Volume 1, Issue 1, 2007    
       
  Dysfunctional Management Education and Declining Global Competitiveness of the United States Economy    
       
  Yoshi Tsurumi
Baruch College, the City University of New York
yoshi_tsurumi@baruch.cuny.edu
   
       
 

Abstract

The Bush Administration has been aggravating the jobless GDP growth and  the widening income and social gaps between the top 3% of income brackets and the rest.  These problems are damaging the global competitiveness of the U.S. economy.  They have been shaped by flawed theories of business, economics, and law in the self-centered culture of market fundamentalism.  It produces business and public services mindset that embraces the robber baron culture and Social Darwinism of market and Christian fundamentalism.  It is destroying the manufacturing culture that had produced the “golden age” of the post-World War II era.  Fundamental remedies require alternative management theories and practices.  Such alternative business models can be gleaned from the comparisons of Detroit’s demises and the rising competitiveness of Toyota and Honda transplant firms in the U.S.

Dysfunctional MBAs and Jobless Economic Recovery of America
 

Thirty-two  years ago, George W. Bush was my student at Harvard Business School.  In my class, he called President Franklin D. Roosevelt’s New Deal  “socialism and bad for business.”  He  opposed  the Social Security, the Securities and Exchange Commission, the unemployment insurance, and other New Deal innovations.    In reality, the U.S. and the world benefited from the New Deal innovations and the federal government’s positive roles  in managing the economy and fostering the civic-value based rules of fair and open market competition.  This bailed the U.S. out of the Great Depression, won World War II, produced the Golden Age of the post-World War II era.  American democracy and capitalism were repaired and solidified.

               

In those days, however, Bush belonged to a minority of MBA students who were seriously disconnected from accepting the moral and social responsibility for their actions.  Today, he would fit in comfortably with an overwhelming majority of business students and teachers.  President George W. Bush epitomizes the dysfunctional business mindset – anti-intellectualism, ignorant of science, flawed integrity, greed, and lack of  civic values and compassion for the unfortunate. 

               

President Bush has modeled his presidency on the Gilded Age of the McKinley Presidency of 1897-1901 (Bill Moyers, 2003: 10).  President McKinley saw to it that Washington was ruled by big business.  Corrupt crony capitalism and  rampant Wall Street’s money games finally brought about the Great Depression.  Under the Bush Administration, Wall Street’s money games are dominating the economy, and the jobless economic recovery is hurting the global competitiveness of the U.S. economy.  As it was during the McKinley-Gilded Age, America is beset by a widening income gap between the haves and have-nots.  It is rapidly resembling a divisive, undemocratic Latin American country.

               

During the economic recovery of March 1991 to April 1993, a 10 percent increase in the real GDP expanded manufacturing jobs and service jobs 3 percent and 5.9 percent respectively.  Ten years later, under the Bush Administration, the economic recovery from November 2001 through August 2003 showed that a 10 percent increase in the real GDP expanded manufacturing and service jobs only 0.7 percent and 0.9 percent respectively.  Since 2001, over 5 million people have lost their health benefits while about 3 million quality manufacturing jobs disappeared.  In his State of the Union speech of 2006, President Bush boasted his records of job creation and low unemployment rate.  In reality, a bulk of new jobs that President Bush’s economic policies created are low paying service jobs and part-time jobs.  The working poor have swelled in number and are toiling in the minimum wage and dead-end jobs with no health and pension benefits.  The middle class is rapidly thinning out.

 

The loss in manufacturing jobs causes compounding losses in suppliers and related quality service jobs.  Since August 2003, President Bush’s economic policies have not created 300,000 jobs monthly barely enough to absorb those who were thrown out of work under him and to keep up with  population growth.  America is burdened by four colossal debts – federal budget deficits, foreign debts, trade deficits, and household debts, which are dragging the national economy.

               

Meanwhile, encouraged by President Bush’s large tax cuts to big business and the wealthy, many chief executive officers (CEOs) of corporate America give themselves large bonuses and salaries that have little to do with their performance (Nicholas Kristof, 2005: A21).  Throughout the post World War II era before the Reagan-Bush I Administration (1981-1993), CEOs’ median annual compensations remained at about 30 times their average employees’ pay.  However, since 1981, social, political and economic restraints of CEOs compensations have been increasingly eliminated (Eric Dash, 2006, C1). Under the Bush Administration, comparable CEOs, many of whom had business education, have given themselves 600 to 1,000 times larger annual compensations than their ordinary employees whose incomes have stagnated. 

 

To pay for such self-dealt compensations, CEOs lay off their workers, cut ordinary employees’ health benefits, raid employees’ pension funds, destroy their labor unions, and outsource jobs abroad.  During the deep Reagan recession of 1981-83, the CEOs of American large corporations doubled their compensations and perks.  Meanwhile, their firms’ profits fell and the national unemployment passed the 12 percent mark, the highest since the Great Depression. Even after the Reagan recession ended, one CEO after another have continued with their relentless shedding of their American employees and suppliers in the name of restructuring, leveraged buyouts, global competition, outsourcing, downsizing, and relocations.  They have chased ever more relentlessly short-term and financial profits and have become manipulated by the speculative casino called the Wall Street.  Meanwhile,  the CEOs of Japanese competitors  have kept their compensations no more than 30 to 50 times larger than their rank-and-filers’.

