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CHAPTER 1
Introduction and Chapter Outline
NATIONAL AND REGIONAL experiences of rapid growth that lack easy explanations are often casually ascribed to divine intervention. Over two dozen national and regional experiences of rapid growth lacking explanation have been dubbed "miracles." These so-called miracles are unexpected and outside the scope of the conventional market-centric economic paradigm. This book brings several such purported miracles back to earth. It offers an explanation in terms of a production-centric paradigm anchored by fundamental principles of production and business organization. The capability triad is the primary organizing concept. The claim is that we can learn about how capitalist economies function and malfunction from examining cases of rapid growth. The lesson is that there is no divine intervention, just a man-made conjunction of capabilities.
The Capability Triad Thesis: The Argument in Brief
In 1939 the US Army Air Corps had an inventory of 2,500 airplanes. On May 16, 1940, with the fall of France imminent, President Franklin Delano Roosevelt addressed Congress asking for appropriations to increase production, including a request for 50,000 planes within three years. Eighteen months later, the newly designated US Army Air Force still had only 3,304 combat aircraft (Tate 1998). Within four years aircraft production overall totaled 100,000 planes. The American production "miracle" was not limited to aircraft. Between 1935–39 and 1944, US munitions production increased 140 times versus 7 times in Germany, and national output nearly doubled. Over the same period, the nation's labor supply available for production declined by the nearly 12 million men and women, who were absorbed into the armed forces.
What makes the experience interesting is that it involved the crafting and enactment of a development policy that successfully transformed the nation's industrial structure and doubled output in half a decade. New industries were built and others reorganized according to more advanced principles of production and organization. It was a period of unprecedented government investment in research and development (R&D), but an R&D that interfaced with production engineering in companies to develop new productive structures and scale new production processes. The diffusion of innovation processes inside and outside enterprises combined to drive the rapid growth of the American economy.
Conventional economic policymaking was suspended during World War II. Prices were frozen, and macromonetary policies were subordinated to policies geared to the development and diffusion of production capabilities in the nation's business enterprises. Special-purpose "mobilization" agencies were constructed to design and operationalize productive structures to achieve the production goals outlined in the president's vision of an "Arsenal of Democracy."
The policy focus on production capabilities and business organization takes us into uncharted territory with respect to the mainstream economics of policymaking. For example, the World War II policy focus was on the transformation of the nation's production system and the creation of a new set of productive structures to meet the president's output targets. Organizational change and technological innovation were the only means of increasing productivity at a time when increasing numbers of workers were being transferred into the armed forces.
A development policy strategy and a governance structure were designed to organize entrepreneurial activity into a force driving national growth and economic transformation. Here the government was the organizer, and business was strategically reorganized to drive the transformation of production. What were the implications for economic theory, education, and policymaking? They take us beyond the standard paradigm to an emergent political economy framework in which production, enterprise, and governance are systemically interconnected.
The standard paradigm is theoretically rigorous, but its failure to account for the drivers, processes, and enablers of transformative experiences illustrates the limits of the a priori principles to address complex interactive processes in real-world economies. The role of historical experiences as a tool for theory construction and paradigm development signals a methodological divide between the standard equilibrium and the alternative systemic approach to economics and economic inquiry.
This book advances a production-centric economics paradigm that is constructed from an examination of real-world transformative experiences applying systemic observation rather than a priori reasoning to discover economic principles. The historical chapters serve as real-world laboratories for investigating patterns of change and characterizing deep structural principles of production and organization.
The historical case studies do not start from a blank page. They build on earlier work in which I characterized examinations of successful transitions in industrial leadership and economic transformative experiences in terms of a capability triad:
Rapid growth involves coordinated organizational changes in each of three domains: the business model, production capabilities, and skill formation. The three domains are not separable and additive components of growth, but mutually interdependent sub-systems of a single developmental process. No one of the three elements of the Capability Triad can contribute to growth independently of mutual adjustment processes involving all three elements. (Best 2000, 56)
Figure 1.1 visualizes this interconnectedness. This book applies and extends the thesis with new case studies and a chronologically organized supportive account of the major theoretical contributors to an emergent economics in which production and business capability development are the critical dimensions of variation and integral to transformative policy frameworks.
