resulting from steering wheel assembly independent of its necessary role in the overall manufacturing process.

The production manager didn't know how much the specific operation cost, and was utterly perplexed as to why Breech wanted to know. Was Breech suggesting the steering wheel assembly operation was the source of a bottleneck in the flow of the line? No. Was there some inefficiency in the operation? No. Since it had to be done, and done right, it could only be considered as part of the overall process. And the only proper way to increase efficiency, and reduce costs, was to lower unit costs by improving the flow of the overall process.

The lean accounting companies define making money as receiving cash. Incremental work is not good--it is a waste of money.... Money is made only by selling to customers, not by transferring dollars between accounts or by moving parts from one inventory pile to another. [p. 92]

Between the accounting people Breech brought in from GM, and the "whiz kids" Bob McNamara brought in from the war department, Ford was cured of that kind of thinking. [pp. 89-90]

The Sloan system focuses, exclusively, on labor savings "perceived to be attainable only through faster machines. Never mind that faster machines build inventory faster, as well." [p. 119] As the authors of Natural Capitalism argue, batch production results from attempts to optimize each separate step of the production process in isolation ("optimizing one element in isolation from others and thereby pessimizing the entire system"), without regard to its effect on the flow of the overall production process. A machine can reduce the labor cost of one step, by running at enormous speeds, and yet be out of sync with the overall process, so that it simply produces excess inventory that waits to be used by the next step in the process. [Paul Hawken, Amory Lovins, and L. Hunter Lovins, Natural Capitalism: Creating the Next Industrial Revolution (2000), pp. 129-30.] The Toyota Production System, on the other hand, emphasizes takt: pacing the output of each stage of production to meet the needs of the next stage, and coordinating all of the stages in accordance with current orders. [pp. 122-123]

As Waddell and Bodek argue, lean production isn't primarily a matter of shop floor organization. Shop floor organization, rather, tends to follow automatically from the incentives the management accounting system puts in place.

However the accounting system is set up, it defines "making money" for the company and becomes the basis for all decision making. The quality system, production and inventory control systems and policies, people policies and so forth are all structured to enable the company to make the most money. How these systems are structured is a direct result of how the management of the company defines making money.

....Early Ford and later Toyota defined money in a lean accounting manner and lean practices resulted. General Motors defined making money as optimizing ROI and we all know the practices that arose as a result. Henry Ford and the Toyoda family did not personally go out and implement assembly lines or kanbans any more than Alfred Sloan went out and personally created batch production. These men defined 'profitability' for their companies, then urged and pushed their organizations to aggressively and creatively attain that version of profitability. [pp. 92-93]

Success, in lean terms, barely shows up as such by Sloan metrics. Of the United Defense plant in Aberdeen, South Dakota (one of the few American lean experiments that actually "got" the Toyota system), Waddell and Bodek write:

A balance sheet prepared according to DuPont would miss the value of the plant in Aberdeen entirely. According to the statistics in the most recent Best Manufacturing Practices award from the Navy, inventory is down 78% from where it was just a few years ago, and it was low by industry standards to begin with. A balance sheet, however, would not reflect that as much of an accomplishment. The same balance sheet would assign no value to the 150 cross-trained,, self-directed, customer-focused employees who generate very profitable, sustained manufacturing results. [p. 159]

Indeed, most American companies would lay half of them whenever business slowed down, warn the remaining workers to work hard to pick up the slack (with a little Fish! Philosophy thrown in to jolly them into being screwed), and figure they could hire more help from a temp agency when things picked up.

But "imagine," Waddell and Bodek write, a software or tech company declaring that "computer science is a commodity--"

basically any warm body from the local temp agency can do it--and that the key to success in running these technology companies is not technology, but finance and marketing. Imagine further that they all but declare war on their programmers and system design folks, classifying them as variable costs and devising a management system aimed directly at cutting their numbers and minimizing their pay. [p. 223]

Sloan and Brown were dead wrong. People are not interchangeable commodities, to be fired and laid off every time the wind blows from a different direction. Manufacturing is too complicated; there are far too many variables. There is no computer big enough or fast enough to plan and control it. Toyota knows this It takes a factory full of trained, focused, committed people to get all of the details right in the midst of so many dynamic events. They are not commodities.

