Japan Does It Again

By George P. Brockway, originally published October 9, 1995

1995-10-9 Japan Does It Again TitleTHE TEXT for today’s lesson comes from the second act of The Mikado, where Ko-Ko, Nanki-Poo and Yum-Yum sing in unison, “Here’s a pretty how-de-doc!”

For Japan has done it again. Last year

I reported in “Unemployment Japanese Style” (NL, May 9-23, 1994) how Japan has given the lie to the most awesome and awesomely barbarous-notion of American economics. I mean the theory of the “natural rate of unemployment,” or, in proper academic gobbledygook, the “non-accelerating inflation rate of unemployment,” or, in a fashionable acronym, NAIRU.

As you will remember, NAIRU says that if unemployment falls below a certain level, inflation will accelerate without limit until the central bank (a.k.a. the Federal Reserve Board) raises the interest rate high enough to cause a recession. In the United States, the “desired” rate of unemployment is said to be about 6 per cent. At present it is hovering around 5.5 per cent, and the inflation rate is about 3 per cent. We maintain it all with a 9 per cent prime, and are expected to make a soft landing (from where to where no one says).

The Japanese, however, have already landed. Their unemployment rate has not been higher than 3 per cent for decades, and their inflation rate is lower than ours. In short, they have made the natural rate of unemployment and its advocates look foolish.

And now they have done the same thing to the second most hallowed doctrine of contemporary American economics productivity theory. The dogma of productivity is among the most widely invoked in economics, especially when practical policies are at issue. It is dominant at all levels, from microeconomic downsizing to macroeconomic competitiveness in the new global economy. It is central in labor and environmental disputes. Along with NAIRU, it guides the deliberations of the Federal Reserve Board. It is brought to bear on matters not strictly economic, from education to highway design.

How have the Japanese made this sublime theory (and its practitioners) look foolish? Well, it tums out that the assembly plants in the United States of two major Japanese automobile manufacturers, Nissan and Toyota, have higher productivity ratings than those of any American manufacturer. So what’s new? What’s new is that both Japanese plants lost money last year, while American automobile manufacturers were rolling in it.

There are, to be sure, plenty of reasons for the poor profit showing of the Japanese plants. First is the “strong” yen, which renders anything made of Japanese parts expensive in comparison with the same things produced in countries with “weak” currencies. Second is the Japanese determination to use only their own parts, no matter where they are assembled (a casus belli in the trade dust-up last June). Third is the evident Japanese decision to accept the losses for the sake of maintaining or improving their share of the American market. Fourth could be a Japanese preference for losses rather than paying corporate taxes in the United States (since Nissan as a whole lost ¥166.1 billion or $1.86 billion-last year, this is not a probable motive). Fifth is the Japanese policy of slighting their home market in favor of their export market, with the result that a sluggish world economy has been translated, these past three or four years, into a stagnant or recessive Japanese economy.

All these reasons for poor profits would be even more forceful if Japanese plants were less efficient and less “productive.” And American automobile manufacturers would very likely increase their profits by becoming more efficient. The point, though, is this: You can be “unproductive” yet profitable and stay in business. But you can’t stay in business forever, no matter how productive you are, if you don’t make ends meet. (Of course, the American assembly plants of Nissan and Toyota are scarcely noticeable elements of their businesses; these factories could probably be run at a loss indefinitely without much hurting long-term corporate profits.)

In a free economy, productivity may sound nice (at least if you haven’t been downsized), but profitability is essential. This being the case, one must wonder why the economics profession is enthralled by the idea of productivity. You can produce a table and chairs, knives and forks, plants and food, and sustain yourself, but productivity for its own sake is, as Midas found gold to be, not good to eat. Productivity is a less important concept than profit. It is also a slipshod, if not flatly fallacious, idea[i].

I have, over the years, worked up examples of the absurd consequences of applying standard productivity theory to micro-economic and macroeconomic problems, and (you may not believe this) I’m tired of repeating myself. If you missed those lessons, I would advise you to rush to order the third edition of The End of Economic Man, due at your bookseller’s in January.