 

In addition to President Bush, business education has also produced former Enron CEO Jeff Skilling (Harvard MBA) and other MBA masterminds behind stock  frauds and other serious corporate malfeasances at Tyco, HealthSouth, Haliburton, AIG, Arthur Anderson, WorldCom, Wal-Mart, and GlobalCrossing, to mention a few.  The Bush Administration has condoned the lack of oversight by the Securities and Exchange Commission and other watch-dogs winking at dysfunctional CEOs.

The Global Competitiveness of the U.S. Economy and Firms

 

In the global age, the three main ingredients of the growth of a nation’s GDP and its corporations – capital, technology, and information – move globally at the speed of light through the internet networks.  The global competitiveness of the U.S. economy is defined as the continuing  growth of its real national income, enabling its households to keep improving their living standards.  The global competitiveness of a firm is defined as the continuous adaptation to changing business environment.  The adaptive economy needs adaptive private corporations that contribute to expanding the U.S. bases of employment, technological innovations, and business opportunities.

 

Market fundamentalists defend America’s harmful and premature outsourcing of quality and higher-paying manufacturing and service jobs abroad.  They justify their self-serving action by the obsolete 19th Century theory of international trade – comparative advantage theory.  Each trading nation exports those products in which it commands comparatively the most absolute advantage and imports those goods which it cannot produce more cheaply than its trading partner.  This theory is now also applied to those packets of digitalized information “services trade” in which India has come to command comparatively most absolute advantage vis-à-vis the U.S.  This theory forgives greedy American CEOs for destroying American jobs to pad their pockets and stock prices.  However, this theory is wrong and is damaging the global competitiveness of the U.S. economy.  Job and income losses of America are aggravated by the premature abandonment of American suppliers and labor by short-term stock price maximizers like Wal-Mart and Levi that continue shedding even American skilled labor.

 

Today, as in the case of U.S.-China merchandise trade and U.S.-India services trade, there is no market equilibrium point between them.  China and India will persistently combine their endless supply of trained but low cost labor with inflows of capital and technology from the U.S. and Japan. American importers like Wal-Mart and financial firms provide Chinese and Indian exporters with ready accesses to the U.S. market.  China and India will continue to improve their absolute cost and quality advantage to run up colossal trade surpluses with the U.S. at the expense of America’s quality manufacturing and services jobs (Paul Samuelson, 2004: 135-146).  For a comparative advantage theory of international trade to explain the trade benefits for the U.S., the U.S. would have to shift persistently to producing innovative and exportable products and services to China and India.  However, the U.S. has long ceased to produce  many exportable products, say, a high technology machinery with which China produces exports to the U.S.  Instead of the U.S., Japan or other nation exports it to China.  American brands of computers and internet servers that India uses to produce “digitized packets of information” exports to the U.S. are now made in Malaysia and China with American capital and technologies. 

 

Widening Income Gaps and America’s Shrinking Middle Class

 

A nation’s inequality of income distribution is measured by the  Gini  coefficients derived from the Lorenz Curve.  The Gini coefficient falls between 0 (total equality) and 1 (total inequality).  For most developed nations, the Gini coefficient  ranges from 0.3 to 0.4 which are considered conducive to a democracy.  The larger is the Gini coefficient, the greater is the inequality of income distributions.  Gini coefficients of the U.S. have increased from 0.394 in 1970, 0.403 in 1980, 0.428 in 1990, 0.462 in 2000 and to 0.496 in 2004.

 

The widening income gaps of the U.S. began about 30 years ago (after the First Oil Crisis of 1973-75).  However, the income gap widening was accelerated during the Reagan-Bush I Era.  At least, President Bill Clinton (1993-2001) mitigated the harmful effects of widening income gaps upon America’s democracy and economic growth.  Under President George W. Bush (2001-), however, not only the income gaps between haves and middle classes have been accelerated, but the income volatility of the middle and working classes have become hightened.  In 2004, the Gini coefficient of the U.S. was breaking through 0.5 level and began to approach those of Mexico,  Brazil, and Russia.  To identify the causes of widening income gaps of the U.S., I conducted the following regression analysis.
 

                               (1)                 Log (Gini) = - 1.221    + 0.0323D – 0.261 Log (Ratio)

                                                                     (0.0168)     (0.0041)    (0.0163)                 

Where D=Dummy Variable (0 for l968-1998, 1.0 for 1999 – 2001) and Ratio = Manufacturing Sector Employment/Total Employment.

  

Regression Analysis (1) shows that for 10% point decrease in the manufacturing employment ratio, the U.S. shows 2% point increase in the Gini coefficient.  From this, we can infer that the Gini coefficient of the U.S. has increased by ever shrinking manufacturing employment.  And the manufacturing employment has continued to shrink after 1981 and particularly since 2001 due to the  outsourcing of manufacturing and services jobs abroad.

 

The American phenomenon of “growing GDP and shrinking middle class” is vividly  captured by Gini coefficients of household disposable income from 1980’s to the present.  Australia, France, Canada, Japan, Belgium, Germany and Sweden have kept their Gini coefficients of comparable household disposable income steady within a range of 0.215 (Sweden) and 0.315 (Australia).  Meanwhile, in the U.S., comparable Gini coefficients have continued to increase from 0.335 in 1986 to 0.420 in 2004.  The Bush tax cuts have widened the income gaps and shrunken America’s middle class.