A new accountant can be hired and pretty much become as effective as he or she is going to get within a month or two. A production employee is more likely to take six months or more--a year according to the self-directed teams at United Defense. Yet the accountant is a fixed expense with a fair amount of job security, while the production worker is a commodity.

....The best way to develop the work force quickly and increase balance sheet accuracy for the sake of the investor is to capitalize the cost of training and educating people....

Only in the world of F. W. Taylor, Pierre DuPont, Alfred Sloan and Donaldson Brown can kicking trained, experienced, capable people out of a company be seen as a positive move. There is nothing positive about it. It is proof of a basic failure of management. To do so within months of paying the top manager better than $10 million in performance bonuses ought to be proof enough that the system is broken.

To anticipated objections, from those steeped in the Sloan management culture, to capitalizing an intangible like human capital, Waddell and Bodek respond, "[t]hat has never stopped the Sloan companies from capitalizing goodwill and intellectual property, often on far shakier ground than capitalizing people." [pp. 240-242]

As Husman said, it's utterly pointless even to try implementing lean production in a company with Sloan accounting. Every day, Waddell and Bodek write, a Sloanist factory holds a "production meeting" which demands two figures: the value of output (i.e. by DuPont standards that include the value of goods "sold" to inventory), and the labor-hours expended to produce it. They describe one company, governed by the Sloan system, in which a "lean transformation" had been mandated. The company's CEO has a resume full of past "lean" experience.

While it may appear as though the lean team is being asked to fit a square peg into a round hole, they handle it adeptly. On the one hand, lean dictates that they drive the plant to short cycle time, high quality production with no waste, precisely leveled with customer demand. On the other hand, the daily meeting reminds them that the objective is to utilize labor without regard to inventory and marginal regard for quality. The dilemma is resolved by creating a plant that looks lean, but runs as it always has.

A U-shaped cell here and a kanban there is all it takes. When senior management comes to visit, bringing along customers or Wall Street analysts, they are shown visible proof that the plant is, indeed, lean.... The company is typical. It is one of the 98%+ that claim lean accomplishments in public announcements, but bring none of these accomplishments to the bottom line.

If you were to speak to the CEO he would undoubtedly tell you that his responsibility is to exert leadership, and he does that by talking about lean, authorizing spending on lean training, and bringing in lean consultants. The actual change to lean, however, is viewed as purely a factory issue at the end of the day. If you were to ask him exactly what has changed in his world, or anywhere at the corporate level, the truthful answer would be "Nothing." Lean at the corporate level of this and virtually every big company is a factory philosophy, rather than a management philosophy....

...Nowhere in the equation does it occur to [corporate management] that the plants and supply chain have come to exist and operate in a manner that best serves the definition of good performance laid out by the accounting system. The lean strategy they push down directs the factors to operate in a completely different, lean manner than in the manner which has proven to best meet the numbers; but they must still hit all of the numbers. [pp. 132-133]

As Waddell and Bodek put it, Sloan management culture inevitably results in kind of bastardization of lean production that occurred at General Electric under Jack Welch, who "turned Six Sigma into the strategy to outsource and offshore everything."

They value streamed the corporation and came to the conclusion that just about everyone except headquarters (of course) added insufficient value and needed to go.

Lean manufacturing gets "Sloaned." [pp. 201-202]

One thing Waddell and Bodek fail to pick up on, perhaps being more charitable than I am, is how incredibly well the Sloan system's cost and profit metrics dovetail with the class interests of management. If management is simply a fixed cost to be paid in both lean times and bad, but production work is a "direct cost" to be minimized and constantly adjusted--by layoffs and firings--to the current level of demand, management (not surprisingly) are the last to lose their jobs or suffer pay cuts. The metrics of the Sloan system coincide so closely with management's pecuniary and careerist motives, in fact, that it's a bit of a chicken and egg problem figuring out whether American managerialism as it currently exists is a result of the Sloan system's distortions, or whether the Sloan system was adopted because American management found it so conducive to their interests. There's probably a mutual synergy involved. Waddell and Bodek do see the implications of the system very clearly, however, even if they don't see how well it reinforces management venality.

