From Riches to Rags at a Time of Pros per ity:

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2 ii From Riches to Rags at a Time of Pros per ity: Hope ful Observations for a Troubled Republic Frederick M. Zimmerman Uni ver sity of St. Thomas St. Paul, Min ne sota

3 From Riches to Rags at a Time of Prosperity iii Copyright Information From Riches to Rags at a Time of Pros per ity: Hope ful Ob ser va tions for a Trou bled Re pub lic is copy - righted by the au thor Fred er ick M. Zimmerman. Per mis sion is made avail able for sin gle copy ing for any one quo ta tion or class room use. If there are ques - tion, the au thor can be con tacted at or at zimco@visi.com. The ISBN Number is Frederick M. Zimmerman Lloyds Drive Minnetonka, Min ne sota July 25, 2011

4 iv Dedicated to Joanell Eleanor Felker Zimmerman Fred er ick Josef Zimmerman Carita Michelle Zimmerman Chris tina Joanell Zimmerman Brigitte Aimee Zimmerman Hans An thony Zimmerman and all of the peo ple who have tried to do their best in clud ing Michael Naughton, Clar ence Shallbetter, Tom and Libby Hor ner, Fred and Nora Wag ner, Tom Ippoliti, John and Judy Ad ams, Bill Kuban, Dan Berdass, Tom and Joyce Schlough, Orville Free man, Bernie Brommer, Curt Zellers, David Hann, Tom and Pat Daly, Sis ter Generose of St. Mary's Hos pi tal at the Mayo Clinic Bob Olson, Steve Evenson, Thomas Bower, John Boyle, George and Vir ginia Gleeson, John Povolny, Everett Chap man, Steve St. Mar tin, Drs. John Cich and Su san Sencer, Fa ther Dease and the fac ulty mem bers of the en gi neer ing, chem is try, math e mat ics, his tory, and the ol ogy de part ments of the Uni ver sity of St. Thomas.

5 From Riches to Rags at a Time of Prosperity v About the Author Dr. Fred Zimmerman started as a Field En gi neer with IBM in 1955 then spent more than 25 years in in dus - try as an en gi neer, man ager, vice pres i dent and pres i dent pri mar ily with three com puter com pa nies; IBM, Con trol Data, and Na tional Com puter Sys tems (NCS Pearson). Over more than a forty year pe riod, he has worked on many trou bled sit u a tions with com pa nies and or ga ni za tions and has served on the boards of di - rec tors of 14 cor po ra tions. In 1985, he joined the en gi neer ing and man age ment fac ulty of the Uni ver sity of St. Thomas in St. Paul, Min ne sota. Dr. Zimmerman re tired as a Pro fes sor of En gi neer ing and Man age ment at the Uni ver sity of St. Thomas in De cem ber of 2005 and cur rently holds the rank of Pro fes sor Emer i tus. Dur ing his twenty-five year as so ci a - tion with the Uni ver sity of St. Thomas, Dr. Zimmerman served as En gi neer ing Pro gram Di rec tor, En gi - neer ing De part ment Chair, Mem ber of the Com mit tee of Deans, and full Pro fes sor. When he re tired at the end of 2005, he was awarded the Uni ver sity's high est ac a demic award, the Uni ver sity of St. Thomas Dis - tin guished Ser vice Award. For many years, he taught both en gi neer ing and man age ment classes, mostly at the grad u ate level. He has also taught at Universidad Catolica in Mon te vi deo, Uru guay and at the Czech Man age ment Cen ter in Celokovice, Czech Re pub lic, the Uni ver sity of Pitts burgh, and the Uni ver sity of Min ne sota where he also served as a visiting scholar at the Humphrey In sti tute of Pub lic Af fairs. Dr. Zimmerman is a fre quent in for ma tional source to the me dia on in dus trial is sues. He is the au thor of nu - mer ous pro fes sional and tech ni cal ar ti cles plus the book The Turn around Ex pe ri ence: Real World Les sons In Re vi tal iz ing Cor po ra tions which was ini tially pub lished by McGraw-Hill in 1991 and re pub lished as a Kin dle pub li ca tion in His re search manu scripts, Mea sure ment of the In dus trial Econ omy, The Re lo - ca tion Of In dus try, and The Sta tus of Man u fac tur ing in Min ne sota were pub lished by the St. Thomas Tech - nol ogy Press. His book, Man u fac tur ing Works: The Vi tal Link Be tween Pro duc tion and Pros per ity is co-authored with the dis tin guished jour nal ist Dave Beal and pub lished by Dear born Trade Press in Dr. Zimmerman has been a fre quent ad vi sor to me dia staff and pub lic of fi cials on man a ge rial prac tices and the sta tus of the in dus trial econ omy in the United States. Dr. Zimmerman re sides in Minnetonka, Min ne sota with his wife, Joanell. The Zimmermans have five chil - dren and have housed more than ninety fos ter chil dren.

6 vi Ta ble of Con tents Dedicated to...iv About the Au thor...v Ac knowl edg ments...viii Introduction...1 Historical Perceptions of the Good Company 2 Part Two The Econ omy 17 U.S. Econ omy Ham pered by a Lack of Pro duc ers...18 Pros per ity: Pre pare to en coun ter pos ter ity...20 Trade def i cits en dan ger our fu ture...22 Econ omy shares sim i lar i ties with the side shows of old...24 Whose pro duc tiv ity?...26 Qual ity and eco nomic self-in ter est...28 NWA woes will rip ple through MN econ omy...30 Look to tech nol ogy for the long-term fix...31 We have a stake in De troit Three's woes...33 Part Three The Stock Mar ket 35 Fundamentally less monkey business...36 In fat u a tion with tech nol ogy stocks just the lat est in a long se ries of fads...38 Pop u lar is n t al ways pru dent...40 Share hold ers should look again at Honeywell buyout...42 What were we think ing?...44 Take a harder look at pred a tory in vest ing...46 Part Four Manufacturing 49 Ex pand ing the city through man u fac tur ing...51 Reexamining the Cost of Labor...53 Man u fac tur ing: the vi tal cog in state s econ omy...54 Man u fac tur ing Def i cits...56 Man u fac tur ing is the key to wel fare re form...58 Fill ing the need for com pet i tors...59 How to make Min ne sota a maker...61 Part Five Man age ment 63 Mod est over head key to cor po rate suc cess...64 Much trea sure was lost when Con trol Data was saved...66 Com pa nies with real strat e gies ex pe ri ence real re sults...68 Worry but don t or ga nize...70 Dis turb ing Dis par i ties...72 Serv ing as a Di rec tor of a Man u fac tur ing Com pany: 10 Prin ci ples of Suc cess...74 Some mod est, and not-so-mod est, exec pay com par i sons...76 Ex ec u tive ra tio nal iza tion gets in the way of eth i cal con duct...78 Is your boss gen u ine or syn thetic?...79 Man age ment by get ting out of the way...81 Fair play in com pen sa tion game...83 Fill ing the need for com pet i tors...85 His tory teaches what's best in a leader...87 Deere thrives by val ues oth ers just claim...89 Part Six Ed u ca tion 91 Re--en gi neer ing Could Aid Stalled Bud get Pro cess...92 Ed u ca tion sys tem gets fail ing marks...93

7 From Riches to Rags at a Time of Prosperity vii How to cut col lege costs? Easy as Pi...95 Let's make ed u ca tion a class act...98 Boosting quality and productivity not impossible Ed u ca tion as an En deavor Can it be Better? Part Seven Pub lic Pol icy 109 Carl the Worker Na tion has squan dered the pros per ity of ev ery one Ris ing Over head is De stroy ing US Stan dard of Liv ing Mis guided pol i cies cause stag nat ing wages Any di ver sion of tax re ceipts should be equal Hos tile Take overs: are we aware of the costs Trade with China should be de vel oped in ways that give Amer i cans op por tu nity Re stor ing the Bal ance Sports teams aren't worth the cost Jobwise, we're all in this to gether Cognitive dissonance Pull ing to gether or pull ing apart? Fundamentally less monkey business Hardly Work ing What the wolves have wrought Less squab bling, more solv ing Sac ri fice, ef fi ciency needed for Min ne sota Is it, 'GM, Ford and fall on our sword?' GM-UAW pact may be just the be gin ning That money is wash ing away Are we re ally worth what we're be ing paid? Europe's Protests offer lesson to Minnesota, US Does Health Care Cost Re duce Em ploy ment? Busi ness fo rum: Fed's bet on hous ing cause for alarm Part Eight Will Real Lead er ship Emerge? 163 Chap ter 14 Real or Il lu sory Lead er ship?...164

