Economics WITHOUT Numbers
Keisling, Phillip
Economics WITHOUT Numbers by Phillip Keisling At the beginning of February, In Search of Excellence, by Thomas Peters and Robert Waterman, was the best-selling book in America-56 weeks after it...
...Co-author Peters says that the reaction among corporate managers has "astonished him:' adding, "There seems to be a real hunger out there to know more about how business works...
...There's also a darker side to the allencompassing "corporate values...
...Workers are motivated by their fear of unemployment and their desire to purchase consumer goods...
...Journalists who've focused their efforts on this vague "feel',' and on the values and assumptions of the executives who run major corporations, have produced some memorable pieces...
...More specifically, it holds important lessons for three major groups: corporate' managers, policymakers, and journalists...
...An excess of pride in one's enterprise can be dangerous...
...But in this case, first appearances are wildly deceiving...
...The economy seemed to be relatively healthy...
...One wishes the authors had given the important question of worker ownershipmore attention...
...Like In Search of Excellence, it came from within the citadels of respectability...
...Such economists devote their energies to arcane formulas that purport to chart the relationships between these variables—a practice called "econometrics...
...But corporate managers in the early 1970s felt little pressure to change their rigid, hierarchical habits...
...as for bureaucracy in general, Townsend suggested that a vice president be given the assignment of "wandering around the company looking for new forms, new staff departments, and new reports, and whenever he finds one that smells like institutionalization, he screams 'Horseshit!' " Townsend's most important credos stressed individual responsibility and morale-building efforts...
...Hayes' and Abernathy's insights were extended by many others, two of whom published books shortly after In Search of Excellence appeared...
...Even the economic "recovery" now underway confirms the gross inadequacy of this quantitative model...
...The account detailed the efforts of William Buehler, a vice president of marketing at AT&T, to overcome "Bell's rigamarole of endless memos, interminable meetings, and-strict chain of command ." Buehler,-an unabashed enthusiastof In Search of Excellence, exhorted his salespeople to keep-close to the customer and instituted a compensation system that far better rewarded good performance...
...McDonald's puts an almost ubiquitous emphasis on "Quality, $ervice, Cleanliness, and Value...
...For all its seemingly vague generalizations about the importance of corporate culture, In Search of Excellence is a truly revolutionary—and dangerous—book...
...But numbers, as we've seen, don't always equate with quality...
...Lester Thurow, who teaches economics at MIT, takes on a different target: the supplydemand relationship on which much of the "dismal science" of economics is based...
...The striking inaccuracy of their wellpublicized forecasts isn't due to a few bugs in their computer programs, Thurow argued, but to fundamental flaws in the endeavor itself...
...Ray Kassar, Atari's president during the slide, was an imperious manager who seldom ventured outside his office...
...Where American corporations had once ruled the globe, now they were running scared—in their own markets, no less—from foreign competitors...
...According to the quantitative model, if you simply discern the correct mathematical relationship between taxes and savings, or capital investment and productivity, you'll know exactly what to do, whether you're a CEO or a president charting the country's economic policy...
...As for Regan, his "35 years' experience in the marketplace"—a credential he recently trotted out to dismiss Feldstein's'"library work...
...Last fall, Daniel T. Carroll, a business consultant, attacked the book in the Harvard Business Review for lacking analytic rigor, being rife with "shoddy" analysis, and, not least, relying on the observations of journalists, former McDonald's cooks, and conversations "overheard ...in a Palo Alto bar...
...Peters recalls the time he went to speak with a division manager at Hewlett-Packard and found his office—a 6- by 8-foot cubicle shared by a secretary—empty...
...Not once It's an all too common complaint—but one government has little ability to control...
...Delegate authority in important matters...
...As it was two decades ago with political journalism, the great unexplored territory of business journalism lies in revealing the inner workings of the economic institutions that have so much influence on our lives...
...More important still, the quantitativemodel has come to dominate the nation's postwar economic policies...
...Townsend's remarkable success at Avis gave much credence to his homey observations...
...Gone were the days when there were so few White House reporters that FDR could convene news conferences in his office...