It is so commonly accepted in the United States that direct labor is a variable cost that the consequences of this arbitrary decision are rarely appreciated. At the top of the hierarchy are the policy makers, strategists and those charged with controlling the factories. Their salaries are a fixed cost, which means their jobs are relatively safe regardless of business results, within a broad reasonable range. In the middle are manufacturing management whose jobs have been, as a result of refinements to the cost accounting system, categorized as semi-fixed or step function costs. Their jobs are only secure to a point. At the bottom are Taylor's workers who should have no input to how things are made. They should be expected to simply produce to the maximum efficiency. Their jobs are purely variable, meaning their job security is purely a function of sales volume.

Those variable cost people--the ones Taichi Ohno points out are not even whole people in American cost accounting--are not people at all. They are "headcount". That simple fact makes lean manufacturing virtually impossible in Sloan companies. Lifetime employment, such as that at Toyota, is nothing more than changing the system to categorize production labor as a fixed expense. [p. 153]

Just about every company says they want their people to work smarter not harder. Few of them understand that people cannot and will not work smarter when they have supervisors and industrial engineers hovering over them dictating and measuring their every move. They especially will not work harder if management has defined the ultimate goal to be a lights out factory, while they soar like hawks over the plant hunting for jobs to eliminate and people to lay off. People everywhere will work smarter and harder for the customer, but people will not work harder for someone who has defined them as a variable cost. [p. 58]

Contrast this to the Japanese approach, as described by W. Edwards Deming based on his experiences in Japanese industry.

In Japan, when a company has to absorb a sudden economic hardship such as a 25 per cent decline in sales, the sacrificial pecking order is firmly set. First the corporate dividends are cut. Then the salaries and the bonuses of top management are reduced. Next, management salaries are trimmed from the top to the middle of the hierarchy. Lastly, the rank and file are asked to accept pay cuts or a reduction in the work force through attrition or voluntary discharge. In the United States, a typical firm would probably do the opposite under similar circumstances [except for the relative priority of dividends and management pay, of course--KC]." [W. Edwards Deming, Out of the Crisis (Cambridge, Mass.: M.I.T., Center for Advanced Engineering Study, 1986), p. 147.]

To the usual suspects at the Wall Street Journal and on CNBC money programs, it goes without saying that the Toyota approach is wrong-headed. It makes perfect sense to pay Bob "Sucks at Job" Nardelli or "Chainsaw Al" Dunlap a multi-million salary for all that "productivity." But guaranteeing lifetime employment to production workers--to the host organism rather than the parasite--is just plain wrong. As the analyst community's reaction to Costco demonstrates, even if you can afford to pay good wages and provide job security, it falls into the same moral category--vaguely decadent things that just don't seem right--as putting a diamond collar on a dog. Such pampering makes companies "bloated," "fat," and "lazy," don't you know!

Never mind that the Toyota approach to lifetime employment is perfectly consistent with their understanding of the importance of painstakingly acquired human capital as a source of organizational value. And never mind that it works. For example, John Micklethwaite reports, before a Range Rover factory made a lifetime employment pledge in the early '90s, only 11% of employees entered the annual employee suggestions competition, "because they were worried that increased efficiency might cost them their jobs; afterward the proportion rose to 84 percent." And a single one of those proposals saved the company 100 million pounds. [John Micklethwait and Adrian Wooldridge, The Witch Doctors: Making Sense of the Management Gurus (New York: Times Books, 1996), p. 209.]

When employees are a fixed cost, the source of their job security is plant profitability. When employees are a variable cost, they find job security by assuring that the work is never complete. Lean companies outperform Sloan companies because profits are in the best interests of the production employees in lean companies. It is hard to imagine how Sloan and Brown could have expected a system to work that polarized workers and management so thoroughly. [p. 169]

But again, never mind. What matters is that no decent person puts a diamond collar on a dog, and no decent company (despite all the Official Happy Talk about "teamwork" and "our most valuable asset") actually treats its production workers like valuable assets. You don't take money from starving kids to pamper a dog, and you don't take money from Nardelli or Welch to pay production workers a living wage. It doesn't matter whether it's profitable; it's a matter of decency. And in any case, when management is the de facto owner of the corporation and runs it in its own interests, it's obviously not going to hurt its own interests for the sake of productivity. It may fake productivity to game its stock options, but it won't attempt the real thing when it requires treating workers like human beings.