8 viii Acknowledgments The pro ject of From Riches to Rags at a time of Pros per ity: Hope ful Ob ser va tions for a Trou bled Re pub lic was more than twenty years in the mak ing and could not have been com pleted with out the meaningful con - tri bu tions of many ded i cated peo ple. It will be very hard to ad e quately thank all who have con trib uted to this work. The many vis its with fac tory work ers, man ag ers, share hold ers, pub lic of fi cials, jour nal ists, clergy, jan i tors, and so many other im por tant and in ter ested cit i zens have framed the ba sic ideas ex pressed herein. My role was merely that of a scribe, a re corder of ideas better than my own. First and fore most were the con tri bu tions of Joanell, my dear spouse and part ner for the past 49 years. Joanell is a so cial worker by pro fes sion and dis tin guished prac ti tio ner in her own right, with her mas ter's de gree and her ex pe ri ence of hous ing more than 90 fos ter chil dren in our home. Her ob ser va tions always pro vided a prac ti cal earth-bound per spec tive on im por tant vari ables to con sider when dis cuss ing busi ness pol icy, ed u ca tion, pub lic pol icy, and even the con struc tive role of man u fac tur ing in pro vid ing em ploy ment for the na tion's cit i zens. Our five chil dren have helped as well; dis tin guished schol ars and busi ness prac ti tio ners in their own right, they have added the use ful per spec tive of in ter na tional ex pe ri ence by liv ing in Ar gen tina, Aus tria, Fin land, Togo, Ger many, the Neth er lands, and Ma lawi. Per haps the most ex ten sive grav i ta tional force was ex erted on this doc u ment when our youn gest daugh ter, Brigitte, used one of my ar ti cles as an ex am ple of "unobjective opin ion ated writ ing" in one of her pub lic pol icy courses at Stan ford. I was glad that at the end of her cri tique she at least said that she "agreed with a few points in the ar ti cle." Var i ous ed i tors at McGraw-Hill, CityBusiness, Pre ci sion Man u fac tur ing, and other pub lish ers worked hard to cor rect my sub mis sions and im prove what is writ ten here. Im par tic u larly in debted to John Oslund at the Min ne ap o lis StarTribune, who not only ed ited the ma jor ity of the ar ti cles in cluded in this book, was also kind enough to pro vide me with an elec tronic ver sion of ar ti cles writ ten so many years ago. Ed i tors Mar i lyn Maghee and Carmen Peota of the St. Thomas Tech nol ogy Press and Jim Winterer of the St. Thomas External Affairs staff were also instrumental in formulating research material that provided substance for pub lished ar ti cles. I do owe a spe cial thanks to my friends from the press and me dia corps; Gary Eichten and Bill Catlin of Min ne sota Pub lic Ra dio, Dave Beal from the Pi o neer Press, Dee DePass, Mike Meyers, Neal St. An thony from the StarTribune, Sam Black and oth ers from The Busi ness Jour nal, as well as peo ple from the Wall Street Jour nal, New York Times, At lanta Jour nal-con sti tu tion, and many other pa pers, TV sta tions, ra dio sta tions, and other me dia out lets through out the coun try. The es sen tial and valu able role played by jour nal - ists in or derly so ci et ies is ex em pli fied by these won der ful peo ple. I also thank my long-term friends in the man u fac tur ing com mu nity; Bill Kuban of Kurt Man u fac tur ing, Dan and Fred Berdass of Bermo, Fred and Paul Wag ner of Min ne sota Wire, Tom and Joyce Schlough of Park In dus tries, and the many of fi cers and work ers of Winnebago in dus tries for their in sights, guid ance and con sul ta tion. I am also in debted Charles Ar nold of the Min ne sota Pre ci sion Man u fac tur ers As so ci a tion and all of its mem bers. I am also grate ful for the sig nif i cant en cour age ment and sa lient in sights re ceived from busi ness as so ci ates -- par tic u larly some of the peo ple who also served on the boards of di rec tors of the com pa nies where I was priv i leged to serve. Work ers were also help ful in that they al ways added both re al ism and ad di tional in for - ma tion that uni formly en riched any se ri ous anal y sis of ma jor in dus trial ques tions. In this re gard, I am par - tic u larly in debted to the many con tri bu tions of the pro duc tion em ploy ees of Winnebago In dus tries. My hard work ing colleagues from the Uni ver sity of St. Thomas en gi neer ing, chem is try, the ol ogy, his tory, and math e mat ics de part ments were also help ful be yond mea sure. Our lunch time dis cus sions were of ten the most use ful seg ment of my work days -- far more pro duc tive than the fac ulty meet ings. But, as use ful and the in for mal ses sions with other col leagues were, I be lieve that I learned even more from our stu dents. The stu dents at St. Thomas were hard work ing, re spon si ble, inquiring, and cre ative. Over the course of my twenty-one years at St. Thomas, I learned a great deal from our stu dents. Among these help ful col leagues were the ex ceed ingly help ful li brar i ans who were al ways ea ger to help our fac ulty mem bers pur sue what might be re garded as "weird ques tions.'" Erik Kallas, Earl Belisle, Jan Orf,

9 From Riches to Rags at a Time of Prosperity ix Su san Price, and many oth ers at both St. Thomas and the Uni ver sity of Min ne sota helped to gather much of the ma te rial that is chron i cled in this manu script. Li brar i ans, weld ers, and machinists are great peo ple. Then there are our old friends; Clar ence Shallbetter, John and Judy Ad ams, George and Vir ginia Gleeson, Tom and Pat Daly, and many oth ers with whom we have had se ri ous dis cus sions of pub lic pol icy dat ing back to the Ei sen hower ad min is tra tion. These friends have pro vided us with in nu mer a ble im por tant in - sights. God bless them all. The pic ture of the front cover was painted by the author's aunt, Bernice Soldat of Attleboro, Mas sa chu setts, who was born in And, I be lieve I need to men tion, again, my thanks to my won der ful wife Joanell for her pa tient tol er ance of the time it has taken to com plete the back ground re search for these and other manu scripts. She has been a true col lab o ra tor. Her wis dom and keen in sights have added much to strengthen these ar ti cles.

10 From Riches to Rags at a Time of Prosperity 1 Introduction The United States is a won der ful coun try with an enor mous po ten tial to bring good will, pros per ity, health, and peace to its cit i zens and the rest of the world. In this sense, the au thor is op ti mis tic. But, I also have the feel ing that we are ne glect ing some im por tant les sons of the past, that we are too spec u la tive, and that we are ig nor ing the last ing prin ci ples of ba sic arith me tic and sound phi los o phy in our day-to-day deal ings in busi ness, the econ omy, and the work ings of gov ern ment. I would like to see things im prove and I be lieve things could be better. But, im prove ment is of ten a re - source based ques tion. How are we go ing to im prove if our schools are weak, our sav ings for the fu ture are neg li gi ble, our in vest ments are mi nus cule and of ten ori ented to en ter tain ment rather than to worth while pro jects which might im prove our sit u a tions in en ergy, en vi ron men tal pro tec tion, health, trans por ta tion and the or derly con duct of hu man af fairs? This manu script is not par ti san. The so lu tions to the prob lems we face do not fit neatly into any one po lit i - cal camp. In or der to make prog ress on the press ing prob lems be fore us, we will need a new un bi ased per - spec tives based on more ex ten sive ob ser va tion and sound anal y sis. The last thing we need is for lead ers to in ter pret world events seek ing re in force ment of what they said in their last speech. The world re quires, and the world will soon de mand, far more ob jec tive anal y ses of what we are do ing, where we stand, and the prob a bil ity of im prove ment given the meth ods we are us ing. Should those of us in lead er ship fail to pro - vide those valu able in sights, the world will de prive us of our lead er ship role. Then the fu ture will be even more un pre dict able be cause vi o lent dis sat is fac tion with the way things are does not al ways pro duce a clear pre scrip tion for what things will be ef fec tive in the fu ture. The ma te rial pre sented here is a se ries of es says and other pa pers writ ten over a twenty-year pe riod. Very few of the thoughts pre sented here are orig i nal with the au thor. They re sult from the worth while ex po sure to work ers, man ag ers, share hold ers, pub lic of fi cials, jour nal ists, clergy, jan i tors, and a huge as sort ment of or di nary em ploy ees. The es says and ar ti cles pre sented were writ ten in re sponse to these ex po sures. I am grate ful to all who con trib uted to these works. The ti tle, From Riches to Rags at a Time of Pros per ity, was pur posely cho sen. There is still time for us to mod ify our be hav ior. But, if we mis read or ig nore world events, we will be poorer. The United States is cur rently the world's larg est debtor by a sub stan tial mar gin. Our pros per ity is largely based on the rapid de - ple tion of liq uid fos sil fu els which are likely to be vir tu ally fully ex hausted this cen tury. Our ed u ca tion sys tem is sub-par. Our re tire ment prom ises are vastly in ex cess of what we can af ford. Our en vi ron ment is erod ing. Though most US cit i zens are com par a tively pros per ous at the mo ment, we are grad u ally transitioning to much less pros per ous cir cum stances From Riches to Rags at a Time of Pros per ity. This book is di vided into eight ma jor parts. Part One in cludes a brief his tory of how some of the ear lier writ ers in the field of man age ment em pha sized our re spon si bil i ties as man ag ers and how they en vi sioned the in te gra tion of com pany and com mu nity interests. Part Two deals with the econ omy and what we may have to do to sus tain pros per ity for the world's cit i zens. Part Three in cludes some es says writ ten in re - sponse to the eu pho ria of the stock mar kets. part Four deals with man u fac tur ing and its role in an in te grated so ci ety. Part Five dis cusses the role of busi ness man age ment in a whole some so ci ety along with some sug - ges tions and ca ve ats for the prac tice of man age ment. Part Six re views the im por tance of ed u ca tion and the re spon si bil i ties of those of us who are ed u ca tors. Part Seven deals with a few of the na tion's press ing pub lic pol icy ques tions. Part Eight closes with a ques tion: Will real lead er ship emerge?.

11 2 Historical Perceptions of the Good Company Historical Perceptions of the Good Company Pre pared for use in class at the Uni ver sities of Min ne sota, St. Thomas, Pitts burgh, and Universidad Catolica in Uruguay What makes up a "good com pany" has been thought about and writ ten about for many years. This ar ti cle will not ex plore the com plete spec trum of schol arly con tri bu tions on the sub ject, but it will briefly go over a few in ter est ing per spec tives of the past one hun dred years. Of course, what is pre sented here can not be a com plete list so the au thor is ea ger to learn of other ideas pre sented at the con fer ence. A few fre quently oc - cur ring his tor i cal con cepts are pre sented here to show how the prac tice of man age ment should re late to the per for mance of the econ omy and to so ci ety in gen eral. A care ful read ing of clas si cal writ ers in the field of man age ment will re veal a com monly re peated ba sic the ses what we might call cor ner stones of man a ge rial phi los o phy. These key prin ci ples are ap pli ca ble to the prac tice of man age ment in any era but sev eral of these may have spe cial ap pli ca tion to our man a ge rial and eco nomic prob lems of to day. In this sense, the ma te rial pre sented re lates to Cath o lic so cial thought and cor po rate so cial re spon si bil ity the ti tle di a logue of this Oc to ber con fer ence on "The Good Com pany." Some of the writ ers we will cover, such as Moo ney and Riley, were Cath o lic prac ti tio ners. Oth ers such as Fred er ick Tay lor were Quak ers. Oth ers ad hered to other be liefs. How ever, all of them dis played in ter nal value sys tems which ex tended well be yond the mere re fin ing of the man a ge rial task. The em pha sis on pur pose, on the com mu nity, on the in te - gra tion of goals, all pur port to a car ing larger view of the re spon si bil i ties of man age ment the stew ard ship role. Stew ard ship in short sup ply We have much rea son to be lieve that in to day's world, stew ard ship is in short sup ply. Our pres ent per for - mance as man ag ers is not im pres sive. The world econ omy of to day is in con sid er able dif fi culty. In the United States, sev eral of our larg est and most im por tant in dus tries have been mar ginal for sev eral years. Gov ern men tal bud get def i cits threaten the sta bil ity of world fi nan cial mar kets. Se vere un em ploy ment ex ists in many re gions. Re cord trade im bal ances con tinue. In ter na tional debts mount yearly with our own coun try be ing the larg est debtor na tion. The world's fi nan cial mar kets are fear ful of these un prec e dented def i cits and could be come quite vol a tile. Re source scar city, with its re sult ing po ten tial for in fla tion and mon e tary in sta bil ity, adds to our con cerns. Ob vi ously, many of these prob lems may be be yond the scope of man age ment at the level of the firm. But, some of us are more hope ful. With ef fec tive man age ment, we should at least be able to greatly im prove our sit u a tion. How ever, a rig or ous re-ex am i na tion of our fun da men tal con cepts of man age ment may be nec es - sary to trig ger the needed im prove ments. The qual ity of man age ment is in flu ences the per for mance of the econ omy at the level of the firm and at the na tional level. The per for mance of the econ omy, in turn, im pacts so cial prob lems and cul tural de vel op - ments. Af ter all, if man age ment is to be con sid ered an im por tant and well-com pen sated func tion, should not its im pact on the gen eral so ci ety be con sid ered? All of these ques tions have sur faced be fore. Let us ex am ine what some of the ear lier writ ers had to say. What are some of the ba sic cor ner stones of man a ge rial thought and how do these ideas dove tail with cor po rate re spon si bil ity and Cath o lic so cial thought? To what de gree are these pre cepts ap pli ca ble to the prob lems we have to day? It is use ful to eval u ate con cepts of man age ment with re spect to the eco nomic set ting in which they were de - vel oped. Our pre vail ing con cepts of man age ment have changed over time. In di vid ual man age ment the o ries