...A few adjustments and much fewer large transfusions of money no longer seem sufficient to keep the economy running at full power...
...In short, Peters and Waterman concluded that the excellent , companies acted in ways that violated long-standing tenets of scientific management and "rational" business behavior...
...In Search of Excellence brought welcome balm for America's battered self-image...
...The Organization Man critique so popular during the 1950s rested upon an unspoken assumption: he was an inevitable, necessary byproduct of the nation's prosperity...
...His story painted a vivid picture of Ross's extravagant and erratic behavior, suggesting in the process a major reason why Warner's fortunes—and stock—had plummeted so quickly...
...I've just had my first conversation with Rene,' he•confided to Peters and Waterman...
...Managing Our Way to Economic Decline" by Robert Hayes and William Abernathy of the Harvard Business School held that the nation's waning economic vitality was linked directly to the rise of a new cabal of corporate managers, many the products of Harvard and other business schools...
...Skinner and Elton Mayo...
...But although more people were covering the government, most reporters remained prisoners of their beats, so inhibited by the grueling pressure of daily deadlines that they seldom ventured beyond the conventional...
...If this mindset has a familiar ring to it, perhaps it's because Carroll once worked for Robert McNamara, back when he was applying the quantitative approach to our conduct of the Vietnam war...
...The prescription for corporate managers is the most straightforward...
...Peters and Waterman present the arguments of these sources, without deluging the reader with details, and explore their strengths and weaknesses before offering their own conclusions...
...The phenomenon of In Search of Excellence—and that is precisely the correct word, with 1A million copies now in print—is a heartening sign of how popular tastes have undergone a sea-change in recent years...
...The situation admittedly has improved since the early 1970s, when Chris Welles looked at The New York Times's business page and found it all too typical of most others: "seldom more than a bland, tedious, disorganized, and turgidly written rehash of the previous day's hand-outs and spot news events, mere surfaces and facades bereft of even the most rudimentary of analysis, explanation, color, or perspective' The Times's business page has since more than doubled its staff, and business editors at many other newspapers have followed suit in expanding their coverage...
...In the summer of 1980, an article in the Harvard Business Review fired an attention-grabbing salvo across the bow of corporate America...
...They showed a "bias for action:' preferring experimentation (and the inevitable mistakes) to painstaking study...
...The Next American Frontier, by Robert Reich, who teaches business and public policy at Harvard's Kennedy School, traces the rise of paper entrepreneurs—the merger lawyers, investment bankers, and various speculators whose efforts amount to nothing more than rearranging existing corporate assets...
...A story in The Wall Street Journal last December provided a graphic example of the self-protective instincts of corporate managers...
...In Search of Excellence simply demonstrates how dramatically important this' approach can be...
...The book •is dangerous because of who its authors are...
...And if the public has been enthusiastic, many in the business community have taken to the book with the guilty zeal of converts at a revival meeting...
...An excellent example is a recent story by John Hubner and William Kistner of The San Jose Mercury`What Went Wrong at Atari?' that traced the company's fall from a corporate wunderkind to a foundering giant that by mid-1983 was hemorrhaging cash at the rate of $1 billion a year...
...Still, to think these changes will come easily is to underestimate the inertia of large bureaucracies...
...Invasion of the Profit Snatchers In Search of Excellence is hardly the first book to challenge the abstract premises of modern economics by examining the way corporations really work...
...They ' had lean-staffs...
...This approach produced some of their most valuable insights...
...This . is a truth that many economists and policy-makers—conservative and liberal—prefer to overlook, insisting that the solution will come once Washington adopts the right strategy...
...When profits began to fall, he became cautious, cutting back on innovative research and concentrating on short-term profits...
...The authors also spent more than two years testing their theories against their own experiences...
...Joseph Nocera of the Texas Monthly accompanied T. Boone Pickens, the president of Mesa Petroleum, when he went to Wall Street two years ago as part of his unsuccessful bid to acquire Cities Services...
...Equally important were the attributes the excellent companies didn't share...