 

Dysfunctional Management and Economics Theories of Market Fundamentalism

               

The business culture of hubris and cronyism is encouraged by dysfunctional management and economics theories of market fundamentalism.  Sumantra Ghosahl, a leading management scholar, noted (2005: 75-91): “Combine agency theory with transaction costs economics, add in standard versions of game theory and negotiation analysis, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value obsessed, win-at-any-cost business leader of which Scott Paper’s “Chainsaw” Al Dunlap and Tyco’s Dennis Kozlowski are only the most extreme examples.  This is what Isaiah Berlin implied when he wrote about absurdities in theory leading to dehumanization of practice.”

 

For the last thirty years, American business and economics studies have increasingly become the pseudo-sciences of financial economists’ mathematical formula manipulation which is devoid of humanity.  These market fundamentalists build their theories and policy paradigms on their illusionary assumptions about market efficiency, individuals, firms, governments, and society.  Individuals are assumed to maximize their economic self-interest.  Corporations are told to maximize short-term profits and stock prices at all costs to reward abstract stockholders.  Laissez-faire  capitalism is assumed to need no ethical and democratic constraints.  It is assumed that  Wall Street stock markets properly measure the fair market value of the listed corporations and prevent selfish excesses of CEOs and board members (“shareholder value mantra”). Financial institutions are assumed to prevent corporate executives’ raiding their corporate treasuries.  It is assumed that  government institution cannot administer effectively any public service from Social Security and health care to air- and sea-port security.  Even cursory observations of the real world would tell us that the assumptions of market fundamentalists do not hold true.

               

Market fundamentalists ignore that Adam Smith’s market efficiency requires the democratic context of fair and honest competition (no monopoly and business-government collusion).  They ignore that there are many important failures and limits of the market mechanism (Kelvin Lancaster and Richard Lipsey, 1956: 11-32; Francis Bator, 1958: 351-379).  When, as in the case s of labor, education, and health markets, there are multiple and systemic distortions in the price and demand/supply discipline of a given market, a piecemeal removal of price mechanism distortions to bring the market closer to a pure market will worsen the overall outcome.  This dictum refutes market fundamentalists who advocate substituting “market incentive vouchers” or “privatization” for government regulations of clean water and air, public safety, public education, labor, energy supply, and health care, and racial-gender discrimination.

               

Market fundamentalists assert the futility of government intervention in the market mechanism.  They incorrectly extrapolate the social choice theory of Kenneth Arrow (1951), a Nobel Prize winner, who  warned us not to twist his mathematical proof of the “impossibility theorem” into the imagined futility of civic and democratic efforts at social betterment or into manipulating consumer behavior.  Arrow merely showed that the equilibrium outcome of the group choice is indeterminate when there is a circular conflict situation like the kids’ game of rock-paper-scissors among different groups of people.  It is the democratic political processes of  coalition forming and public education that break the log-jam of conflicting interests among different groups of people to attain their civic goals.  We have only to review how the Civil Rights Movement made many corporations, civic groups, and individuals change their attitude toward the race and gender discrimination in America.  Similarly, market fundamentalists have twisted the game theory of von Neumann and Oskar Morgenstern into collusion and deception games of business negotiations that unethical CEOs’ abuse.

               

Milton Friedman is a guru of market fundamentalism, although he admitted that his theories are not based on  reality (Milton Friedman, 1953).  This is an illusion-based pseudo-science according to Friedrich von Hayek (1989: 3-7), Friedman’s colleague and a recipient of Nobel Prize in Economics Science.  Undaunted by such criticism, Friedman promoted the “survival of the fittest” ideology of crude Social Darwinism.  Such Social Darwinism was very popular with the robber barons of the McKinley-Gilded Age.  John D. Rockefeller declared in 1900 that “the growth of a large business is merely a survival of the fittest.  It is merely the working of a law of nature and a law of God.”  Little did they care how the strong survive at the expense of the weak.    Charles Darwin (The Origins of Species,1859),  warned us not to use the biological evolution theory as an ethical justification of the right of the strong to trample on society’s weak (Peter Singer, 1999: 70).

               

Today, market fundamentalists have revived the Social Darwinism of the McKinley-Gilded Age.  Milton Friedman himself sanctified business executives’ hubris of greed supremacy and absolved them of any civic and social responsibilities for their actions. He declared (2002: 133): “Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.”  To pass their ideology as economics and business theories, market fundamentalists cite Adam Smith, the laissez-faire economist of the 18th century.  However, nowhere in his 900-page book, The Wealth of  Nations (1776), does Smith even imply that those who harm others in pursuit of personal greed also benefit society.  Today, Adam Smith would castigate government-business collusions, monopolies, corporate executives’ excessive self-compensation and stock frauds, unfair taxes and WAL-MART like exploitation of employees and communities (Anthony Bianco and Wendy Zellen, 2003: 100-110).