Sarcasm aside, the difference in companies like Toyota may have something to do with our discussion of managerialism and the corporate form at the beginning of this chapter. I argued there that while the idea of shareholder ownership, as a legitimating ideology, did not reflect any actual shareholder control over management, it did play into management's hands by insulating them from internal stakeholder control. American corporate management, by pretending to be constrained by their duty to shareholders, can actually promote their own interests without interference. Toyota, on the other hand, has no pretense of being the "property" of shareholders, and its management has no pretense of representing shareholders. Because of the prevailing capital structure in Japan, corporations like Toyota, generally, function as unabashedly self-governed entities that deal with the banks as their main source of outside finance. The Japanese corporation approaches, if not perfectly, the ideal of a stakeholder cooperative.

To the extent that companies like Toyota have problems from my standpoint, it comes from the distorting effects on their structure of their existence in a larger capitalist system. That is, profit-maximization pressure from creditors, and excessive size and hierarchy resulting from a state capitalist system that subsidizes corporate size. But Toyota is, at the very least, an example of the kind of "liberal capitalist" firm we mention in Chapter Fifteen, with high degrees of worker equity and worker self-management. And at best, it allows us to extrapolate what things would be like if the Toyota system functioned in a decentralized economy with free credit.

The End of the Quarter Shuffle: Or, Beating the Five-Year Plan

One of the central themes in my writing has been the parallel between the inner workings of the large corporation and of a Soviet-style planned economy. For your entertainment value, I'd like to quote at length from Waddell's and Bodek's description of the "End of the Quarter Shuffle." [pp. 127-130] To anyone who's ever read inside accounts of (or experienced first-hand) the workings of the Soviet planned economy, and what went on in their factories toward the end of a planning period, this should sound familiar.

During those last few days of the quarter, all of the stops are pulled out to make the numbers. Some of what is done is downright illegal. Much of it is unethical. Just about all of it is senseless. However, management salaries and promotions are driven by numbers....

Most plants have been through the drill so many times that the people need very little coaching. All the way down to the operators on the production floor, the people know how to rig the numbers.

Every machine and every production employee will run all-out if there is anything in the plant for them to work on. Supervisors who are normally lenient concerning breaks will become frenzied taskmasters. Of course, there will be no employee or safety meetings. Nothing will keep production people from their machines in the last few work days of the quarter.

There will be a steady stream of shop supervisors to the production control office demanding that production orders be written to machine, assemble, paint, or pack whatever parts they have been able to find in the plants. If there were a demand for those parts they would already have production orders, but they are not producing for demand. They are producing for the sole purpose of earning credit for direct labor hours, which, in term, earns credit for overhead on their budgets.

Quality inspection will virtually shut down. If anything produced is bad, no one wants to know about it until next week--after the books are closed on this quarter.

The folks who communicate with customers will be on the telephones trying to pull a few orders for next month into this month....

Every shipping and receiving manager and employee worth his or her salt is a master of the game. Product not scheduled to ship for days or even weeks will be pulled, skidded, wrapped, labeled and entered into the system as gone--then stacked off to the side....

With work-in-process inventory building at the plant at staggering rates, the plant inventory goal may be in jeopardy, so receiving virtually shuts down. Trucks are turned away when possible. If they have to be unloaded, their contents will be stacked on the dock, but not received into the system until the next week.

...[The plant manager] can be found behind an overflowing in-basket, because plant spending was shut down days before. Requisitions for maintenance supplies, training materials, and anything else deemed not critical to production will not be approved until the next quarter....

This scenario, to varying degrees, happens at every plant every quarter.

Lean Production in a Sustainable, Decentralized Economy

In Chapter Fourteen, "Decentralized Production Technology," I described Murray Bookchin's ideas for decentralized, small-scale manufacturing based on general-purpose machinery, switching from one short production run to another. Eric Husman of GrimReader blog argued, in response, that the good parts of Bookchin's proposal were a reinvention of lean production, while it preserved the batch production inefficiencies of Sloanism.