12 From Riches to Rags at a Time of Prosperity 3 have been pop u lar at one time or an other but have be come less pop u lar un der dif fer ent con di tions. Great lead ers of the past re lied heavily on a char is matic style of man age ment. Team mo bi li za tion, ba sic or ga niz - ing, lead er ship and the amal gam ation of power were cen tral at trib utes to the emer gence of the im por tant or - ga ni za tional en ti ties of our ear lier his tory. Dur ing the early 1900's, when our coun try was strug gling to es - tab lish it self as an in dus trial power, there was more in ter est in ef fi ciency, or der, and more of an en gi neer - ing ap proach to the pro cess of man age ment. Then, af ter greater pros per ity had been at tained, our at ten tion shifted more to the so cial as pects of man age ment to mo ti va tion, par tic i pa tion and per son nel ad min is tra - tion. Since the 1960's, with the ar rival of larger busi nesses, we wit nessed more in ter est in the an a lyt i cal, quan ti ta tive, de ci sion mak ing and stra te gic as pects of man age ment help ful in man ag ing large en ter prises. Later, we saw more of an in ter est in glob al iza tion and in ter na tional fac tors. Each of these schools con trib uted to a more com pre hen sive the ory of man age ment, but the schools did evolve some what se quen tially. Eco nomic and en vi ron men tal con di tions of dif fer ent times re quired var ied man a ge rial ap proaches. Some man a ge rial the o ries emerged dur ing ro bust eco nomic pe ri ods when the or - ches tra tion of growth was of prin ci pal in ter est. Dur ing the se ri ous re ces sion of the 1980s ans since, how to sur vive eclipsed how to grow as a man a ge rial con cern. Now, we may be en ter ing a new his tor i cal pe riod with eco nomic con di tions en tirely dif fer ent from those in play when some of our the o ries were de vel oped. The man age ment the o ries we have em ployed for the past forty years may pro duce un an tic i pated re sults if ap plied un der these new and dif fer ent eco nomic con di tions. We may find some older pre scrip tions, for mu - lated dur ing less af flu ent times, re late more ap pro pri ately to the prob lems we face at the mo ment than the o - ries fos tered dur ing more af flu ent times. We may be gin this in quiry by ex am in ing what the job of man ager re ally is. Per cep tions Of Man age ment A Fun da men tal Dif fer ence There is a dif fer ence be tween pop u lar cur rent man a ge rial par a digms and those of old in the gen eral per cep - tion of the role of man age ment. We can see in these ear lier writ ings a def i nite in ter est in the re spon si bil i ties of man age ment its stew ard ship role. We could il lus trate these dif fer ences by the fol low ing ex am ple: Com pany A is in volved in a ba sic in dus try that shows signs of ma tu rity. The in dus try is viewed as crowded, low mar gin, slow growth and is fraught with stag na tion it its la bor man age ment re la tions. These characteristics are detected by sound analytical techniques as applied by Company A's headquarters staff. A stra te gic di rec tion is charted to get Com pany A into a more vi brant and emerg ing busi ness. The base busi ness is milked as a cash cow while Com pany A's re sources are shifted to emerg ing mar kets. Com pany B is in a sim i lar in dus try and its man age ment team ob serves sim i lar threats and trends. The higher mar gins and higher growth rates po ten tially avail able in a new in dus try are also ob served by Com - pany B. How ever, the man age ment of Com pany B notes that there are two ma jor con sid er ations to any dra - matic shift to the new in dus try: 1: The skills re quired for the new in dus try are rad i cally dif fer ent from those cur rently pos sessed by the company's management and employees. The difficulties encountered are likely to be substantial. 2: Any ma jor stra te gic shift to a new in dus try would re quire cast ing as less valu able some of the com - pany's most pre cious as sets; pro duc tion ex per tise, rap port with cus tom ers, knowl edge of the in dus try and an appreciation for its economics. The attendant personnel ramifications, both sociologically and op er a tion ally, are also likely to be sub stan tial. The man age ment of Com pany B also ob serves that there are many op por tu ni ties to im prove the ef fi ciency of the base busi ness and that the op por tu ni ties avail able in their home in dus try are re garded as lu cra tive by in ter na tional sup pli ers. Com pany B con cludes that its in her ent ex per tise in its pres ent in dus try is much greater than it would be in the new in dus try and that it would be dif fi cult to es tab lish a last ing pres ence in an un known mar ket so late in the game. Com pany B es tab lishes a stra te gic di rec tion, with the co op er a tion and un der stand ing of com pany per son nel, to con cen trate on the in dus try it now serves and to be come the most ef fi cient and dif fer en ti ated sup plier in its base busi ness. Ar gu ments can be made for ei ther ap proach, though there seems to be strong clin i cal ev i dence that ma jor stra te gic shifts across in dus try lines is per il ous. How ever, the ma jor point here is the fun da men tal dif fer - ence in the per cep tions of what the term man age ment re ally means.

13 4 Historical Perceptions of the Good Company To Com pany A, man age ment is a task of stra te gic se lec tion. Man age ment in volves anal y sis, de ci sion mak - ing, re source al lo ca tion and the even tual stra te gic di rec tion of the firm. The em pha sis is on se lect ing what is per ceived is the most ad van ta geous thing to do. To Com pany B, man age ment is the nec es sary task of on tak ing what you have and mak ing it work. The em pha sis is on im ple men ta tion, ser vice to mar kets, co op er a tion with com pany stake holders, ef fi ciency, ef - fec tive ness and the com pany's mis sion. The em pha sis is on the de vel op ment of a com pet i tive ad van tage and the es tab lish ment of a de fen si ble in ter na tional po si tion so that the firm, its peo ple, and its com mu nity will sur vive. Though there may be in stances where ei ther one of these two ap proaches is ap pro pri ate given cir cum - stances, they are fun da men tally dif fer ent in their un der ly ing value sys tems, the kinds of skills the man ag ers need, and the sense of man a ge rial re spon si bil ity (stew ard ship). Some busi ness men and ac a demic lead ers have been con cerned that we may be drift ing too much to ward the anal y sis of prob lems at the ex pense of re fin ing our abil ity to ex e cute. We may be stra te gi cally po si tion ing our selves into some sit u a tions that have high po ten tial, but we may not be suf fi ciently pre pared to at tain the po ten tial that ex ists. Clearly, there are some ex cel lent com pa nies that have de vel oped and re tained the abil ity to ex e cute, sur vive and ex pand dur ing a tough world econ omy. Deere, Nucor, Steel Dy nam ics, and Winnebago all pro vide ex - cel lent ex am ples. They have been able to at tain suc cess by op er at ing ef fi ciently in in dus tries that other firms found dif fi cult in in dus tries some times re garded as lack lus ter and slow growth. We should re mind our selves that in dus tries we of ten see as ma ture and slow growth are of ten rec og nized as highly ex cit ing op por tu ni ties by off-shore com pet i tors. As Co lum bia Uni ver sity pro fes sor Don ald Hambrick and his col leagues 25 have noted, we can not dis card most of in dus trial Amer ica be cause it does n't fall into the proper cor ner of the Boston Con sult ing Group ma trix. We have to ex am ine what ef fect our man a ge rial ac tions of to day will have on our so ci ety in the fu - ture and on the firms that we, as man ag ers and di rec tors, rep re sent. We have to de ter mine which styles of man age ment are ap pro pri ate to the par tic u lar cir cum stances we have be fore us. Which prin ci ples will best en able us to sur vive in an in creas ingly com pet i tive world. A pa tient re view of the his tor i cal lit er a ture on man age ment will re veal many in ter est ing and ap pli ca ble man a ge rial con cepts which have stood the test of time. How ever, there are four value laden philo soph i cal themes which seem to sur face re peat edly as im por tant cor ner stones in the man a ge rial lit er a ture. Our in tent is to ex am ine the ap pli ca bil ity of these four cor ner stones to our busi ness prob lems of to day. Briefly, the prac tice of man age ment is based on the fol low ing four fun da men tal prin ci ples: 1: The en ter prise is viewed as an in te gral part of the whole com mu nity and it rou tinely func tions in that role. 2: Success is dependent upon an established, cultivated and maintained coincidence of interest between workers and the organization. 3: High in teg rity on the part of both man ag ers and work ers is nec es sary for suc cess. 4: Shared value sys tems, ob jec tives and be liefs must be es tab lished and in cul cated within the or ga ni za - tion. It is not the au thor's in tent dis cuss which of these prin ci ples is pre em i nent. I merely wish to re view what has been said re peat edly by ear lier au thors in or der to stim u late dis cus sion at our con fer ence. Cor ner stone One The En ter prise As Part of the Com mu nity As de scribed in the early clas sics, a busi ness is an in te gral part of a larger com mu nity sys tem and, in or der to suc ceed, it has to func tion with that per cep tion in mind. Henry Gantt, Frank Gilbreth, and Ol i ver Shel - don saw the mis sion, goals and meth ods to achieve ob jec tives as firmly rooted in the needs of so ci ety. Not with stand ing, the con cept of the en ter prise as part of the com mu nity was fun da men tally eco nomic, it has a so cial di men sion in that it in te grates the in ter ests of so ci ety with those of the firm. In the view of these writ ers, the firm would not suc ceed over the long term with out ad her ing to this ba sic con cept of ser vice to the broader com mu nity.