               

The Oil Crisis of 1973-75 abruptly ended the Golden Age of the post-World War II era that was characterized by low inflation, low unemployment and high income growth.  American economic and political systems that had already been damaged by the Vietnam War fiasco could not adapt to the sudden four-fold rise in energy costs.  A  stubborn stagflation ensued.  Many Americans suddenly lost their positive views of government and were lured into the illusionary power of the “efficient market.”  Milton Friedman’s economics that had until then been treated merely as a curiosity suddenly came to dominate not only economics and business studies but also studies of law (R.A. Posner, 2003), sociology (J.S. Coleman, 1992: 1-15), political science (Mancur Olson, 1965), and social psychology (J. Thibaut, 1959). In particular, business students are taught the mistaken idea that corporate management is a financial game. Few business schools teach even rudimentary course on manufacturing operations and management-labor relations. Students are taught to treat ordinary employees as disposable costs and to swallow, as the truth,  the ideological assumption that corporations should exist only to reward abstract stockholders. 

               

A case in point is the agency theory (M. Jensen and W. Mckling, 1976: 305-360).  It is based on the illusionary assumption of perfectly efficient stock and labor markets and stockholders’ control of their firms.  As early as in 1932, Berle and Means conclusively showed that stockholders do not own or control the corporations whose shares they buy and sell in the stock markets (Adolf Berle and Gardiner Means, 1932).  Stock markets have become the money-game casinos of extremely shortsighted speculators (Paul Krugman, 2003: 426).  Labor cannot move as freely as assumed by the efficient market hypothesis.  The agency theory and its theoretical cousin, the capital asset pricing model (CAPM) of stock price determination, have reduced the complex behavior of firms into mechanistic, simple and mathematically presentable models. 

 

At best, CAPM measures the average risk-return trade off trends of an industry group of stocks, but cannot tell what investors really want to know – that is unique risk-return trade offs of a specific stock.  Both agency theory and CAPM have been empirically disproved in the real world (Robert Kuttner, 1996: 410).  At best, stock markets may measure a firm’s price, but not its long-term value to society.  Warren Buffett, a billionaire investor, does not believe in agency theory and CAPM and is successfully picking growth stocks ignored by Wall Street.  His three criteria are: management, management, and management of no robber baron CEOs.

               

The agency theory treats professional managers merely as unethical agents who are hired by shareholders.  Wall Street loves the agency theory because it encourages corporations to attempt hostile takeovers of other corporations and CEOs to become obsessed with their stock prices.  The agency theory states that agents cannot be trusted to maximize shareholder value and that corporate raiders of the “undervalued” firms increase the fair market values of the acquired firms.  In reality, as shown by Hewlett-Packard’s acquisition of Compaq, the stocks of the merged firms have mostly fallen after Wall Street’s speculative feeding subsided.  The threats of hostile raiders drive insecure CEOs to pad their stock prices by forgoing investments in research and development (R&D), market development, manufacturing, and human resources, all of which are necessary for the firms’ long-term growth and global competitiveness. 

 

Meanwhile, the agency theory has encouraged CEOs to align their self-compensations with those of their speculative shareholders by making stock options and bonuses a significant portion of their compensation.  President Bush has been steadfastly refusing to treat corporate executives’ stock options as taxable compensations in kind.  Hence, we have witnessed CEOs’ excessive self-compensations and stock frauds at the expense of their employees, suppliers, customers, communities and even shareholders – namely, the long-term growth of their firm (Thomas Kochan, 2002: 139-141).

               

Transaction costs economics (O.E. Williamson, 1975) is another misleading theory.  This theory encourages managers to monitor and control their subordinates to  discourage their “opportunistic and entrepreneurial behavior” and to treat them as disposable costs. In reality, the 21st century is characterized by the fact that capital, technology, and information – the three vital ingredients of economic and corporate growth – are globally moving through cyberspace at the speed of light.  Globally competitive firms have rejected the business models based on the agency theory and the transaction costs theory.  Instead, they have built their adaptive corporate structure and culture by  empowering their managers and employees to  cooperate with one another for “opportunistic” and “innovative” initiatives. A case in point, today, is 

 

As shown by Enron and General Electric, the managers’ financial contributions to their firm’s earnings per share are often monthly ranked and the bottom ten percent performers are yanked out of the firm.  Fears of job loss, mistakes, initiatives and bosses paralyze corporation. Transaction costs paradigms ignore Adam Smith’s warning about the division of labor and controlled employees: “the man whose whole life is spent in performing a few simple operations generally becomes as stupid and ignorant as it is possible for a human creature to become ”(The Wealth of Nations, Book V. Ch.1).

               

Michael Porter’s theory of “five forces framework” has influenced management and marketing courses (Michael Porter, 1980).  Porter argues that companies must compete not only with their competitors but also with their suppliers, customers, employees, and regulators.  Porter’s paradigms of “intrapreneurship” and “Darwinian revolution”  internally pit one division or group against the others and play one manager against the other.  The resultant turf wars discourage sharing vital information, products, and technology across different business units and functions and even among different individuals of the same business unit and function.  Internally divided American firms are being soundly beaten in the U.S. and abroad by their internally cooperative competitors from Japan, South Korea and Europe.    

 

From the 1980’s through today, following the dictum of agency, transaction costs and Porter theories, one American company after another slashed and burned (“downsized”) their employees and suppliers to cut costs and pad their earnings per share.  But downsizing reduced profits, lost customers and suppliers and demoralized the remaining employees.  The firms lost valuable capital of human resources that are vital for maintaining customers and suppliers and for utilizing technological and marketing innovations (The Wall Street Journal, “Call It Dumbsizing,” May 14, 1996). 