In the meantime, I will repeat a baseball example, since that sport may again be the national pastime. Once upon a time, the Washington Senators got a rookie centerfielder by the name of Joe Hardy. On Hardy’s first time at bat in the majors (as I heard the story), he hit a grand slam home run. When he was due up next, there were only two men on base; so the manager[1], who had majored in economics, yanked him for a pinch hitter. Otherwise Hardy’s productivity (the number of runs he knocked in per at bat) would have had to go down-unless he drew a base on balls or got hit by a pitch, and neither could be counted on. I forget the manager’s name; I think M.I.T. snapped him up to coach their entry in the Neoclassical Synthesis League.

I know our baseball analogy reeks of metaphysics. So does productivity theory, and I’m sorry, but we’re going to have to think about it.

Productivity is defined as output divided by input. The output part presents no particular difficulty. It can be as definite as the 48,000 pins produced in a day by the “small manufactory” Adam Smith tells us about; but usually it is as diffuse as the Gross Domestic Product, and so has to be reduced to dollars, as the GDP is.

You might think that the input part would also be reduced to dollars, for it, too, is pretty diffuse, including at least land, labor and capital. The fact of the matter, however, is that economists tend to be embarrassed by money. Victorians thought it vulgar to talk about it. Today’s economists, like medieval scholastics and contemporary analytic philosophers, think money is merely nominal-unreal. Mathematical economists who fancy general equilibrium theory can’t find a place for money in their model. Unreal.

The obvious way to avoid using money in the denominator of the productivity fraction is to select the largest factor of input and make it a surrogate for the whole. Very well. Labor is today the single largest factor in the U.S., year after year amounting to close to 60 per cent of total costs. You will have noticed that total costs have to be stated in terms of money, and therefore that 60 per cent of the total also has to be stated in terms of money. (We’re going to have to let that pass, or this column will become a book.)

ANYWAY, the Productivity Index prepared by the Bureau of Labor Statistics of the Department of Labor divides the Gross Domestic Product of a period by the number of hours worked by all persons “engaged” in the period, including the hours of proprietors and unpaid family members. “Hours worked,” especially by unpaid workers, certainly is not money, and the category presents other problems. Most important, the hours are not homogeneous. Lee Iacocca’s hours, or some of them, undoubtedly yield a greater output than do a machinist’s, and a machinist’s hours yield a greater output than do a floor sweeper’s; but they’re all the same to the Department of Labor. Indeed, when you stop to think of it you realize that land and capital also work hours, probably more hours than labor, because they never sleep, and therefore might be thought more suitable than labor as surrogates for all inputs.

There is also an Employment Cost Index, which divides the total annual compensation of all employees of private business, from handyman to CEO, by the annual total of hours worked for pay. This gives us a figure that I frankly can see only cynical use for. Since it combines rapidly growing executive salaries with slowly falling common laborer wages, it has almost doubled from 64.8 in 1980 to 123.5 in 1994, and so can be used by readers of the Wall Street Journal to prove to their seat mates on the commuting train that labor never had it so good.

The conclusions drawn from the Productivity Index are similarly not remarkably reliable or even useful. During our autumn of discontent, mainstream economists recommended single-minded devotion to productivity to prepare us for the explosive competitiveness of the brave new global village. We learned that to become more productive, we must reduce “hours worked,” and to reduce “hours worked,” we must downsize.

Well, you don’t need a productivity index to know that you could make more money if you could turn out the same quantity of commodities with fewer employees. I could do that one with my eyes closed. With my eyes open, I can see that you make more money by producing the same output while borrowing less and paying lower interest on the sum borrowed, or paying lower taxes, or reducing advertising, or having fewer three-martini lunches, or organizing your business more rationally.

What I see with my eyes open as well are a lot of situations where input and output are stated in terms of money. That is not as strange as modern economists seem to think. When we divide total output in dollars by total input in dollars, our answer is the rate of profit, which is not an esoteric new idea at all. Business managers seeking to compare their firm’s current operations with those of their competitors, and with their own in other years, have used such ratios for generations. It’s nothing to them how many hours are required to make their product; what they’re after is the minimum cost.

For years the Japanese have demonstrated that you don’t have to have unnaturally high unemployment to maintain low inflation. Now Nissan and Toyota offer empirical proof that although yours may be the most “productive” outfit in the village, it may profit you nothing. Thus the Japanese have cooled off the two hottest tickets of modern American economics.

What will they think of next?

The New Leader

[1] Benny Van Buren

[i] Shades of Clayton Christensen and, among other things “When Giants Fail”

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