14 From Riches to Rags at a Time of Prosperity 5 Ol i ver Shel don saw this is sue clearly his pre am ble to his 1923 es say; A Phi los o phy of In dus trial Man age - ment. In dus try ex ists to pro vide the com mod i ties and ser vices which are nec es sary for the good life of the com mu nity, in what ever vol ume they are re quired. These com mod i ties and ser vices must be fur nished at the low est prices com pat i ble with an ad e quate stan dard of qual ity, and dis trib - uted in such a way as di rectly or in di rectly to pro mote the high est ends of the com mu nity. In - dus trial man age ment, in a broad sense, is the func tion, prac ticed by what ever per sons or classes, re spon si ble for the di rec tion of in dus try to the above end. It must, there fore be gov - erned by cer tain prin ci ples in her ent in the mo tive of ser vice to the com mu nity. Such prin ci ples are Firstly, that the pol i cies, con di tions, and meth ods of in dus try shall con duce com mu nal well be ing. It is there fore part of the task of man age ment to value such pol i cies, con di tions, and meth ods, by an eth i cal mea sure. 47 The in dus trial en gi neer, Frank Gilbreth, also rec og nized the in te gra tion of proper and ef fec tive man age - ment, the gen eral pros per ity of the peo ples of the world and the health of the firm it self. From the clos ing para graphs of his 1923 es say, Sci ence in Man age ment for the One Best Way to do Work, we have the fol low ing: Great est na tional pros per ity de pends upon great est in di vid ual train ing in knowl edge and in abil ity to con trib ute to ward the pub lic wel fare. Such con tri bu tions may be, and of ten have been, more or less hap haz ard and still re sult in good. How ever, to be most prof it able, ac tiv ity must be planned and di rected, must have abil ity, ex pe ri ence and knowl edge be hind it. It must be based on mea sure ment and will ing ness to abide by the re sult of mea sure ment. Noth ing will stand for a long time and con tinue to ex ist and to give sat is fac tion un less there is a real rea son for it so do - ing. It may stand for a long while be cause no one has changed it, but the day of com par i son and strug gle for sur vival will come, and un less it can show log i cal rea son for its ex is tence, it must go. There fore, de vel op ment of na tional pros per ity that is to have per ma nent sta bil ity, that is to be evo lu tion and not rev o lu tion, that is to at tain and per pet u ate the all es sen tial el e ment of main te nance, does de pend upon sci ence, upon mea sure ment; and it is for this rea son that the sci ence of man age ment is an es sen tial fac tor in the de vel op ment of na tional pros per ity, of in ter - na tional pros per ity, and of the pros per ity of the whole world. 22 Henry L. Gantt, also an ac cred ited mem ber of the sci en tific man age ment com mu nity, un der scored the ne - ces sity of ser vice to the com mu nity as a foun da tion to ef fi ciency and suc cess in his es say, The Part ing of The Ways, which was writ ten at the time of the First World War. It is this con flict of ide als which is the source of the con fu sion into which the world seems to be div ing head long. The com mu nity needs ser vice first, re gard less of who gets the prof its, be - cause its life de pends upon the ser vice it gets. The busi ness man who says prof its are more im - por tant to him than the ser vice he ren ders; that the wheels of busi ness shall not turn, whether the com mu nity needs the ser vice or not un less he can have his mea sure of profit, has for got ten that his busi ness had its foun da tion in ser vice, as far as the com mu nity is con cerned. We all re - al ize that any re ward that busi ness ar bi trarily takes, over and above that to which it is justly en ti tled for ser vice ren dered, is just as much the ex er cise of au to cratic power and a men ace to the in dus trial peace of the world, as the au to cratic mil i tary power of the Kai ser was a men ace to in ter na tional peace. This ap plies to Bol she vists as well as Bank ers. 20 It is in ter est ing to note that Gantt ar gues these points from the stand point of in dus trial ef fi ciency in the long-term in ter est of the busi ness it self. The firm must be an ef fi cient and low cost pro vider of what so ci ety needs. If this prin ci ple is not ob served, the en ter prise will fail and the civil peace of the so ci ety it self will be in jeop ardy. Ches ter Barnard de voted an en tire chap ter to op por tun ism in 1938 trea tise, THE FUNC TIONS OF THE EX EC U TIVE6. Barnard de scribed op por tun ism as ex ist ing when the val ues, ide als and de ci sion pro cesses be come spe cial ized to the in di vid ual rather than to the or ga ni za tion or to so ci ety. The nine teenth cen tury French In dus tri al ist, Henri Fayol, for mu lated a sim i lar con cept in his sixth prin ci ple of man age ment; Sub or di na tion of in di vid ual in ter ests to gen eral in ter ests 59. And for cen tu ries, an op er at - ing prin ci ple of the re li gious mon as ter ies has been that the in di vid u als sub or di nate their in ter ests to those of the com mu nity and to the so ci ety in gen eral. Al though, in spite of low pay, sub or di nated in ter ests and a re - stricted chan nel ing of self ac tu al iza tion, peo ple worked hard. The or ga ni za tional for mat of the Ben edic tine

15 6 Historical Perceptions of the Good Company Or der has sur vived vir tu ally un changed for 1500 years with the vow of pov erty be ing a prin ci ple bond ing element. Mod ern schol ars have also com mented on the dys func tional na ture of too much op por tun ism. The noted ge og ra pher, John Ad ams, a spe cial ist in the de vel op ment of re gional econ o mies, la mented the dys func - tional role an op por tu nis tic ser vice sec tor is play ing in weak en ing the U.S. econ omy. From his ar ti cle en ti - tled The Re gional Ser vice Econ omy A Con tem po rary Mi rage?3: It's a na tional scan dal and in the ag gre gate ev ery one loses. None of these ploys cre ates new wealth. Each merely shifts as sets from one set of pock ets to an other. To gether they fos ter a cyn - i cal in dif fer ence to pro duc tion or to any goal be yond per sonal gain. Sus tained eco nomic growth can be achieved only through co op er a tion. The fu ture wel fare of the coun try de pends upon com pli cated in ter de pen dent or ga ni za tions in which re spon si bil ity is shared and where all trust that ben e fits and sac ri fices are borne fairly. But this view is slip ping from our grasp and es pe cially in the ser vice in dus tries that we have started to dis cuss to day. 3 Note that these schol ars were not ar gu ing for changes in ei ther the so cial sys tem or the eco nomic struc ture of so ci ety. The were ar gu ing for goal in te gra tion with the com mu nity from the per spec tives of man a ge rial ef fec tive ness and prac ti cal eco nom ics. They were say ing that those or ga ni za tions which have the high est like li hood of last ing have their ob jec tives firmly rooted in the ef fi cient sat is fac tion of the needs of the so ci - ety. They were against op por tun ism be cause they did n't think it would work. In the real world, how ever, this fun da men tal con cept of com mu nity ser vice as a de ter mi nant of or ga ni za - tional suc cess is of ten vi o lated with poor re sults for both the firm and the so ci ety. For years, ar ti fi cial mech a nisms have been em ployed to al low some in ter ests to par tic i pate pref er en tially. On a tem po rary ba - sis, such op por tun ism may pro vide in su lated prices, man dated re quire ments for ser vices, ar ti fi cial bar ri ers to ef fec tive com pe ti tion, pref er en tial fi nanc ing or in some cases, the overt con ver sion of prop erty. As a re - sult of sus tain ing their po si tions on the ba sis of syn thetic ad van tage, these or ga ni za tions never de velop the skills to effectively serve the community. Ultimately, however, these temporary artificial advantages are over come. Such forces as de reg u la tion, for eign com pe ti tion, new tech nol o gies, niche mar ket ing or other coun ter vail ing forces sur face to neu tral ize the ad van tage that is gained with out sub stance. When it fi nally be comes nec es sary for the op por tu nis tic firms to pro vide a truly ef fec tive ser vice in or der to sur vive, they are ill-equipped to do so. Chaos for them and their com mu ni ties is the fre quent re sult. The forces of com pe ti tion may serve to limit the ef fec tive ness of op por tun ism in some cases, quite ef fec - tively. There is noth ing wrong with hon est com pe ti tion or pru dent op por tun ism. How ever, many of the strat e gies that are un fold ing from gov ern ment, la bor, and many busi nesses to day are largely oblique to the long term needs of the gen eral so ci ety as a whole and are ori ented ex ces sively to the sat is fac tion of spe cial, rather than com mu nal, in ter ests. Apart from the mo ral ity of it, self-in ter ested strat e gies are un likely to be successful either managerially or economically. A wide variety of countervailing forces will combine to bring ul ti mate cor rec tion to those sit u a tions where con cern for ser vice has not been pres ent. The en ter prise as a part of the com mu nity was seen by these ear lier writ ers as an on go ing nec es sary cor ner stone prin ci ple of management. Cornerstone Two Coincidence of Interest Between Management and La bor Fred er ick Tay lor, the early twen ti eth cen tury stu dent of time study and pro duc tiv ity, iden ti fied in ti mate and friendly co op er a tion be tween the man age ment and the men as one of his four ba sic prin ci ples of man - age ment. His writ ings are among the most ve he ment re gard ing the ne ces sity of strong co op er a tion be tween man age ment and la bor in the pur suit of their com mon in ter ests. The fol low ing is an ex cerpt from his 1912 tes ti mony be fore a spe cial com mit tee of the House of Rep re sen ta tives which was later re printed later as an essay entitled; What is Scientific Management. The great rev o lu tion that takes place in the men tal at ti tude of the two par ties un der sci en tific man age ment is that both sides take their eyes off the di vi sion of the sur plus as the all--im por - tant mat ter and turn their at ten tion to ward in creas ing the size of the sur plus un til this sur plus be comes so large that it is un nec es sary to quar rel over how it shall be di vided. They come to see that when they stop pull ing against one an other, and in stead both turn and push shoul der to