               

In the information age of the 21st century, technology and information, rather than capital, have become most important capital that can only be utilized, improved, and accumulated by human beings.  If you shed or demoralize them,  you destroy your technology and information capital.  The competitive edge of  a firm is determined by its  ability to link worldwide product development, manufacturing, supply procurement, R&D and marketing.  Such links can only be maintained and refined by mutually supportive and trusting people.  “Dumbsizing” destroy such vital personal networks of human and social capital.

 

Two Models of Corporation: Model J vs. Model A
 

General Motors, Ford, and Daimler-Chrysler have continued to lose their market shares in their home market of the U.S.  Meanwhile, Toyota, Honda, and Nissan have expanded their market shares and profits in America.  For some years, Toyota’s annual profits have been larger than the profits of Detroit Big Three combined.  General Motors and other profit and stock price maximizers are annually beaten by Toyota and other long-term “value-added maximizers” from Japan (Yoshi Tsurumi and Hiroki Tsurumi, 1985: 29-35).  Toyota’s share value has persistently outperformed  that of General Motors. Toyota’s business model is making better “dollars and cents” sense than Detroit’s “shareholder value mantra.”

 

Repeatedly in recent years, American executives have watched sheepishly as their Japanese competitors took America’s failing plants and unproductive and uncooperative workers and turned them around into rousing successes.  In these increasingly common examples of what I call the “Japanese Paradox,”  all the excuses American executives use to explain their failures – the overvalued dollar, high labor costs, restrictive union work rules and government regulations—are irrelevant.  The Japanese Paradox appeared first in the 1970’s as Zenith, RCA, General Electric, and Motorola abandoned their manufacturing operations in the U.S. and ceded their color television markets to Sony and other Japanese manufacturers (Hiroki Tsurumi and Yoshi Tsurumi, 1980: 583-597).

               

In the most celebrated case of the Japanese Paradox in the  mid-1980’s, Toyota revived a unionized auto plant in California, MUMMI, that had been virtually abandoned by General Motors as “unworkable.”  Toyota pledged that management would cut its own salaries first before rank-and-file employees would be asked to accept temporary concessions during economic downturns.  Because of this pledge, the United Auto Workers (UAW) allowed Toyota to reduce over 26 rigid job categories from the former GM days to four broad classifications, enabling Toyota to empower the workers and install its famed flexible, quick-response and quality-first manufacturing system.  The UAW workers used to resent their former GM executives asking sacrifices of workers that they had no intention of making themselves.  The workers used to respond with absenteeism and shoddy workmanship.

               

Early in the 1990’s, Kodak saw its market dominance outside Japan increasingly eroded by Japan’s Fujifilm.  Kodak charged that Fujifilm was engaged in unfair marketing practices with the help of the Japanese government.  In 1997, the World Trade Organization unanimously absolved Fujifilm of the Kodak charges.  Fujifilm’s business strategy and corporate structure were found more adaptive to the dynamically changing market and technological environment worldwide (Claudia Deutsch, 1997: D 10; Yoshi Tsurumi and Hiroki Tsurumi, 1999: 813-830).

               

For Toyota, Honda, Sony, Canon, Fujifilm and other Japanese firms, their strategic goals are not to maximize their stock prices, but to become the world’s most efficient and innovative provider of whatever products and services they offer. They bring their corporate goals in line with the national interest of their home and foreign host countries.  They refuse to be swayed by the speculative stock traders.  They continue to invest in technological innovations, market development, human resources, and in international trade and investment.  In 2005, Toyota reported a visible dip in earnings because it was investing heavily in international market and product developments.  The Toyota executives  calmly accepted the stock price fall.  Once they become the world leader, profit follows (Akio Morita (Sony), 1986: 309; Robert Shook (Honda), 1988: 238; Steven Spear (Toyota), 2004: 78-86).  Their private goals are made consistent with their social responsibilities for expanding their host nations’ bases of technological innovations, employment and international business.  Their marketing strategy is built on ever more closely linking R&D, supply and distribution chains, manufacturing and marketing on site of the targeted markets to service ever changing their customers’ needs. 

               

There are two distinctly different types of corporations (Douglas McGregor, 1960; Abraham Maslow, 1971; Yoshi Tsurumi, 1976: 333).  Model A firms are represented by General Motors, Enron, General Electric and many American firms that have adopted the management paradigms of  Milton Friedman-led market fundamentalists.  Model J firms are epitomized by Toyota, Sony, Honda, Canon, Fujifilm and other world class firms like Starbucks, Google, and Microsoft.  They have the corporate structure and culture envisaged by McGregor and Maslow.

               

Outwardly both Model J and Model A firms show a triangle  pyramid hierarchy  structure of any formal corporate organization, from the CEO down to rank-and-file employees.  However, Model A corporate culture and management control systems are designed in such a way that an inverted triangle depicts the individual’s paid commitment to the firm’s strategic goal and his paid time horizon for his daily work guide. 