The interconnectedness theme has important implications. Policies that address production capability, enterprise growth, and skill formation separately and in isolation will not be successful. As noted, a requirement for transformative policies is that they be seamlessly blended into the detailed mechanics of organizational change within private firms, as investigation of the alleged economic miracles shows. The instruments are not subsidies and taxes to nudge and tweak business behavior but the provision of capability development services by infrastructural agencies outside the firms. Key, too, is the incorporation of business leaders, scientists, and technology experts in the structure of economic governance and their conversion to the desirability of the transformative objectives. When firms, regions, and nations become stuck in low-productivity capability triads, the government may be the only institution that can coordinate and orchestrate holistic organizational change cutting across the three domains.
Furthermore, although enterprise development and economic governance are bound together, they are indirectly mediated by infrastructural institutions in successful transformative experiences. The policymaking spectrum extends to linking developmental infrastructures in ways that advance change within and across mutually adjusting enterprises. The term "economic governance" calls attention to ways in which financial, science and technology, and educational infrastructures can be strategically unified to foster enterprise innovation and cluster dynamic processes at both regional and national levels.
The term "economic governance" is paradigm-specific. From a market-centric perspective it is about regulating transactions not covered by detailed contracts or problems in rule enforcement. In the wake of the financial, fiscal, and economic crises that began in 2008, the EU defines economic governance in terms of "coordination and surveillance of both fiscal and macroeconomic policies and the setting-up of a framework for the management of financial crises." In the production-centric paradigm, economic governance is understood in terms of infrastructural institutions and organizations that galvanize capability triad innovation dynamics.
The policymaking goals go beyond standard macroeconomic stabilization targets to, for example, organize and link developmental infrastructures and processes of change to reduce regional imbalances; transition from declining to new industrial sectors; establish entirely new sectors, as in the United States during World War II; or create and grow the entrepreneurial engines and the cluster dynamic processes required to drive the transition to a post–fossil fuel economy.
The capability triad is a better way to understand how crises can be overcome and robust growth achieved. It is a way to understand how real people react (or do not react) to crises and challenges. Quantitative economic analysis starts with a fixed model (or representation) of the economy as it is today and was in the past. It feeds in anticipated changes in the domestic and international policy environments and examines the impacts of such changes where the structure of the economy is often treated as effectively frozen in time.
It is possible, but not likely, that the transformative experiences described in this book can be interpreted by the economist's standard quantitative models, but despite an abundance of research, not much progress has been made. The alternative production-centric economics paradigm goes some distance toward conceptualizing the otherwise missing production side of the economy, toward capturing the interdependencies of production capabilities, business organization, and economic governance in real-world economies and thereby toward explaining the success stories and addressing the challenge of designing and executing transformative policy frameworks. These are the claims that the book seeks to substantiate.
The paradigmatic differences go beyond a difference in the axioms to the relationship between models and complexity. The methodological approach that unites all the theorists I associate with the alternative paradigm is the priority given to observation, including case studies and empirical research, as a means of making sense of the complex relationships, institutional structures, and innovation processes of a capitalist economy. Each of the historical experiences examined in the chapters that follow is treated as a real-world laboratory for investigating and characterizing relationships, processes, and institutional forms by which principles and generalizations can be drawn for crafting policy frameworks. Each experience tells us more and subjects previous findings to review.