...It told us a lot about the whole company, why it felt different;' Peters says...
...Five years ago, if a book with this title had achieved similar renown, its subject doubtless would have been something like "personal growth ." But the subtitle of Peters' and Waterman's book— Lessons from America's Best-Run Companies— reveals that its exhortations are not aimed at affecting our behavior as individuals, but at changing how we act collectively...
...The new corporate culture he created;' the Journal- concluded, "has been weakened, if not snuffed out...
...Entrepreneurship:' a word that once instantly identified the utterer as an enthusiast of Ayn Rand, is now often bandied about whenever academicians, journalists, and even presidential candidates discuss the economy, In Search of Excellence is also a top best-seller on college campuses...
...Speaking extensively with former and current officials, and especially with engineers who designed the video games that were Atari's main product, the company they described was a polar opposite of the excellent companies profiled by Peters and Waterman...
...Dismayingly little of this reporting penetrated into the bureaucracy to reveal the culture and values that lay behind the actions—and failures—of government officials...
...They draw from a wide range of sources: behavioral psychologists such as B.F...
...In Search of Excellence was no sniper's shot from behind the rocks, no ideologically motivated brief against the corporate state...
...Charles Brown, the chief executive officer of AT&T, took his top executives Phillip Keisling is an editor of The Washington Monthly...
...Dangerous Currents zeroes in on the econometricians...
...These economists have seized upon the profitmaximizing "rational man" model of human behavior because, in theory at least, it's predictable...
...We intend to be five years from now...
...This is the hot field now in journalism;' Welles says...
...It was profit at any expense...
...Economics WITHOUT Numbers by Phillip Keisling At the beginning of February, In Search of Excellence, by Thomas Peters and Robert Waterman, was the best-selling book in America-56 weeks after it first broke onto the charts...
...for example, John Steinbeck's belief that any book worth writing can be distilled into one page is compared to Proctor and Gamble's decree that no memo be any longer...
...Corporate managers and policy-makers who rely on the econometrician's equations for guidance are like the carpenters who try to build a house on an out-of-square foundation with saws that won't cut squarely...
...Few seriously believed that something was fundamentally wrong with how most American corporations conducted their business...
...and Waterman's findings suggest the need to abandon traditional approaches...
...Feldstein is a quintessential numbers man, whose forecasts have a dubious reputation even among his fellow econometricians...
...There was a better, wholly indigenous solution to declining productivity and industrial decline, and Peters' and Waterman's argument was put in terms that most people could immediately grasp...
...Each knows as much about how production processes really work as the-other...
...Because it is abstruse, and requires much technical training, it is the kind of economics to which the academy attaches the greatest prestige...
...Nearly all the nation's schools of business and public policy base their teaching upon quantitative analysis...
...Government has a key role to play in encouraging economic growth—for example, by changing the tax laws so- they encourage investment only in new jobs and corporate assets and don't reward speculation in existing assets...
...Delta Airline's executives (including the president) pitch in every Christmas to help with such chores as baggage handling...
...Their study includes too few examples of companies in distressed industries, where cheap foreign imports may pose a greater threatthan . number-crunching CEOs...
...Donald Burr, whose fledgling People Express airline wasn't profiled in the book but well could have been, called In Search of Excellence "the most significant book about economics since Adam Smith's The Wealth of Nations...
...These managers had little understanding of how products were actually manufactured or marketed...
...They consciously avoided the acquisition of unrelated businesses and "stuck to their knitting ." They eschewed rigid organiza...
...Consumers, workers, and bosess are assumed to behave in uniformly rational ways, driven always to maximize their "utility" or "profit!' A consumer buys a product according to its price...
...Portfolio managers like ITT's Harold Geneen and Bendix's William Agee had elbowed Henry Ford aside as the new role model for America's corporate managers...
...the scare from the OPEC-induced recession of 1974-75 was short-lived...
...They gave numerous presentations to corporate executives, and actively solicited further suggestions and criticism...
...To some, that may sound simplistic, banal, or even somewhat corny...