 

The very top echelon of management in both Models A and J is expected to maintain the broadest and longest commitment to the long-range future of the firm.  However, in Model A corporation, as the individual’s hierarchical position in the firm declines, his expected commitment to the firm’s strategic goal and future tapers off markedly.  At the very bottom of Model A firm, the rank-and-file employees are expected to perform pre-designed jobs from one hour to the next.  Corporate executives shift the blame for their management mistakes like misreading market trends to the rank-and-file employees who are laid off.  In contrast, Model J firms cultivate their corporate culture and concomitant management-employee relations so that even the lowest ranked employees maintain the broadest commitment to their firm’s strategic goal and long-term growth.  Model J firms treat all employees as “knowledge and brain” workers.  They are repeatedly trained to improve the quality and productivity of their operations.  Model J CEOs know that their employees’ loyalty and team work matter.   Fujio Mitarai, the CEO of Canon, Japan’s world class manufacturer, has continued to advocate that the mutual loyalty and respect between management and employees is the key to his firm’s continued successes.  Being a transplant manufacturer from Japan in the U.S., Mitarai has put into practice his belief that a world class manufacturer must help expand employment, export, and technological bases of any host country it enters.

 

American executives’ obsession with short-term profits and their cavalier treatment of employees weaken their firm’s global competitiveness.  When a recession befalls GM and other Model A firms, their executives’ primary goal is to protect their cherished profit number and their compensation by cutting their employees, R&D, and investment in manufacturing and market developments.  During the deep recession of 1974-76 triggered by the Oil Crisis, American semiconductor firms protected their budgeted profits by reducing planned investment in employee training, R&D, production facilities, and market development.  When the recession was over, they suddenly noticed that their Japanese competitors had used the downturn to improve their manufacturing, technological and marketing capabilities and were positioned to overtake them.  Similarly, America’s once venerable machine tools manufacturing firms lost out to their Japanese competitors.

               

Their Japanese competitors absorbed the shocks of revenue shortfall, not by cutting employment and supplies, but by reducing dividends, executives’ compensation and perks, managers’ salaries, and eventually an across-the-board cut in the salaries of the rank-and-file.  Recessions are used to retrain surplus people and suppliers so that they will be prepared to produce new products and market them more efficiently once their markets bounce back (The New York Times, “Back to School for Honda Workers,” March 23, 1993).  When Japanese firms need to permanently downsize, they freeze new hiring and  downsize through natural employee attrition.  When they need to further downsize, they buy out employees with a sizable lump-sum severance pay and help outplace them.  At a well-run Model J firms, top-ranked executives and the rank-and-file remain alert to the changing technological and market environment because they all have a stake in their quick adjustment to new competitive situations.

               

Not all Japanese firms are Model J.  After collapsing in 1992, the paralysis of Japanese banks for more than a decade was due to their bureaucratic inertia of Model A.  Their collusion with the ruling political party and the central bureaucracy produced Japan’s crony capitalism.  There are also Model J firms among American and European firms such as Gore Associates in Newark, Delaware (Malcom Gladwell, 2000: 301), Malden Mills in Lawrence, Massachusetts (The New York Times Magazine, 1996),  and Scannia AB of Sweden (H. Thomas Johnson and Anders Broms, 2000: 225).  Starbucks’ founder and CEO, Howard Schultz, has built his organization and culture into a Model J firm (Howard Schultz, 1997: 351). All these firms view their employees as long-term human capital even in an intensely competitive economy.  For example, Harman International still has a deliberate policy of no lay off.  Sidney Harman, the founder, advocates worker empowerment for good morale, quality, and productivity.  Model J organizations are not bound by Japanese culture but by a universally-appreciated culture which treats its managers and employees as most renewable capital and assets.  Japanese and American Model J firms have built their adapting and globally competitive strategy upon the external and internal team works based on the social capital networks of loyal employees, executives, and suppliers.

               

Rather than obsessed with their short-term “bottom line,” executives of Model J firms keep track of balanced performance measurements of financial goals, R&D goals, manufacturing goals, and goals of market competitiveness.  Japanese Model J firms also track the performance goals of their human resources development.  Their financial goals are to improve their 5-year moving average of the value-added of the firms.  Unlike Model A firms’ central command-and-control through explicit rules and management by financial objectives, Model J firms cultivate the shared strategic goals from the top to rank-and-filers and corporate culture of mutual cooperation.

 

Model J organizations and culture (implicit rules of conduct) encourage an adaptive, cooperative, innovative and experimental behavior and mindset.  Model J firms prefer training and promoting their managers from within rather than bringing them in from outside.  Model J firms often provide profit-sharing rewards for their rank-and-file as well. Cooperative and mutually supportive culture nurtures social capital network of human interactions.  Thus, vitally important technology and information capital are readily shared and improved throughout Model J firms’ stakeholders including their external alliance members.  Model J firms are learning organizations that reward dynamic economies of scale of learning by doing among their eco-system members.

 

The Origins of Japanese Model J Firms – They were “Made in America.”
 

The so-called “Japanese Management” is not characterized by such obsolete facades as “lifetime employment,” “seniority-supremacy promotion and staffing,” and “docile company-based labor unions.”  Instead, regardless of their size, the three true traits of Japanese management are: (1) executives’ hands-on management of people, market, and technology to prevent financial tails from wagging corporate dogs; (2) internal and external team works and strategic alliances; and (3) ethical executives who honor a psychological contract of investing in employee and respect their job security and welfare.