16 From Riches to Rags at a Time of Prosperity 7 shoul der in the same di rec tion, the size of the sur plus cre ated by their joint ef forts is truly out - stand ing. 52 The writ ings of Fred er ick Tay lor are re plete with ref er ences to the ne ces sity of co in ci dence of in ter est be - tween man age ment and la bor as a re quire ment for the at tain ment of in dus trial ef fi ciency and the gen eral wel fare of so ci ety. From the same es say: This, gen tle men, is the be gin ning of a great men tal rev o lu tion which con sti tutes the first step to ward sci en tific man age ment. It is along this line of com plete change in the men tal at ti tude of both sides; of the sub sti tu tion of peace for war; the sub sti tu tion of hearty broth erly co op er a tion for con ten tion and strife; of both pull ing hard in the same di rec tion in stead of pull ing apart; of re plac ing sus pi cious watch ful ness with mu tual con fi dence; of be com ing friends in stead of en e - mies; it is along this line, I say, that sci en tific man age ment must be de vel oped. 52 Also in his 1912 book, THE PRIN CI PLES OF SCI EN TIFIC MAN AGE MENT, Tay lor de lin eated the main el e ments of his sys tem: Sci ence, not rule of thumb. Har mony, not dis cord. Cooperation, not individualism. Max i mum out put, in place of re stricted out put. The de vel op ment of each man to his great est ef fi ciency and pros per ity." 51 Charles Babbage was most noted for his dif fer en tial en gine but his writ ings on man age ment were also ex - ten sive. His 1832 book en ti tled, ON THE ECON OMY ON MA CHIN ERY AND MAN U FAC TURES was an early at tempt to bring or der to the prac tice of ad min is tra tion. In this book, Babbage ad vo cates the need for a har mony of in ter ests be tween work ers as a cat a lyst for the at tain ment of in dus trial ef fi ciency. 5 Ches ter Barnard re garded the co in ci dent of in ter est be tween man age ment and la bor as fun da men tal to the cre ation of faith within a co op er a tive sys tem. His co op er a tive sys tem in volved the free will of the mem bers of the or ga ni za tion, a mu tual set of in ter ests be tween the or ga ni za tion and its mem bers and the struc tural sys tem within which the will ing ness to co op er ate is main tained. In Barnard's view, ex plicit pro vi sions need to made for both the cre ation and the main te nance of the co op er a tive sys tem. It was nec es sary to not only have com mon in ter ests but also to com mu ni cate this com mon al ity of in ter ests to both the for mal and in for - mal or ga ni za tions. Barnard iden ti fies his three func tions of the ex ec u tive as; 1: To pro vide a sys tem of com mu ni ca tion. 2: To pro mote the se cur ing of es sen tial per sonal ef forts. 3: To for mu late and de sign a pur pose for the or ga ni za tion. 6 This ma jor ex ec u tive func tion of for mu lat ing and de sign ing the pur pose for the or ga ni za tion ne ces si tated a last ing and mean ing ful co in ci dence of in ter ests be tween the or ga ni za tion and its mem bers. This em pha sis on co in ci dent in ter ests was fully in te grated with his "ac cep tance the ory of au thor ity." Au thor ity could not be de manded but is vol un tarily ac cepted be peo ple within or ga ni za tions. Be cause it is "vol un tary" and can - not be co erced, the goals of peo ple and the or ga ni za tion it self must be in te grated. Lillian Gilbreth, Pro fes sor of In dus trial En gi neer ing at Purdue, wife of Frank Gilbreth, mother of twelve chil dren, and Time Mag a zine's Woman of the Year in 1947, for mu lated ear lier a sim i lar theme in her 1914 book on THE PSY CHOL OGY OF MAN AGE MENT. The work ers knowl edge that the man age ment plans to main tain such con di tions... leads to love or loy alty be tween the work ers and em ploy ers. Far from Sci en tific Man age ment abol ish - ing the old per sonal and sym pa thetic re la tions em ploy ers and work ers, it gives op por tu ni ties for re la tions as have not ex isted since the days of the guilds and the old ap pren tice ship. The co - op er a tion upon which Sci en tific Man age ment rests does away with the tra di tional war fare" be tween em ployer and work ers that made per ma nent friend li ness al most im pos si ble. Co op er a - tion in duces friend li ness and loy alty of each mem ber in the or ga ni za tion to all the oth ers." 23 Mary Parker Follett re ferred to this pro cess as the in te gra tion of goals. Her 1925 pa per on Busi ness as an In te gra tive Unity strongly ar tic u lated the need for the co in ci dence of in ter est of man age ment and la bor. 18 She ar gues against self in ter est pur sued at the ex pense of goal in te gra tion:

17 8 Historical Perceptions of the Good Company Cap i tal and La bour must fight or unite. No gen tle manly name for fight ing will change the es - sen tial na ture of the re la tion be tween cap i tal and la bour where sides" are sharply de fined." 18 Follett ar gued strongly for a col lec tive re spon si bil ity for pro duc tion be tween la bor and cap i tal and for the ma ture ap pre ci a tion of their dif fer ent func tions and of their com mon in ter ests. Later, in 1927, Ms. Follett pre sented a pa per on The Psy chol ogy of Con sent and Par tic i pa tion wherein she out lined the es sen tial con di tion to ob tain ing par tic i pa tion: There are three ways of deal ing with dif fer ence: dom i na tion, com pro mise and in te gra tion. By dom i na tion only one side gets what it wants; by com pro mise nei ther side gets what it wants; by in te gra tion we find a way by which both sides may get what they wish...we get prog ress when we find a way that in cludes the ideas of both or the sev eral par ties to the con tro versy. But this re quires hard think ing, in ven tive ness, in ge nu ity. We should never think of in te gra tion as a fore - gone con clu sion; it is an achieve ment. 18 The con cept of 'the co in ci dence of in ter est be tween man age ment and la bor' is so fun da men tal and ob vi ous that we tend to ne glect it when we talk about man age ment. Yet, it is a nec es sary con di tion to the at tain ment of or ga ni za tional suc cess. The sub sti tu tion of peace for war; the sub sti tu tion of hearty broth erly co op er a tion for con ten - tion and strife Fred er ick W. Tay lor, 1911 Un for tu nately, the co in ci dence of in ter est be tween man age ment and la bor is not al ways pres ent when we deal with prob lems of ad ver sity. It is not a sim ple con cept that op er ates free of other in flu ences. As sev eral of these writ ers have pointed out, it is in te grated with trust, ef fi ciency, com mu nity in ter est, pro duc tiv ity, com pen sa tion sys tems, an en gi neer ing ap proach to the prob lem and an at mo sphere of co op er a tion. Yet, the re la tions be tween man age ment and la bor of ten re flect a spirit of dom i na tion or com pro mise much more than true goal in te gra tion. We have fac to ries that are woe fully in ef fi cient and ter ri bly out-of-date where man age ment and la bor ag gres sively com pete with one an other so that each might ob tain a greater per cent - age of a rap idly shrink ing pie. It does n't make any sense, from the stand point of ei ther man age ment or la - bor. La bor and man age ment, com mu ni ties and com pa nies, gov ern ment and in dus try, and other his tor i cally po - lar ized el e ments of so ci ety have a vast com mu nal po ten tial if they work to gether. The en tire sys tem needs review. With out a co in ci dence of in ter est be tween man age ment and la bor, our man a ge rial sys tem, our econ omy and our so ci ety are in jeop ardy. The his tory of Ger many pro vides an ex cel lent com men tary on what can hap pen when la bor and man age ment co op er ate, as they did from 1948 through 1975, and what can hap pen when they do not, as was the case be fore and dur ing World War II. Cor ner stone Three In teg rity of Man ag ers and Work ers In teg rity on the part of both man ag ers and work ers is nec es sary for the man a ge rial sys tem to op er ate ef fec - tively. Ches ter Barnard un der scored this ne ces sity when he ob served that or ga ni za tions con sist of both for - mal and in for mal or ga ni za tion el e ments. The for mal or ga ni za tion es tab lishes pur poses, com mu ni cates, and en lists the will ing ness to serve. But the equally im por tant in for mal or ga ni za tion also serves im por tant func - tions: 1: Es tab lishes at ti tudes. 2: Cre ates con di tions un der which for mal or ga ni za tions may rise. 3: Com mu ni cates. 4: Reg u lates the will ing ness to serve. 5: Main tains the feel ing of self re spect and in de pend ent worth.6 Barnard ob served that the mere pres ence of im mo ral ity or op por tun ism is suf fi cient to re tard the ef fec tive - ness of the or ga ni za tion, re gard less of who is af fected. Peo ple are in clined to see how other peo ple are treated as an in dex of how they will be treated. When peo ple wit ness ne far i ous be hav ior at work, the in for -

18 From Riches to Rags at a Time of Prosperity 9 mal or ga ni za tion senses this, com mu ni cates it, for mu lates new at ti tudes and reg u lates the will ing ness to serve. From Barnard's same chap ter on Ex ec u tive Re spon si bil ity, we have the fol low ing: Now we shall con fine our thoughts to the sec ond as pect of lead er ship the more gen eral; the more con stant; the sub jec tive; that which re flects the at ti tudes and ide als of so ci ety and its gen - eral in sti tu tions. It is this as pect of in di vid ual su pe ri or ity in de ter mi na tion, per sis tence, en dur - ance, cour age; that de ter mines the qual ity of ac tion; which of ten is most in ferred from what is not done, from ab sten tion; which com mands re spect, rev er ence. It is the as pect of lead er ship we com monly im ply in the word "re spon si bil ity", the qual ity which gives de pend abil ity and de ter - mi na tion to hu man con duct, and fore sight and ideality to pur pose." 6 Philip Selznick com mented on the ne ces sity of in teg rity in his 1957 book, LEAD ER SHIP IN AD MIN IS - TRATION: The in teg rity of an en ter prise goes be yond ef fi ciency, be yond or ga ni za tional forms and pro ce - dures, even be yond group co he sion. In teg rity com bines or ga ni za tion and pol icy. It is the unity that emerges when a par tic u lar ori en ta tion be comes so firmly a part of group life that it col ors and di rects a whole wide va ri ety of at ti tudes, de ci sions, and forms of or ga ni za tion, and does so at many lev els of ex pe ri ence. The build ing of in teg rity is part of what we have called the in sti - tu tional em bodi ment of pur pose" and its pro tec tion is a ma jor func tion of lead er ship."46 Sev eral mem bers of the sci en tific man age ment com mu nity were par tic u larly im pressed with the need for tra di tional mo ral ity on the part of both man ag ers and work ers. Tra di tional val ues served as a strong foun - da tion for the ap pli ca tion of their meth ods. Hon est work and proper moral qual i ties in ter act upon one an - other to pro duce an im proved so ci ety on a higher plane. The fol low ing ex cerpt from Gantt's 1908 es say on Train ing Work man on Hab its of In dus try and Co op er a tion is in dic a tive: Moral Train ing: The fact that un der this sys tem, ev ery body, high and low, is forced by his co - work ers to do his duty, for some one else al ways suf fers when he fails, acts as a strong moral tonic to the com mu nity, and many whose ideas of truth and hon esty are vague find hab its of truth and hon esty forced upon them. This is the case with those in high au thor ity as well as those in hum ble po si tions, and the man high est in au thor ity finds that he must also con form to laws, if he wishes proper co op er a tion from those un der him. 21 Lillian Gilbreth com mented on the re la tion ship be tween the moral de vel op ment of the mem bers of the or - ga ni za tion and the at tain ment of the or ga ni za tion's pur pose. She de voted much at ten tion to both moral de - vel op ment and fair ness in THE PSY CHOL OGY OF MAN AGE MENT: The ul ti mate re sult of all this phys i cal im prove ment, men tal de vel op ment and moral de vel op - ment is in creased ca pac ity, in creased ca pac ity not only for work, but for health, and for life in gen eral. Moral de vel op ment un der Sci en tific Man age ment re sults from the pro vi sions for cul ti vat ing 1: per sonal re spon si bil ity 2: responsibility for others 3: ap pre ci a tion of stand ing 4: self con trol 5: square ness... Square ness. This square ness is ex em pli fied first of all by the at ti tude of the man age ment. It pro vides, in ev ery way, that the men are given a square deal, in that the tasks as signed are of the proper size, and the re ward that is given is of the proper di men sions, and is as sured. This has al ready been shown to be ex em pli fied in many char ac ter is tics of Sci en tific Man age ment, and more es pe cially in the in spec tion and in the dis ci plin ing." 23 James Moo ney, an early ex ec u tive with Gen eral Mo tors, teamed with Alan Riley to de velop the func tion - ally sim i lar con cept of fair play : The leader must be sen si tive to the rights of the led and he must take mea sures to en sure that they are main tained for ev ery in di vid ual through out the or gani sa tion. In other words, he must hug closely to the pol icy of 'fair play'. To this end, the lead ers must be gin by play ing fair with each other. 39