Human Scale (1980) was written without reference to how badly the Japanese production methods (especially those of Toyota, but also Honda) were beating American mass production methods at the time.... What Sale failed to appreciate is that the Japanese method (derived more from Fordism than from Taylorism, and almost diametrically opposed to the Sloan method that Sale is almost certainly thinking of as "mass production") allows the production of higher quality articles at lower prices....

....Taichi Ohno would laugh himself silly at the thought of someone toying with the idea [of replacing large-batch production on specialized machinery with shorter runs on general-purpose machinery] 20 years after he had perfected it. Ohno's development of Toyota's Just-In-Time method was born exactly out of such circumstances, when Toyota was a small, intimate factory in a beaten country and could not afford the variety and number of machines used in such places as Ford and GM. Ohno pushed, and Shingo later perfected, the idea of Just-In-Time by using Single Minute Exchange of Dies (SMED), making a mockery of a month-long changeover. The idea is to use general machines (e.g. presses) in specialized ways (different dies for each stamping) and to vary the product mix on the assembly line so that you make some of every product every day.

The Sale method (the slightly modified Sloan/GM method) would require extensive warehouses to store the mass-produced production runs (since you run a year's worth of production for those two months and have to store it for the remaining 10 months). If problems were discovered months later, the only recourse would be to wait for the next production run (months later). If too many light bulbs were made, or designs were changed, all those bulbs would be waste. And of course you can forget about producing perishables this way. The JIT method would be to run a few lightbulbs, a couple of irons, a stove, and a refrigerator every hour, switching between them as customer demand dictated. No warehouse needed, just take it straight to the customer. If problems are discovered, the next batch can be held until the problems are solved, and a new batch will be forthcoming later in the shift or during a later shift. If designs or tastes change, there is no waste because you only produce as customers demand.

At the time, I expressed some curiosity as to whether the Toyota Production System could be scaled down for decentralized manufacturing in a local economy. I've since concluded, in fact, that the TPS system is ideally suited to such an economy. The Toyota system, applied to a local network of small cooperative manufacturers like that in Emilia-Romagna, will have found its true purpose.

The present association of "just-in-time" supply chains, whether in industry or in Wal-Mart's wholesale distribution model, with "warehouses on wheels" (or in container ships), is just one example of the way lean production is distorted by the larger state capitalist system within which it operates. It would be far more in the spirit of the lean system if it were organized around local supply chains. The "warehouses on wheels" supply model is really just a way of smuggling Sloanism, in disguised form, into the Toyota Production System. The whole point of the TPS's just-in-time supply chain operations is to reduce inventory costs to zero. But as practiced by a giant corporation like Toyota, it simply outsources the inventory costs to the long-haul trucks and container ships. They're not only still paying for de facto warehouses to hold inventory, they're paying the fuel costs to move it around.

Husman suggested as much himself. Although the effect of transportation costs and large market area on overall efficiency has been an obsession of mine for years, Husman beat me to the punch in grasping the relation of that principle to the lean system's emphasis on emphasis on minimizing inventory:

Bill Waddell and other lean consultants have been trying to convince manufacturers that if they would only fire the MBAs and actually learn to manufacture, they could do so much more cheaply locally than they can by offshoring their production. Labor costs simply aren't the deciding factor, no matter what the local Sloan school is teaching: American labor may be more expensive then [sic] foreign labor, but it is also more productive. Further, all of the (chimerical) gains to be made from going to cheaper labor are likely to be lost in shipping costs. Think of that flotilla of shipping containers on cargo ships between here and Asia as a huge warehouse on the ocean, warehouses that not only charge rent, but also for fuel.

So trying to integrate lean production into a conventional globalized economy of large corporations is putting new wine in old bottles (although Ohno did it as well as it was humanly possible to do it). The TPS is really meant for a decentralized world where the trucks and container ships are eliminated, the supply chains are local and composed of small firms (on the Emilia-Romagna model), and the local economy is
organized for producing on a demand-pull basis.