 

Until Japan’s defeat in World War II (August 1945), Japanese corporations were dominated by Model A types and by robber baron CEOs.  At home and abroad “things made in Japan” meant shoddy products.  Many CEOs agreed with Shitago Noguchi, the founder of Nippon Nitrogen (established in 1908) and the infamous polluter of natural environment, who told his managers to treat the workers as “cows and horses.”  In the days of Japan’s robber baron capitalism, many CEOs mercilessly exploited their workers (E. Patricia Tsurumi, 1990: 213).

               

However, throughout the 1950’s and 1960’s, one Japanese firm after another consciously restructured their prewar Model A organization and culture to Model J.  One firm after another gave every employee a “salaried” status and bonuses and benefits.  Both management and labor unions lobbied  successfully the government to enact a universal government-administered health care, unemployment insurance, workplace safety, and minimum wages.  Just as Akio Morita of Sony realized, the human resource-based and internally cooperative organization is necessary for rapid growth at home and abroad.  This is why Model J firms are found in Japan and elsewhere among companies striving toward international competition, technological innovation and growth. 

               

Japanese executives first learned about quality- and people-first management from America’s “arsenal of democracy” of the World War II era.  Management and employees were united in their goals of winning the war to preserve America’s democracy.  Management and labor unions developed their cooperative accommodation.  They mass-produced quality products and deliver them promptly to where they were needed.  CEOs were not obsessed with their compensation packages and stock prices.  The Roosevelt Administration prevented private companies from war profiteering which Haliburton and the Carlyle Group – well connected with President Bush – are now exploiting in the Iraq War.

               

In the fall of 1945, two hands-on engineers of the “arsenal of democracy,” Homer Sarasohn and Charles Protzman, were invited to Japan.  Their mission was to revive and restructure Japan’s manufacturing sectors of telephone, telecommunications, and broadcast equipment.  Sarasohn discovered the sorry state of Japan’s manufacturing industries, which were plagued by a lack of quality consciousness, low employee morale, and incompetent management.  When the start-up problems were brought under control, Sarasohn teamed up with Protzman in 1948 to design and teach intensive management training seminars, the Civil Communication Section (CCS) Management Seminar (Toshio Goto, 1999: 499).

               

From 1949 to 1950, Sarasohn and Protzman gave a series of intensive eight-week courses for top executives, engineers, and academics on management and product quality control.  They wrote a 600-page text book for their seminar.  Afterward, CCS seminar graduates took turns conducting seminars for others over the next 25 years.  By 1974, over 5,200 had attended the seminar.  The graduates taught CCS lessons to their colleagues who further disseminated the CCS lessons widely inside and outside their firms and schools.

               

Meanwhile, CCS seminar attendants were eagerly embracing many institutional reforms of “democratizing Japan,” ranging from the dissolution of the prewar Zaibatsu combines, and the general purge of wartime business executives, government officials, and politicians, to the legalization of labor unions.  The dissolution of Zaibatsu destroyed the centralized control of each Zaibatsu headquarters over its membership firms.  The general purge swept away those executives who had come from the legal, financial, and government relations fields.  For each corporation, Sarasohn made sure that people well versed in manufacturing operations, technologies and sales would fill CEO and other top management ranks.  This was the beginning of the postwar “Japanese management system” characterized by hands-on executives, team works, and management-employee joint moral ownership of their corporation.  Management would not shift the blame for management mistakes and sudden economic shocks to summary layoffs of the rank-and-file.  This psychological contract between management and employees became the foundation of emerging Model J firms.

               

Sarasohn defined leadership as an act of self-sacrifice and the ability to secure the faith and respect of his workers.  He taught that a leader must himself be the finest example of what he would like to see in his followers.  The goals of contributing to the national interest as well as to democracy are taught as necessary leadership qualities.  A leader could gain his workers’ support simply by being loyal to them.  Sarasohn stressed the importance of consultation between management and employees.  Building employee morale and making effective policies require a constant process of education.  He also taught the social responsibility of a firm and its executives.  He recalled in 1989: “I asked CCS seminar participants what the raison d’etre of their firm was.  Nobody was able to answer this question.  I told them that profits or sales could not possibly be their raison d’etre.  Chasing greedily profits is a low level goal and does not permit them to stay with a changing world.  Such greed would merely invite the general public’s wrath” (The Pacific Basin Quarterly, No. 16, 1990: 1-5).

 

Sarasohn’s views of management leadership and the raison d’etre of private corporations struck a responsive chord in his Japanese students, who were reminded of Japanese “Bushido” – noblesse oblige and the ethical codes (public accountability) of conduct of feudal samurai (warriors) – that guided business and government leaders of the Meiji Era, 1868 – 1911.  They propelled Japan from a weak, feudal country into an industrial and modern power in Asia.

 

After World War II, Japan’s “captains of industry” fortified Sarasohn’s management values with Japanese Bushido values of public services.  They reshaped their business structures and strategies on Model J models.  This way, they rebuilt Japan’s war-torn economy and produced the postwar “miracle” of building up a world class power center of manufacturing and technological innovations.  They contributed to transforming the past Imperial Japan into political, economic, and social democracy.  At present, the Japanese economy is finally showing a solid rebirth by cleaning up 12 year debris of financial bubbles and their bursting aftermath.  The excesses of financial bubbles of the 1980’s seem to have taught the Japanese bitter lesson that the financial game economy of crony capitalism breeds the culture of corruption and wrecks the nation.