19 10 Historical Perceptions of the Good Company Fair ness on the part of the work ers to ward the or ga ni za tion was of equal im por tance to fair ness on the part of those in man age ment. The sci en tific man age ment school was par tic u larly ad a mant re gard ing sol dier - ing or de lib er ate slow ing of the work pace. Tay lor sum ma rized his as sess ment of it crisply in SHOP MANAGEMENT: The nat u ral la zi ness of men is se ri ous, but by far the great est evil from which both work men and em ploy ers are suf fer ing is the sys tem atic sol dier ing which is al most uni ver sal un der all of the or di nary schemes of man age ment and re sults from a care ful study on the part of the work - men of what they think will pro mote their best in ter ests. 50 Of ten, we have treated the con cepts of busi ness eth ics and moral in teg rity as an cil lary char ac ter is tics apart from the more di rect pro cess of man age ment. They are seen as nice qual i ties to have but they re ally don't have any thing to do with mak ing money. In stead, they are oc ca sion ally seen as get ting in the way of it. Shel don, Barnard, Gilbreth and oth ers saw the role of in teg rity as ab so lutely fun da men tal to the pro cess of mak ing money. They saw in teg rity as hav ing a di rect ef fect on the smooth and ef fec tive work ings of or ga - ni za tions. As time pro gressed, they be came more in ter ested in pro mot ing and teach ing in teg rity as an in te - gral part of the man a ge rial pro cess. The in ter con nec tions be tween in teg rity, mo ral ity and eth ics and or ga ni za tional suc cess have not re ceived much dis cus sion in the ac a demic world re cently and only some in the busi ness world. One of the main prop o si tions ad vanced in the man a ge rial clas sics is that tra di tional mo ral ity and in teg rity are qual i ties that are basic to organizational success they are admiral but optional qualities. They are fundamental necessi - ties. In teg rity on the part of man ag ers and work ers sug gests that, in the long run, hon est peo ple will be more suc cess ful than dis hon est peo ple. So ber peo ple will be more suc cess ful than those who show lit tle per sonal re straint. Hard work is as im por tant as skill. Mo ral ity must be taught and re in forced. Man age ment should do the teach ing. In teg rity is func tional ne ces sity to en list the will ing ness to serve. Cornerstone Four Value Systems and Organizational Culture In their more re cent clas sic, IN SEARCH OF EX CEL LENCE, Pe ters and Water man ob served that suc cess - ful com pa nies cre ate, nur ture and re in force unique cul tures that em a nate from overtly for mu lated value sys - tems that are partially embodied in the organizations' reasons for existence. Successful companies have strong phi los o phy sys tems and weaker sys tems for brack et ing be hav ior.42 The ar tic u la tion of these phi los - o phies, val ues and pur poses is on go ing and an ac tiv ity of man ag ers of all ranks. Ac tions of the com pa nies un fold in ways that are con sis tent with these phi los o phies and value sys tems. Ex plicit op er at ing dogma is less com mon but the value sys tems, phi los o phies and pur poses re main stead fastly re in forced and broadly ar tic u lated. As Philip Selznick ar tic u lated in his 1957 trea tise; We shall not find any sim ple pre scrip tions for sound or ga ni za tional lead er ship; nor will it be pur chased with a bag of tricks and gad gets. It re quires noth ing less than the proper or der ing of hu man af fairs, in clud ing the es tab lish ment of so cial or der, the de ter mi na tion of pub lic in ter est, and the de fense of crit i cal val ues." Philip Selznick, Har ring ton Em er son was in ter ested in value sys tems and the first of his TWELVE PRIN CI PLES OF EF FI - CIENCY, writ ten in 1912, was Clearly De fined Ide als : As to def i nite ide als, we could profit from by--gone ages, al though sub sti tut ing other in spi ra - tions. over one of the Greek tem ples, the words are carved, Know Thy self", for which we could sub sti tute, Know the Spirit Rather than the Ex ter nals of Your Busi ness. 12 Philip Selznick's 1957 book, LEAD ER SHIP IN AD MIN IS TRA TION, is heavily ori ented to the role of val - ues and cul ture in the ef fec tive ness of or ga ni za tions. The fol low ing quotes pro vide some in di ca tion of Selznick's per spec tive re gard ing the re la tion ship be tween means and ends: The ten dency to em pha size meth ods rather than goals is an im por tant source of dis ori en ta tion in all or ga ni za tions. It has the stim u lat ing full de vel op ment of these meth ods, but it risks loss of adapt abil ity and some times re sults in a rad i cal sub sti tu tion of means for ends. Lead ers may feel more se cure when they em pha size the ex ploi ta tion of tech ni cal po ten ti al i ties, but the dif fi cult task of de fin ing goals and adapt ing meth ods to the may be un ful filled. 46

20 From Riches to Rags at a Time of Prosperity 11 Selznick ar gues that val ues be come in cul cated in or ga ni za tions and be come in sti tu tion al ized thus pro vid ing an at mo sphere of guid ance to the or ga ni za tion mem bers. In what is per haps its most sig nif i cant mean ing, to in sti tu tion al ize" is to in fuse with value be - yond the tech ni cal re quire ments of the task at hand." 46 From the stand point of so cial sys tems rather than per sons, or ga ni za tion's be come in fused with value as they come to sym bol ize the com mu nity's as pi ra tions, its sense of iden tity. 46 This institutionalization of val ues changes the re la tion ship be tween the or ga ni za tion and its mem bers. From the stand point of a com mit ted per son, the or ga ni za tion is changed from an ex pend able tool into a val ued source of per sonal sat is fac tion 46 Mean ing is thus pro vided to those as so ci ated. Both per sonal and so cial com mit ments com bine to weaken the purely tech ni cal sig nif i cance of or ga ni za tions. Be gin ning as a tool, the or ga ni za tion de rives added mean ing from the psy cho - log i cal and so cial func tions it per forms. In do ing so, it be comes val ued for it self...or ga ni - za tions do not so much cre ate val ues as em body them. As this oc curs, the or ga ni za tion be comes in creas ingly in sti tu tion al ized. 46 Mem bers have to make sense out of what they are do ing. They have to feel that their ef forts are in te grated into a no ble pur pose. Both ends and means are im por tant. The cal i ber of the goals are im por tant. The le git i - macy of the means em ployed is cru cial. There is la tent ide al ism among all of us. Dur ing times of stress, this la tent ide al ism be comes more pow er ful and in flu en tial. It is dif fi cult to at tain or ga ni za tion ob jec tives with - out in te gra tion with the un der ly ing value sys tems of the or ga ni za tion mem bers. Good man age ment helps the or ga ni za tion for mu late and in sti tu tion al ize its value sys tem and then pro vide for cri tique. Once the or - ga ni za tion's val ues have be come in sti tu tion al ized, the need for the con stant pres ence of man age ment in ev - ery de tail of the or ga ni za tion is re duced. Care fully cul ti vated and well-un der stood val ues can serve as struc tural lynchpins in help ing the or ga ni za - tion to fo cus on its mis sion, goals, and pro ce dures. How ever, or ga ni za tional val ues need to be struc tured and ar tic u lated with cau tion. Some of the world's most in fa mous move ments, such as Nazi Ger many and mod ern ter ror ists, have well-cul ti vated value sys tems. In deed, his tory is re plete with value-laden dem a - gogues who have cast mis ery to mil lions. So, the le git i mate bound ing of value sys tems is an ap pro pri ate sub ject for study. The at trib utes that seem to make the in cul ca tion of val ues help ful, rather than harm ful, ap pear to cen ter on a two characteristics: Moral prin ci ples and sound phi los o phy pro vide the nec es sary foun da tion for the use of val ues in an or ga ni za tional set ting. Thus the for ma tion of cho sen val ues should not be en tirely in ter - nal to the or ga ni za tion. This is where many or ga ni za tions make their mis take. The as sume all im por tant con cepts are up to them when there are higher au thor i ties. Or ga ni za tion lead ers have to be hum ble, sin cere, and wholly just. Many a ne far i ous ex ec u tive has fired some well-mean ing and thought ful per son on the grounds that the per son did not share the value sys tem of the or ga ni za tion. More prob a bly, the per son was fired be cause he or she thought for them selves and their abil ity to do so was threat en ing to the in se cure ex ec u tive. Hyp o crites can dam age most any or ga ni za tion and in se cure hyp o crites are among the most dan ger ous. In - se cure and un in formed hyp o crites, who take no time to study the phi los o phies and ideas that have worked well in the past, are the most dan ger ous of all. With a proper moral foun da tion per me ated by hu mil ity, sin cer ity and jus tice, the cul ti va tion of in sti tu tional val ues can greatly help bring co he sive ness to an or ga ni za tion's pur poses and meth ods. But with out these foun da tions, some nasty con se quences can re sult all in the name of val ues. Man age ment as a Com plex Sys tem The great wis dom of some of these ear lier writ ers is ap pli ca ble to day and dove tails neatly with more mod - ern writ ings in Cath o lic so cial thought and cor po rate so cial re spon si bil ity. But please note that these "cor - ner stones" are not selectable pil lars of in di vid ual traits but are the es sen tial foun da tions of a co he sive sys -