This research methodology creates a dilemma in terms of presentation. Which comes first, real-world case studies or the conceptual framework used in their interpretation? As noted, systemic observations influence the design of the economics framework, just as observations are chosen, interpreted, compared, and reinterpreted through it. Real-world investigative research and the development of theoretical concepts combine to derive general principles and craft terms by which we observe and make sense of the complexities of capitalist economies. With this methodological caveat in mind, two real-world transformative experiences are chronicled in chapters 2 and 3 before turning to an account of the major contributors to the alternative production-centric theoretical framework in chapter 4. Chapters 5, 6, 7, and 8 apply the capability triad to the postwar economic development experiences of Germany, the United Kingdom, Ireland, Japan, and China; chapter 9 examines changes in the strategic external context for US policymaking with the success of Japan and China's export-led growth strategies. In each case, cross-country comparisons of productive structures and economic systems are used to elucidate economic governance dimensions of the production-centric paradigm.
We now turn to a brief synopsis of the chapters that follow to map the journey by which the real-world analyses and conceptual frame evolve symbiotically together. The goal is to inform policy deliberations at regional and national levels with an economics that accounts for the fundamental principles of production and business organization that underlie competitive advantage in the global marketplace.
America's Arsenal of Democracy
In chapter 2 the strategic transformation of the American production system during World War II is examined. President Franklin Delano Roosevelt's vision was to use economic power to build an Arsenal of Democracy that would help the Allies to win the war. The wartime experience serves as an extraordinary but rarely examined laboratory that permits research into the economics and governance of production.
Economic histories that focus mainly on the Federal Reserve Bank and the Treasury obscure the agencies, programs, and policies by which the nation's industrial performance advanced by orders of magnitude. Both fiscal and monetary policies were involved, but they were subservient to the transformation of the nation's productive structures.
Two agencies, among others, pioneered new methods of economic policymaking. The War Production Board (WPB) focused on the measurement, coordination, and transformation of production. Simon Kuznets, chief economist at the WPB, was the author of the Victory Program, by which economic and military strategies were coordinated. The Office of Scientific Research and Development (OSRD), at the center of science and technology policymaking, was led by Vannevar Bush, the institutional architect behind the creation of America's organizational capability to design, develop, and produce advanced-technology weapons systems. These two agencies, in effect, combined to enact a national economic development strategy to integrate mass production with technological innovation. Kuznets was awarded the third Nobel Prize in economics; Bush's Science: The Endless Frontier was the foundation stone for what became America's postwar science and technology infrastructure. Together, these two agencies undertook complementary policies that transformed the industrial innovation system and empowered the wartime and postwar growth of the American economy.
Implementation was led by production and business leaders immersed in the process engineering practices for applying the synchronization principle of mass-production, innovative programs to introduce participatory management practices in the workplace, and the economic governance innovations of the multidivisional enterprise. It is within this organizationally interconnected structure that a major shift in production performance was achieved and new permanent industrial planning relationships linking government, business, and universities were institutionalized.
Greater Boston: A Manufactory of Sectors
Chapter 3 turns to postwar Greater Boston as a real-world laboratory to characterize the origins and complementarity of the productive infrastructures that define the region's industrial innovation system. Business enterprises in Massachusetts do not and never have concentrated on mass production. Nor have they been recognized for process engineering of high-volume assembly production processes. The region has few Fortune 500 companies, yet it leads the nation in R&D, and it has both created and lost more industrial sectors than anywhere in the world. The Massachusetts high-tech economy has the characteristics of an industrial experimental laboratory in which business enterprises, individually and collectively, are organized to pursue strategic advantage based on global leadership in early-stage technology development and rapid new business growth.
The critical input for making these claims is a historical data set of economic information for real companies that includes for each its date of founding, location, employment, and products. Official data are of little help for two reasons. First, the companies are anonymous and ahistorical, and second, the classification categories lack the granularity required to capture changes in enterprise differentiation and patterns of specialization. Critical to the latter are product data screened by an engineering-based taxonomy without which the activities performed by small- and medium-sized companies in a region remain hidden.
The research included the construction of a longitudinal company and product database organized around a finely grained, technology-informed taxonomy. It offers an alternative to the market-centric paradigm that holds technology and product definition constant and allows prices and quantities to adjust. The alternative accounts for the opposite. Firms compete by establishing a distinctive capability to develop new products and improve performance.
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Excerpted from "How Growth Really Happens"
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