...Peters and Waterman based their conclusions on an exhaustive, two-year study of about 75 "excellent companies',' whose excellence they measured by the same yardsticks corporate managers hold so dear: profit and rates of return...
...The latter "are people who borrow your watch to tell you what time it is and then walk off with it!') As for meetings, the "fewer the better...
...When McPherson later became dean of Stanford's business ,school, , one associate dean was thrown into a panic...
...In this key respect, the supply-siders are really no different than the Keynesians they ritually lambaste...
...It was McNamara's analytically rigorous, by-the-numbers thinking—exemplified in the daily body counts—that for so long led the public to believe the war was being won...
...The first Nobel Prize in economics, in 1969, went for work in econometrics...
...on a two-day retreat to discuss the book...
...In this regard, today's business journalism seems analogous to the political reporting of the early 1960s...
...At Dana, a $3 billion manufacturer of automobile and truck parts, -the company president, Rene McPherson, eliminated time clocks and posted signs around the company that said, "Talk Back to the Boss...
...The manager had been out on the shop floor for several hours...
...They interviewed dozens of CEOs at their corporate headquarters...
...Productivity growth ominously ground to a halt, unemployment climbed, and many analysts began to fear that the sins of the past were finally catching up...
...Decisions should be made at the lowest level possible...
...In Search of Excellence doesn't shed• light .on who's right about the deficits, but it does suggest how ill-equipped both men...
...It is revolutionary because it demonstrates, more conclusively than ever before, that what most of today's corporate managers and economists believe to be true is, to put it bluntly, dead wrong...
...The view was most vividly—and often humorously—expressed in a 1971 book, Up the Organization by Robert Townsend, the former president of Avis Rent-A-Car...
...They were almost obsessed with giving customers good service and giving their employees responsibility...
...As the Journal's article on Buehler illustrates, reporters can use In Search of Excellence as a useful lens through which to view corporate behavior...
...Previously loyal distributors were slighted and ignored...
...They are also adept at finding comparisons from seemingly unrelated fields...
...Among his "No-Nos for Corporate Managers": reserved parking spaces, conventions, time clocks, and management consultants...
...since then, all but a handful have gone for similar work...
...And David McClintick's 1982 book, Indecent Exposure, detailed the internecine warfare that erupted at Columbia pictures in the late 1970s when a popular executive was caught forging checks...
...For those who cling to the conventional wisdom about how the economy and businesses operate, it was far worse...
...The public was bombarded with stories about early-morning calisthenics at Mitsubishi and quality circles at Nissan Motors...
...As for economists and policy-makers anxious to prescribe remedies for the nation's economic ills, Peters...
...As for relations on the shop floor, it's not a new idea that employees will be more productive if they're given more respon.sibility and- encouraged to "talk back to the boss...
...The reason is simple: in its approach to research, analysis, and in-the-field reporting, In Search of Excellence is an exemplary piece of journalism...
...Texas Instruments—one of the excellent companies— has taken a severe beating in the personal computer market in large parr because it's insisted on the in-house development.of certain•components, rather than buying cheaper, more reliable ones made by others...
...Chris Welles, a reporter for the Los Angeles Times who also teaches at the Columbia Journalism School, reported last spring on Steve Ross, chairman of Warner Communications...
...But most important, they focused their reporting on the middle-level managers and employees...
...These "excellent companies:' they discovered, shared common characteristics...
...Still, it is discouraging how seldom business reporting offers such insights...
...The best journalism can't rely wholly on library work, however...
...historians from Max Weber to James McGregor Burns...
...Japan, once a synonym for cheap and shoddy merchandise, suddenly was being celebrated for its high-quality products and management "culture...
...It is called "quantitative" because it assumes that economic behavior—within corporations as well as in society at large—is best understood through gross "aggregates" such as "supply;' "demand;' "inputs;' and "outputs...
...are to their task...
...Where Japanese and European managers emphasized long-term research and development efforts, America's managers lived from quarter to quarter, if not day by day...
...For• example, despite their well-publicized squabble over Reagan's deficits, both Martin Feldstein and Donald Regan • assume that the proper mixture of monetary and fiscal policies will return the economy to robust health...
