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Building Wealth: The New Rules for Individuals, Companies,
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from NewsLink, Vol. 3, No. 4, Summer 1999
In his new book, Building Wealth:The New Rules for Individuals, Companies and Nations in a Knowledge-Based Economy, Lester Thurow seizes upon a tidy, simple metaphor for the New Economy that now animates American power: the pyramid. Impressive on the outside, pyramids disappoint within, their treasures long since carried off by robbers.The American economy, presently the envy of the industrial and developing world, is, for Thurow, much like a pyramid, elegant on the outside and empty within. In spite of the enormous market wealth created this decade by a dynamic American economy, factors such as the loss of jobs due to downsizing, the emergence of the Internet and the loss of leisure time have robbed the conventional narrative. According to Thurow, the productivity growth that creates real wealth isn't there.
“No one denies that the last decade has produced more market wealth and generated greater fortunes than any other decade in American history,” writes Thurow. “Yet ... the last decade has been the worst decade in the history of American productivity growth.”
Thurow marshals a series of disturbing statistics. U.S. labor productivity has grown only 1.1% in the last decade – far less than the 1960s and, by Thurow's estimate, even less than the Great Depression when productivity was growing by 1.6% per year between 1929 and 1939. Total factor productivity has created no real wealth. America's almost illusory success is marked only by the fact that Europe and Japan's predicaments are far worse.
These dismal statistics amid peace and prosperity are the issues any nation must address in order to thrive in the third industrial revolution that rests on information technology. And the ability of national governments to fine tune either their claims to sovereignty or comparative advantage is next to nil. Nonetheless, Thurow attempts to fashion a post-Keynesian strategy. He recognizes that government is left only to control the damage rather than pursue policies such as restricting trade or protecting wages.
To his credit, Thurow, a liberal academic and popularizer, admits he made a critical mistake in an earlier work. In his 1991 book, Head to Head, he underestimated the ability of the United States to bounce back from the savings and loan crisis. That crisis became inconsequential for the United States while the Japanese are still mired in the stock market and banking disasters of the early 1990s.
Why American success?
Some of the American success we see today is due to a sociological acceptance of the freedom to fail. Acknowledged failure, not to mention creativity, is simply not part of Japan's business culture. Morever, Thurow has finally recognized the necessity of entrpreneurship and Schumpeterian creative destruction. Eight of the nation's 25 biggest firms didn't exist in 1960. Others managed to “destroy themselves in order to save themselves.”
Thurow has found a role for super-entrepreneurs. Bill Gates, Microsoft's founder and mega-billionaire, is something of a national asset. Rather than revert to egalitarian nostrums about income inequality, Thurow contends that nurturing risk-takers or “change agents,” as he calls them, is necessary for a nation to build wealth.
Mature companies know when to fold the tent. American companies are very good at downsizing, a much maligned tactic that, when observed in perspective, provides long-term benefits. Europe with its ossified aversion to both risk-taking and discontinuity would do well to clone its own Gates. Japan with its superb but rigidly educated classes would be wise to teach creativity.
There are other areas where Thurow's previous positions have been refreshingly re-aligned. Europe's labor force must be more flexible. Tax harmonization in a competitive global economy is near impossible. Moreover, Europe and Japan's fear of the future – magnified by the fear of biotechnology – could prove to be very costly. Thurow wisely suggests that for all its talk about creating a United States of Europe, what the continent really needs is its own version of NAFTA.
But for all his revisions, Thurow can't help himself from wanting to alter the DNA of capitalism. Capitalism doesn't save and invest enough for his taste although U.S. business investment in information technology, which really seems to matter these days, far outstrips that of France and Germany. Thurow seems to have discounted individual preferences in the marketplace in favor of a nebulous concept built on social organization, the building blocks to his national wealth pyramid.
Still, a faith in government
Thurow believes that any government endeavor such as the Internet is proof that public engagement is superior to private initiative. And since government invented publicly-funded universal education, similar enterprises like tool building (life-long learning, public education, infrastructure and basic research) should be initiated and directed by government. This philosophy, Thurow believes, was apparent even to the 19th century mill owners who supported public education knowing that private decision making wasn't going to lead to the right results for them.
Thurow's faith in government funding of basic research is unshaken. Hence Rule Number Eight delivered in ironclad fashion: “The economic payoff from more social investment in basic research is as clear as anything is ever going to be in economics.”
That faith is often carried away. Rather than build wealth, Thurow advocates policies that would diminish it. By calling for mandatory benefit packages for part-time employees, Thurow is willing to sacrifice flexibility and choice. His argument that President Clinton's universal health reform package would have generated more full employment by discouraging the hiring of part-time workers is hard to believe.
In keeping with the spirit of the new economy, Thurow has opted not to publish the references cited in his footnotes. For those interested, the full citations can be obtained from his web site at http://web.mit.edu/lthurow/www. This “departure from custom,” may be his way of launching a debate. If the inconvenience of this high-tech strategy is any indication, advocates of freer markets, limited government and sound money might just want to take him up on the offer.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved.
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