H. Thomas Johnson, a coauthor with Robert Kaplan of Relevance Lost: The Rise and Fall of Management Accounting (Harvard Business School Press, 1987 and 1991), argues that Toyota's lean production system, stripped of its present distortions which result from the global corporate system, can serve as the basis for sustainable local production. In his Foreword to The Rebirth of American Industry he writes:

Waddell and Bodek call for restoring American industry by replacing the Sloan model of financial management with lean management. Rightly, they refrain from describing in any detail what form this restoration might take. That issue is the next frontier of research and practice concerning lean management. Some people, I am afraid, see lean as a pathway to restoring the large manufacturing giants the United States economy has been famous for in the past half century.

Overlooked in this picture are the unfortunate environmental consequences of building such global production systems. The cheap fossil fuel energy sources that have always supported such production operations cannot be taken for granted any longer. One proposal that has great merit is that of rebuilding our economy around smaller scale, locally-focused organizations that provide just as high a standard living [sic] as people now enjoy, but with far less energy and resource consumption. Helping to create the sustainable local living economy may be the most exciting frontier yet for architects of lean operations. Time will tell. [p. xxi]

I contacted Professor Johnson requesting further elaboration on this intriguing hint, and he helpfully referred me to a couple of his articles. In one of them, "Confronting the Tyranny of Management by Numbers" [Reflections: The SoL Journal, vol. 5, no. 4 (2004)], he wrote:

Some might argue that a world economy of diverse local bioregions would cause consumers’ standards of living to fall because it would reduce the economies and efficiencies of large-scale production and distribution systems that we ostensibly have in the world today. Herein lies the importance of understanding the fallacies of scale-economy thinking. In reality, production systems designed along the lines of Toyota’s turn scale-economy thinking on its head: they make it possible to build manufacturing capacity on a much smaller scale than ever before thought possible, yet produce at unit costs equal to or lower than those of large-scale facilities now thought so necessary for cost-effective operations.

An example of this is found in Toyota’s organization. Compare the plant that makes Camry and Avalon models in Melbourne, Australia with the plant that makes the same models in Georgetown, Kentucky. Located within or nearby each plant are complete facilities for engine build, axle build, plastic trim and bumper production, stamping, body weld, seat build, and final assembly. According to Toyota, these two vertically integrated plants are equally efficient and effective on all dimensions that matter to Toyota customers. However, the Melbourne plant currently produces about 90,000 vehicles per year, primarily for the Australian market, whereas the Georgetown plant produces about 500,000 vehicles per year.

If a fivefold difference in capacity yields no unit-cost differences between these two plants, then what is to be said on behalf of scale economies? In fact, Toyota people have said they probably will not build another plant as large as Georgetown in the future. The company currently is building new plants, smaller in scale and located as close as possible to customer markets. Carried to its logical extent, Toyota’s example helps show how bioregional economies of 10 to 30 million people could support high-variety and low-cost manufacturing facilities for a wide range of products. Indeed, the relatively isolated Australian economy, with about 20 million people and a vast land area, supports several auto manufacturing operations in addition to Toyota’s, as well as facilities producing a wide array of other products just for Australian consumers.

There are now ample technologies available to support efficient small-scale operation of almost every commercial activity. Some examples among many include the continuous-casting, mini-mill technology that transformed steel making in the last 30 years, small-scale refineries and chemical plants for almost all current petroleum and chemical processing, and Japanese paper-products plants that efficiently produce on a much smaller scale than American papermakers, for example, might think possible.

And bear in mind: those market areas of ten million are the upper range, required only for the most capital-intensive forms of production, like the automobile industry. But as Johnson himself suggests, the present economy's dependence on internal combustion vehicles with heavy engine blocks may be an artificial circumstance. He refers specifically, in the same article, to light vehicles with electrical power trains and alternative sources of fuel, which are discussed in Natural Capitalism. The traditional automobile factory, whether on the model of Detroit or Japan, will likely wind up as the new buggy whip factory in the decentralized market of the future.

Johnson recommended, in fact, that I read the discussion of lean production in Natural Capitalism. I had already read it, actually; but when I first read the book, unfortunately, I wasn't yet fully prepared to grasp the significance of lean production. Reading Rebirth of American Industry was what made it all click together for me.

I can't recommend it strongly enough to anyone who's interested in this sort of thing.