21 12 Historical Perceptions of the Good Company tem. Each of these im por tant prin ci ples are nec es sary and wholly in te gral to an ef fec tive work ing or ga ni za - tion. As the ear lier quo ta tion from Philip Selznick points out, there are few sim ple pre scrip tions for sound or ga - ni za tional lead er ship. Man age ment is the in te gra tion of hu man af fairs with the pub lic in ter est and the so cial order. Management is inescapably a value--based activity. Professors Trist 57, Em ery 13, Ackoff 2 and oth ers have writ ten ex ten sively about the frag ile in ter re la tion ships that ex ist in com plex so cial sys tems. In - sta bil i ties and tur bu lence can re sult even when so lu tions to the or ga ni za tion's most press ing prob lems are at tempted. Rus sell Ackoff de scribes this com plex ity in RE DE SIGN ING THE FU TURE: We have also come to re al ize that no prob lem ex ists in com plete iso la tion. Ev ery prob lem in - ter acts with ev ery other prob lem and is there fore part of a set of in ter re lated prob lems a sys tem of prob lems... Fur ther more, so lu tions to most prob lems pro duce other prob lems;...a fi nan cial prob lem, a main te nance prob lem, and con flict among fam ily mem bers for its use. 1 In man age ment, there are no sim ple gad gets and there is sel dom one big knob to turn. Ev ery ac tion in flu - ences ev ery other ac tion. Man ag ers have to re main at ten tive to the sur round ing at mo sphere they are cre at - ing. Qual i ties such as in teg rity, goal in te gra tion and the abil ity to per ceive a no ble pur pose fa vor ably in flu - ence the at mo sphere within which the com plex sys tem of man age ment func tions. The pres ent at mo sphere sur round ing our man a ge rial ac tiv i ties is of ten far from ideal in busi nesses, gov - ern ments, and not-for-profit or ga ni za tions. Mis trust per vades and of ten for good rea son. In teg rity is too of - ten viewed as op tional and is un der val ued as an es sen tial el e ment of the or ga ni za tional sys tem. In di vid u als too of ten pur sue only their own ob jec tives with in suf fi cient re gard for the com mu nity in which we all op er - ate. Whereas these ne far i ous ac tiv i ties may ap pear to be ra tio nal be hav ior, these are hav ing the ag gre gate ef fect of erod ing the com pet i tive edge of our coun try and our ef fec tive ness as a world eco nomic power. We can do much better. It is im por tant to note that many of the schol ars men tioned here were not phi los o phers by train ing. For the most part, they were en gi neers or ef fi ciency ex perts. Gantt, Tay lor, Em er son, the Gilbreths, Moo ney and Riley all worked pri mar ily on pro duc tion mat ters. Their in ter ests in man a ge rial phi los o phy arose sec ond - arily in search of prin ci ples of man age ment that would make ef fi ciency achiev able. A hun dred years ago these ex pe ri enced prac ti tio ners had learned some thing that most of the mod ern take over art ists and mov ers and shak ers are yet to learn. Ef fi ciency and the at tain ment of ob jec tives is only pos si ble if a philo soph i cally sound man a ge rial at mo sphere is pres ent. Com pa nies pro vide jobs. Good com pa nies pro vide valu able prod ucts and ser vices, stim u late the ex pan sion of sup pli ers, treat their com pet i tors and in ves tors hon estly, pro vide op por tu ni ties for fair treat ment and de - pend able growth of em ploy ees and ef fec tively in te grate their ob jec tives with those of their com mu ni ties. Be ing a good com pany is a chal leng ing task one which takes the full con cen tra tion, ded i ca tion, and tal - ents of man age ment. Some man ag ers are up to the daunt ing task of build ing a good com pany. Some are not. Dur ing this age of cor po rate scan dals, co los sal bank rupt cies, mush room ing fis cal and trade def i cits, it is ap pro pri ate for us to ques tion whether the cal i ber of man age ment with which we have been pro vided is suf fi cient to the task at hand. And yet, dur ing these same times some com pa nies are do ing well and their em ploy ees, sup pli ers, cred i tors, and com mu ni ties are pleased by their ex is tence. Per haps our con fer ence will be un able to for mu - late a de tailed pre scrip tion of what is needed to be come a "good com pany." But, hope fully we will be able to ef fec tively for mu late some sus pi cions. As an en gi neer ing pro fes sor, I am un fit to pres ent deeply theo log i cal ma te rial a task better left to those more ca pa ble. In stead, I have at tempted to pres ent the per spec tive of a prac ti tio ner and a nov ice stu dent who is ea ger to hear what oth ers will say. As the United States strug gles with the tran si tion to a world econ omy dur ing a time of eco nomic dif fi culty, these cor ner stone prin ci ples de scribed above should be kept in mind. We can not dis card ev ery thing. We have to make what we have work. And, we have to fos ter an at mo sphere where the in ter ests of the work ers, the or ga ni za tion and the com mu nity are seen as more con gru ent. REFERENCES

22 From Riches to Rags at a Time of Prosperity 13 1 Ackoff, R. A.; 1974; RE DE SIGN ING THE FU TURE; New York; Wiley; Chap ters Ackoff, R. A.; 1981; CRE AT ING THE COR PO RATE FU TURE; New York; Wiley; pp Ad ams, John S.: The Re gional Ser vice Econ omy A Con tem po rary Mi rage?, The Journal of Applied Manufacturing Systems vol. 3, no.1, spring 1990, p. 3 3 Argyris, C. and D. Schon ORGANIZATIONAL LEARNING: A THEORY OF ACTION PERSPECTIVE. Addison--Wesley, Reading, Mass. 4 Argyris, C. and D. Schon THE ORY IN PRAC TICE ; San Fran cisco; Jossey Bass; Chap ters Babbage, Charles; ON THE ECON OMY OF MA CHIN ERY AND MAN U FAC TUR ERS; Lon don; Barnard, Ches ter I., THE FUNC TIONS OF THE EX EC U TIVE, Har vard Uni ver sity Press, Cam bridge, Mass & Barnard, Ches ter I., OR GA NI ZA TION AND MAN AGE MENT, Har vard Uni ver sity Press, Cam bridge, Mass Behling, O.,& Starke, F.A.; The Pos tu lates of Ex pec tancy The ory ;ACAD EMY OF MAN AGE MENT JOUR NAL; 1973, 16, p Bibeault, Don ald B,;COR PO RATE TURN AROUND: HOW MAN AG ERS TURN LOS ERS INTO WIN NERS; New York; McGraw Hill; Botkin, J.W. et al.;1979;no LIM ITS TO LEARN ING : A RE PORT TO THE CLUB OF ROME; Pergamon, Ox ford. 11 Brent, Sandor B.;"Prigogine's Model for Self Or ga ni za tion in Nonequilibrium Sys tems"; HU MAN DE VEL OP MENT; # Em er son, Har ring ton; The First Prin ci ple -- Clearly De fined Ide als; in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Management Association; p / 13 Em ery, F.E.; New Per spec tives on the World of Work ; 14 Em ery, F.E. and Trist, E.;1973; TO WARD A SO CIAL ECOL OGY; Ple num, New York. 15 Em ery, F.E. and Em ery, M.;1976; THE FU TURES WE ARE IN ; LEIDEN; Martinus Nijhoff; Ch 1 & Ehrbar, A.F.; Is In fla tion Com ing Back ; FOR TUNE;March 21, 1983;pp Fiedler, Fred E.; A THE ORY OF EF FEC TIVE LEAD ER SHIP; New York; McGraw--Hill; Fried man, J.; RETRACKING AMER ICA; New York; Doubleday; Gantt, Henry l.; IN DUS TRIAL LEAD ER SHIP; New Ha ven, Yale Uni ver sity Press, Gantt, Henry l.;"the Part ing of the Ways" in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age ment As so ci a - tion; p Gantt, Henry l.;"train ing Work men in Hab its of In dus try and Co op er a tion" in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; American Management Association; p Gilbreth, Frank B.; Sci ence in Man age ment for the One Best Way to do Work in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age ment As so ci a tion; Gilbreth, Lillian M.; THE PSY CHOL OGY OF MAN AGE MENT; New York; MacMillan; Haber, Samual;EFFICIENCY AND UPLIFT -- Scientific Man age ment in the Pro gres sive Era ; Uni ver sity of Chi cago Press; Chi cago; Hambrick, D. C., I. MacMillan, and D. Day: Stra te gic At trib utes and Per for mance in the BCG Ma trix a PIMS Based Anal y sis of In dus trial Prod - uct Busi nesses, Academy of Management Journal, vol. 25, no. 3, Hamner, W. Clay; Re in force ment The ory and Con tin gency Man age ment in Or ga ni za tional Set tings ; in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Hamner, W. Clay, Ross, Jerry, and Staw, Barry M.; Mo ti va tion in Or ga ni za tions: The Need for a New Di rec tion ; in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Heenan, D. & Perlmutter, H. V.;1979; MULTINATIONAL ORGANIZATION DEVELOPMENT; Addison--Wesley, Reading, Mass. 28 Kakar, Sudhir; FRED ER ICK TAY LOR: A STUDY IN PER SON AL ITY AND IN NO VA TION; Cam bridge Mass.;MIT Press; Latham, Gary P. and Locke, Edwin A.;"Goal Set ting -- A Mo ti va tional Tech nique that Works";in Steers, Rich ard M. and Por ter, Lyman W.;MO TI - VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Law rence, Paul R. & Dyer, Da vis; RE NEW ING AMER I CAN IN DUS TRY; New York; The Free Press; Locke, Edwin A.;"The Ubiq uity of the Tech nique of Goal Set ting in The o ries of and Ap proaches to Em ployee Mo ti va tion";in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Locke, E., Feren, D.B., McCaleb, V.M., Shaw, K.N., & Denny, A.T.; The Rel a tive Ef fec tive ness of Four Meth ods of Mo ti vat ing Em ployee Per for - mance ; in Duncan, K.D., Wallis,D. and Gruneberg, M.M.; CHANGES IN WORK ING LIFE; Chichester, Eng.; Wiley, Maruyama, Magoroh; Mindscapes and Science Theories ; CURRENT ANTHROPOLOGY; October Morgan, Gareth; Paradigm Diversity in Organizational Research ; Revised version of Paradim Di ver sity and Be yond ; Acad emy of Man age ment Sym po sium; San Diego;Au gust Mor gan, Gareth & Ramirez, Rafael; Ac tion Learn ing: A Ho lo graphic Met a phor for Guid ing So cial Change 36 Mi chael, D. N.; ON LEARN ING TO PLAN AND PLAN NING TO LEARN; San Fran cisco; Jossey Bass; 1973; Ch 1,2,5 & Mi chael, D. N.; Com pe tence and Com pas sion in an Age of Un cer tainty ; WORLD FU TURE SO CI ETY BULLETIN; Jan/Feb Miner, John B.; THE O RIES OF OR GA NI ZA TION BE HAV IOR; Hinsdale, Il li nois; The Dryden Press; 1980.