 

Conclusions: Restoring True Business Ethics and Manufacturing Culture of America

 

Business students and executives must be taught that management is not a pseudo-science of financial games devoid of humanity.  They must be taught that real business ethics is a truly effective business and civic leadership.  It is characterized by high purpose, honesty, compassion (noblesse oblige), honor, sincerity, self-sacrifice, and moral courage.  The true business ethics is not a mere compliance with laws.  It is not the governance mechanics of corporations.  Its true leadership is defined by Japanese and American Model J firms in America.  Model J firms’ raison d’etre is not to maximize their short-term profits at the expenses of their employees and communities.  As shown by Toyota vs. General Motors competition in America, profits follow Toyota and shuns General Motors.  This is because their customers value more highly Model J Toyota’s products and customer services than General Motors (Model A).  Contrary to market fundamentalists’ misguided teaching, the financial successes of Model J firms in America teach us that it makes “dollars and cents” sense for private businesses to embrace Model J  business strategies and structures.

 

To regain the global competitiveness of the economy, the U.S. needs to stop shedding its manufacturing activities and employment.  This requires the U.S. government and business to abandon the three prevalent myths about America’s unemployment situations (Louis Uchitelle, 2006: 283).  First, people who are ejected by one firm/industry will be absorbed by another growing firms/industries.  Second, job training and education will solve the unemployment problems.  Third, job losers’ trauma and their social costs are temporary and do not affect adversely the global competitiveness of the U.S. economy.

 

It is not a coincidence that Japanese and American Model J firms are globally competitive manufacturing firms and high-tech information technology firms.  This is because their success of relentless product,  technological and marketing innovations require internal and external team works and alliances that can only be sustained by mutually supporting networks of human and social capital.   For example, Toyota’s famed flexible total quality system of manufacturing and marketing can only be anchored on Model J corporate structures and culture.

 

America’s market fundamentalism has been gutting her high-skill manufacturing and services activities at home.  This has caused the jobless recovery, the chronic and bulging trade deficits and foreign debts, households’ rising debits, and the resultant widening income and wealth gaps (a Latinization of America).  These American problems are hurting the global competitiveness of the U.S. economy.

 

The global competitiveness of a nation can only be sustained by a nation’s expansion of physical capital, technological capital, human capital and by social capital of the growing interconnected civic society (Robert D. Putnam, 2000: 541).  Sam Walton, the founder of Wal-Mart, at lease maintained the public relations appearance of supporting things made in America.  After his death, his sons and daughters and successors have transformed Wal-Mart into today’s monopsonistic behemoth that is maximizing its own short-term profits at the expenses of jobs and social costs of the communities it operates in.  It is CEOs’ personal values, not market fundamentalist theories, that determine a nation’s democracy and economic wealth.

 

The global competitiveness requires the U.S. to restore her manufacturing culture and activities.  The manufacturing operations and scientific and technological innovations have disappeared from American business education that is dominated by market fundamentalists’ harmful dogma.  The misguided economic and taxation policies of the Bush Administration are pushing even world class firms to outsource prematurely their manufacturing operations.  Once lost, manufacturing culture and operations are difficult to be restored.  Hewlett-Packard, a leading high technology innovator, often shuns making their innovative products and instead has them made by Japanese manufacturers.  Hewlett-Packard that is swayed by the Wall Street casino helps Japanese create high technology employment through increased exports to the U.S. and elsewhere.  No wonder that the U.S. has become the net importer of even the high technology products that she invents.  The U.S. continues to suffer rising trade deficits that drag the economy and eliminate quality jobs.

 

In July 2006, Toyota decided to build its new plant of mini-SUVs in Ontario, Canada and passed up hundreds of millions of dollars of incentives offered by America’s southern states.  Toyota chose Canada for its superior quality of public education (worker quality) and a national health insurance system.  The latter eliminates private firms’ burdens of the health benefits of executives and workers alike.  And the national health insurance has made Canada less divisive socially and economically. This permits Toyota to install its famed flexible and total quality manufacturing system (Just-in-Time) on a Model J cooperative business model.  Meanwhile, General Motors has many retirees in America and is saddled with $1,500 per car costs of its private health benefits for its employees as opposed to $200 per car health benefit costs for Toyota.   In 2005, seniors in American high schools scored below the average of 21 industrialized countries in general knowledge of mathematics and science.  In advanced mathematics and science, American high school seniors were on the bottom.  Meanwhile, obsessed ideologically to reject the stem cell research and to ignore the global warming, the Bush Administration has been severely restricting a wide range of basic scientific researches (Michael Spectre, 2006: 58-69).  In 2004, China and India graduated 600,000 and 350,000 engineers respectively.  America only graduated 70,000 engineers. 

 

From macro economy to taxation, science, education, international trade and health care, the policies of the Bush Administration are tantamount to the “unilateral economic disarmament.”  America needs to reject the “New Gilded Age” dogma of the Bush Administration and market fundamentalism.  Otherwise, America’s political, technological, economic, and even military leadership in the world will be increasingly lost.

 

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