Back to Class, Secretary Verity
I was thinking of sending newly confirmed Secretary of Commerce C. William Verity a copy of my latest book, Thriving On Chaos, after reading a report that he was going to devote the next year to jawboning corporate chieftains for better American product quality. I've changed my mind, after reading excerpts from a recent speech he gave the U.S. Chamber of Commerce. Instead, I think I'll send him a copy of the latest edition of economist Paul Samuelson's classic economics text.
In his talk, Mr. Verity criticized Japan's refusal to match the dollar's devaluation with an equal rate of price increases. He said that this failure to jack up prices amounts to an official act of "dumping." Such a suggestion is another mindless escalation of our trade battle with the Japanese, which, as usual, seeks to shift the blame for questionable performance from "us" to "them."
Japan's economic and social systems are different than ours. Its corporate strategists, not under the influence of Wall Street's sharp-penciled analysts, emphasize market share over profits. Japan's leading firms, after spending decades gaining a foothold in America's giant and lucrative markets, are not about to frivolously toss it all away to keep short-term profit margins healthy. (As usual, cultural differences are involved, too. Overall lower profits of Japanese corporations are due in part to their assuming a major share of the national welfare bill. Government provides the majority of human service benefits in the United States; corporations shoulder a large share of the load in Japan.)
Mr. Verity also brushes over the fact that Japan's firms have responded to the new reality. Bellwether Honda, for instance, has implemented eight price increases, amounting to an almost 30 percent overall price hike, since late 1985. That's especially noteworthy, considering that almost half the cars Honda sells to Americans are made in the United States. Moreover, Japan's firms overall have swiftly moved to slash costs by almost 25 percent in the last two years, aided by their very flexible wage structure.
However, the real "profit problem" is ours, not Japan's. A reporter challenged me recently, "If things are as bad as you say they are, how come U.S. profits are high?" Part of the answer is that American firms have responded to the beneficence of the plummeting dollar by raising prices. Faced with Wall Street's opprobrium and the fidgety raiders, as soon as the magnitude of the dollar's fall forced the Japanese to act, many of our firms matched their price increases to be sure. This resulted in a sweeter bottom line. But in the first week of any Economics 101 course, students learn that this was, instead, the time to hold the line on price in order to grab some market share back and to cause further agony for Japanese and other market opponents. But we copped out—heaven forbid we should practice such longish-term, pro-competitive thinking.
But an even more important point gets lost in the shuffle: An economy's performance is, say the economic primers, aimed to increase the well being of all our citizens' welfare; that is, to raise the standard of living over the long haul. Basic economics does not suggest anywhere that maximizing either short- or long-term total corporate profits is an objective. To the contrary. Ferocious, consumer-oriented competition aims to eliminate profit. Serious competitive battles between firms are supposed to drive down prices to the point that no margin is left. With the lowest possible prices, the society achieves maximum benefit—even companies, which in the long run enjoy the privilege of staying in business and growing.
Perhaps one reason that Mr. Verity fails to appreciate such economic basics is that his background is in the steel industry, which, by the way, seems a strange place to search for a commerce boss at a critical juncture, given steel's lousy grades on competitiveness. Over the last two decades, Big Steel has been almost as protected from real market conditions as farmers have been. Moreover, Big Steel didn't have an inkling of what competitiveness meant 20 years ago. I recall my astonishment upon reading a Fortune magazine article about three years ago that said a revolution was afoot in the relationship between steelmakers and automakers, the biggest buyers of steel. The revolution? Price competition. For years, it turns out, automakers never bothered to question paying list price from U.S. Steel (now USX, of course) et al. Such was the nature of the non-competitive, oligopolistic system that marked all of our largest industries. Suddenly, in a nod to tough competition of their own, the auto companies went price shopping!
Such was the world from which Mr. Verity emerged. While I hardly object to profits, which indeed are required to fund research and other investment, it is surely true that the post-World War II fairyland led to non-competitive practices amongst our biggest and most venerated firms. It is a new ballgame. Winners will have to forego short-term profit maximization as a matter of course, no matter what the 24-year-old wizards of Wall Street suggest, to maintain or gain back market share in an increasingly competitive world economy. And, with any luck, the American consumer—and the American worker—will benefit in the long run from ferocious battles between the newly energized American companies and the increasingly productive Japanese firms.
(c) 1987 TPG Communications.
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