...In this hypothetically rational world, corporate managers should, first and foremost, focus on their profit margin...
...They thrived by emphasizing employees and customers—not the bottom line...
...But by tying up money and business energies that could be spent on increasing the nation's economic wealth, their efforts actually sap the nation's economic vitality...
...Rather than imitate Japan Inc., American business would do better to imitate IBM and Maytag...
...Perhaps most important, the excellent corn-- • panies were characterized by a pervasive corL porate "culture" that reflected their basic values...
...Given the unprecedented stimulant of $200 billion of budget deficits over the next several years, the economy's growth rate is noticeably sluggish...
...The fact that excellent companies studiously avoid mergers with unrelated businesses should also be taken to heart...
...Chief executive officers should start acting more like Dana's peripatetic McPherson, whom visitors would- of-ten find wandering the hallways, in shirt sleeves, talking to employees...
...But despite dramatic increases in sales among Buehler's employees—and the aforementioned two-day retreat by AT&T executives—the company decid: ed Buehler's experiment was incompatible with the rest of its operations...
...McClintick's portrait of corporate executives maneuvering for power spoke volumes about the petty preoccupations on which large enterprises too often turn...
...The resourceful merchant of Adam Smith had been succeeded by The Organization Man...
...rguess• I got laid off because make poor-quality cars:' one former GM worker told Peters and Waterman...
...Many who've only glanced at In Search of Excellence are tempted to dismiss it as.a sort of I'm OK, You're OK for corporate managers...
...People often behave in ways that economists consider "irrational...
...But no book can do everything, and in convincingly discrediting the •quantitative view of economics as practiced by both policy-makers and corporate managers, In Search of Excellence is a book of far-reaching implications...
...Adherents to this world view operate on very rigid premises about human behavior...
...Still, the result was not dissimilar...
...In the 1950s and 1960s, John Kenneth Galbraith in The Affluent Society and The New Industrial State showed how these same corporations did not behave the way free-market theorists said they did...
...But their -findings suggest some obvious places to start...
...and rewarding good performance...
...Their efforts revealed, just as In Search of Excellence does, that we can ignore the chasm between what is really true, and what we hope to be true, only at our peril...
...consisted largely of managing real -estate investment and speculating in bonds,-stocks, and other ventures-during his years- at Merrill Lynch...
...Peters and Waterman don't offer a specific blueprint for all managers to follow, and creating a- clearly defined corporate culture obviously takes time...
...Townsend's philosophy was encapsulated in a series of pithy aphorisms...
...A Ford Motor Company official recently told an assembly of executives, "We weren't on the list of excellent companies, and we didn't deserve to be...
...The economic engine needs a major overhaul—and the modern corporation lies at the very heart of the machine...
...The several years preceding the book's publication were marked by the worst recession in half a century...
...No editorial writer who's decried the folly of mergers has captured better the talents, resources, and frantic energies poured into such useless deals...
...But initiatives from Washington can do little to -create a healthy corporate culture that gives workers a feeling that their work is appreciated...
...See "The Cult of Ml:' November 1983...
...They reject a cheaper product for another made by a company with a better reputation...
...At Hewlett-Packard, executives manage by "wandering around',' often spending more time on the shop floor than tending to financial reports...
...a larger paycheck is the best way to reward their efforts...
...The bar-room conversations they overheard weren't in Palo Alto, but in places like Saigon...
...they later wreaked revenge by saddling Atari with hundreds of millions of dollars in unsold video cartridges...
...But in 16 years, not once was I ever asked for a sugges: Lion as to how to do my- job better...
...And what is supply-side economics besides a misplaced faith in the power of cutting marginal tax rates and the efficacy of mathematical models—in this case the infamous "Laffer curve;' which first appeared on the back of a cocktail napkin...
...In this regard, the ultimate compliment to In Search of Excellence may have inadvertently come from one of its critics...
...Modern managers increasingly were behaving like the cautious bureaucrats they had in fact become...
...Conspicuously absent from the "cultures" of these corporations were such things as thick manuals of procedure, an enthusiasm for 'mergers, and droves of business school 'graduates...
...tional charts, long memos, and the pursuit of, short-term profits, and embraced flexibility and simple goals...
...and "Compensation should be related as directly as possible to performance...
...This is where In Search of Excellence makes a contribution to journalists: it shows how much can be learned about corporations by bringing an informed eye to the everyday scenes of modern corporate life...
...You can make a vigorous case, on paper, for both propositions, but hard evidence is more than a little bit scarce' Wandering managers In Search of Excellence's contribution lies in first confirming the critique, albeit implicitly, then offering concrete examples of how companies—and the rest of us—can prosper by recognizing the fallacies of the quantitative approach...
...For starters, Peters and Waterman did their library work...
...Numbers were more important than people:' lamented one of Atari's founders...
...There's no quick fix...
...It was as if a spokesman for the College of Cardinals had suddenly stood up during the Pope's Sunday liturgy and, to the astonishment of the worshiping masses around him, had cried, "Baloney...
...Or, as Thurow concluded, "I am convinced that accepting the conventional supply-demand model of the economy is rather like believing that the world is flat, or that the sun revolves around the earth...
...Instead, Carroll says, Peters and Waterman should have spent more time conducting detailed, analytically rigorous studies...
...The Federal Reserve Board, most recently under Paul Volcker, has long acted on the assumption that the nation's prosperity depends on nothing so much as its own manipulation of various "monetary aggregates...
...Only later did the true story begin to trickle in, much of it from government analysts and reporters who talked to the soldiers and intelligence officers in the field and compared the official version of the war with the one they were hearing about...
...management theorists from Frederick Taylor to Alfred Chandler...
...Paper entrepreneurs are often rewarded handsomely by the marketplace...
...As workers, people are motivated not just by material rewards, but for reasons like "job satisfaction:' a desire to contribute, and a belief their opinion will be listened to...
...Do you know that not one thing he did [at Dana] is even mentioned .in the MBA curriculum...
...The numbers racket The conventional wisdom in this case is a way of thinking about economics that has held sway in America since the second world war...
...Peters and Waterman are management consultants who, between them, have 24 years of experience at .McKinsey and Company, a firm accorded the same respect from corporate managers that IBM usually receives from computer users...
...Off the- beaten track, Improbable as it may sound, In Search of Excellence also holds lessons that are as important for the nation's business journalists as the ones it offers to corporate managers and economic policy-makers...
...And IBM's concern for the morale of its sales force is illustrated— somewhat excessively, perhaps—in the story of the sales manager who rented Meadowlands stadium and, as employees ran out onto the field, flashed their names on the scoreboard...
...Caterpillar's belief in the importance of customer service is reflected in its pledge to deliver a part anywhere in the world within 48 hours'Or Cat Pays...
...acting more like bankers than industrialists, they were more interested in buying and selling corporate assets— "management by portfolio"—than in developing better products and laying the groundwork for broader markets...
...But as Thurow points out, the models don't work...
...But soon, a number of observers began to question whether the Organization Man was such a good capitalist, after all...
...This isn't to say that numerical analysis is irrelevant—the best companies have their share of planners and accountants—or that the vision Peters and Waterman offer is without flaws...
...That changed dramatically with the recession that began in 1979...
...3M shows its enthusiasm for innovation by supporting "champions:' who are encouraged to experiment regardless of whether a practical application for their work is apparent...
...While more reporters are covering business "beats;' the result has usually been more news on quarterly earnings, annual reports, economic forecasts, and the Commerce Department's latest estimate of the Gross National Product...
...Markets for a firm's products operate according to fixed laws of supply and demand...
...In the early 1930s, for example, Adolph Berle and Gardner Means of Columbia University exploded the widely held myth that a corporation was a mini-republic by demonstrating that it was unelected managers, and not stockholders, who really held the reins in large corporations...
...The country was also hungry for In Search of Excellence's specific message...
Vol. 16 • March 1984 • No. 2