23 14 Historical Perceptions of the Good Company 39 Naylor, James C., Pritchard, Rob ert D., Illgen, Dan iel R. ; A THE ORY OF BE HAV IOR IN OR GA NI ZA TIONS; New York; Ac a demic Press; Ozbekhan, Hasan; Thoughts on the Emerg ing Meth od ol ogy of Plan ning 41 Pava, Carl; A Con cept of Nor ma tive Incrementalism ; Draft Pa per. 42 Pe ters, Thomas J., and Water man, Rob ert H. Jr.;IN SEARCH OF EX CEL LENCE: LES SONS FROM AMER ICA'S BEST RUN COM PA NIES; New York; Harper & Row; Ramirez, Rafael; To wards a So cial Sci ence that Ex plains both Change and Sta bil ity through Un der stand ing Par a digm Shifts ; Un pub lished Pa per. 44 Roering, Wil liam and Gilbert, Dan iel; Stra te gic Duty ; an un pub lished pa per at the Uni ver sity of Min ne sota; Scholl, R.S.; Dif fer en ti at ing Or ga ni za tional Com mit ment from Ex pec tancy as a Mo ti vat ing Force ; ACAD EMY OF MAN AGE MENT RE VIEW; 1981, 6, p Schon, D.A.;1971; BE YOND THE STA BLE STATE; Ba sic Books, New York. 47 Selznick, Philip, LEAD ER SHIP IN AD MIN IS TRA TION: A So cio log i cal In ter pre ta tion, Evanston, IL: Row, Pe ter son, Shel don, Ol i ver; A Pro fes sional Creed for Man age ment in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age - ment As so ci a tion; Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Sueno, Akiro; ENTREPRENEUR AND GENTLEMAN -- A CASE HIS TORY OF A JAP A NESE COM PANY; To kyo; Charles E. Tutle; Tay lor, Fred er ick W.; SHOP MAN AGE MENT; New York; Harper; Tay lor, Fred er ick W.;SCI EN TIFIC MAN AGE MENT; Harper and Broth ers; New York; , Tay lor, Fred er ick W.; What is Sci en tific Man age ment in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age - ment 53 Thompson, James D.;ORGANIZATIONS IN ACTION: SOCIAL SCIENCE BASIS OF ADMINISTRATIVE THEORY; New York; McGraw-- Hill; Thorow, Lester C.;THE ZERO SUM SO CI ETY; New York; Pen guin; Trist, Eric; The En vi ron ment and Sys tem Re sponse Ca pa bil ity ; FU TURES; April Trist, Eric; New Di rec tions of Hope: Re cent In no va tions In ter con nect ing Or ga ni za tional, In dus trial, Com mu nity and Per sonal De vel op ment ; RE - GIONAL STUD IES; Vol 13 ; Trist, Eric; Ref er ent Or ga ni za tions and the De vel op ment of Inter--Or ga ni za tional Do mains ; HU MAN RE LA TIONS; Vol 36 #3; Umstot, D.D., Mitch ell, T.R., & Bell, C.H. Jr.,"Goal Set ting and Job En rich ment: An In te grated Ap proach to Job De sign";acad EMY OF MAN - AGE MENT RE VIEW; 1978, 3, Urwick, Lyndall F.; SCIENTIFIC PRINCIPLES AND ORGANIZATION; New York; American Management Association; Van de Ven, An drew H.; Early Plan ning, Im ple men ta tion and Per for mance of New Or ga ni za tions in Kimberly, John R. and Miles, Rob ert H. THE OR GA NI ZA TIONAL LIFE CY CLE; San Fran cisco; Jossey Bass; Wil liams, Trevor A.;1982; LEARN ING TO MAN AGE OUR FU TURES; New York; Wiley; 62 Wood ward, Joan; IN DUS TRIAL OR GA NI ZA TION: THE ORY AND PRAC TICE; Lon don; Ox ford Uni ver sity Press; of the Ways" in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age ment As so ci a tion; p Gantt, Henry l.;"train ing Work men in Hab its of In dus try and Co op er a tion" in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; American Management Association; p Gilbreth, Frank B.; Sci ence in Man age ment for the One Best Way to do Work in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age ment As so ci a tion; Gilbreth, Lillian M.; THE PSY CHOL OGY OF MAN AGE MENT; New York; MacMillan; Haber, Samual;EFFICIENCY AND UPLIFT -- Scientifis Man age ment in the Pro gres sive Era ; Uni ver sity of Chi cago Press; Chi cago; Hambrick, D. C., I. MacMillan, and D. Day: Stra te gic At trib utes and Per for mance in the BCG Ma trix a PIMS Based Anal y sis of In dus trial Prod - uct Busi nesses, Academy of Management Journal, vol. 25, no. 3, Hamner, W. Clay; Re in force ment The ory and Con tin gency Man age ment in Or ga ni za tional Set tings ; in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Hamner, W. Clay, Ross, Jerry, and Staw, Barry M.; Mo ti va tion in Or ga ni za tions: The Need for a New Di rec tion ; in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Heenan, D. & Perlmutter, H. V.;1979; MULTINATIONAL ORGANIZATION DEVELOPMENT; Addison--Wesley, Reading, Mass. 28 Kakar, Sudhir; FRED ER ICK TAY LOR: A STUDY IN PER SON AL ITY AND IN NO VA TION; Cam bridge Mass.;MIT Press; Latham, Gary P. and Locke, Edwin A.;"Goal Set ting -- A Mo ti va tional Tech nique that Works";in Steers, Rich ard M. and Por ter, Lyman W.;MO TI - VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Law rence, Paul R. & Dyer, Da vis; RE NEW ING AMER I CAN IN DUS TRY; New York; The Free Press; 1983.

24 From Riches to Rags at a Time of Prosperity Locke, Edwin A.;"The Ubiq uity of the Tech nique of Goal Set ting in The o ries of and Ap proaches to Em ployee Mo ti va tion";in Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Locke, E., Feren, D.B., McCaleb, V.M., Shaw, K.N., & Denny, A.T.; The Rel a tive Ef fec tive ness of Four Meth ods of Mo ti vat ing Em ployee Per for - mance ; in Duncan, K.D., Wallis,D. and Gruneberg, M.M.; CHANGES IN WORK ING LIFE; Chichester, Eng.; Wiley, Maruyama, Magoroh; Mindscapes and Science Theories ; CURRENT ANTHROPOLOGY; October Morgan, Gareth; Paradigm Diversity in Organizational Research ; Revised version of Paradim Di ver sity and Be yond ; Acad emy of Man age ment Sym po sium; San Diego;Au gust Mor gan, Gareth & Ramirez, Rafael; Ac tion Learn ing: A Ho lo graphic Met a phor for Guid ing So cial Change 36 Mi chael, D. N.; ON LEARN ING TO PLAN AND PLAN NING TO LEARN; San Fran cisco; Jossey Bass; 1973; Ch 1,2,5 & Mi chael, D. N.; Com pe tence and Com pas sion in an Age of Un cer tainty ; WORLD FU TURE SO CI ETY BULLETIN; Jan/Feb Miner, John B.; THE O RIES OF OR GA NI ZA TION BE HAV IOR; Hinsdale, Il li nois; The Dryden Press; Naylor, James C., Pritchard, Rob ert D., Illgen, Dan iel R. ; A THE ORY OF BE HAV IOR IN OR GA NI ZA TIONS; New York; Ac a demic Press; Ozbekhan, Hasan; Thoughts on the Emerg ing Meth od ol ogy of Plan ning 41 Pava, Carl; A Con cept of Nor ma tive Incrementalism ; Draft Pa per. 42 Pe ters, Thomas J., and Water man, Rob ert H. Jr.;IN SEARCH OF EX CEL LENCE: LES SONS FROM AMER ICA'S BEST RUN COM PA NIES; New York; Harper & Row; Ramirez, Rafael; To wards a So cial Sci ence that Ex plains both Change and Sta bil ity through Un der stand ing Par a digm Shifts ; Un pub lished Pa per. 44 Roering, Wil liam and Gilbert, Dan iel; Stra te gic Duty ; an un pub lished pa per at the Uni ver sity of Min ne sota; Scholl, R.S.; Dif fer en ti at ing Or ga ni za tional Com mit ment from Ex pec tancy as a Mo ti vat ing Force ; ACAD EMY OF MAN AGE MENT RE VIEW; 1981, 6, p Schon, D.A.;1971; BE YOND THE STA BLE STATE; Ba sic Books, New York. 47 Selznick, Philip, LEAD ER SHIP IN AD MIN IS TRA TION: A So cio log i cal In ter pre ta tion, Evanston, IL: Row, Pe ter son, Shel don, Ol i ver; A Pro fes sional Creed for Man age ment in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age - ment As so ci a tion; Steers, Rich ard M. and Por ter, Lyman W.;MO TI VA TION AND WORK BE HAV IOR; New York; McGraw Hill; Sueno, Akiro; ENTREPRENEUR AND GENTLEMAN -- A CASE HIS TORY OF A JAP A NESE COM PANY; To kyo; Charles E. Tutle; Tay lor, Fred er ick W.; SHOP MAN AGE MENT; New York; Harper; Tay lor, Fred er ick W.;SCI EN TIFIC MAN AGE MENT; Harper and Broth ers; New York; , Tay lor, Fred er ick W.; What is Sci en tific Man age ment in Merrill, Har wood F., CLAS SICS IN MAN AGE MENT; New York; Amer i can Man age - ment 53 Thompson, James D.;ORGANIZATIONS IN ACTION: SOCIAL SCIENCE BASIS OF ADMINISTRATIVE THEORY; New York; McGraw-- Hill; Thorow, Lester C.;THE ZERO SUM SO CI ETY; New York; Pen guin; Trist, Eric; The En vi ron ment and Sys tem Re sponse Ca pa bil ity ; FU TURES; April Trist, Eric; New Di rec tions of Hope: Re cent In no va tions In ter con nect ing Or ga ni za tional, In dus trial, Com mu nity and Per sonal De vel op ment ; RE - GIONAL STUD IES; Vol 13 ; Trist, Eric; Ref er ent Or ga ni za tions and the De vel op ment of Inter--Or ga ni za tional Do mains ; HU MAN RE LA TIONS; Vol 36 #3; Umstot, D.D., Mitch ell, T.R., & Bell, C.H. Jr.,"Goal Set ting and Job En rich ment: An In te grated Ap proach to Job De sign";acad EMY OF MAN - AGE MENT RE VIEW; 1978, 3, Urwick, Lyndall F.; SCIENTIFIC PRINCIPLES AND ORGANIZATION; New York; American Management Association; Van de Ven, An drew H.; Early Plan ning, Im ple men ta tion and Per for mance of New Or ga ni za tions in Kimberly, John R. and Miles, Rob ert H. THE OR GA NI ZA TIONAL LIFE CY CLE; San Fran cisco; Jossey Bass; Wil liams, Trevor A.;1982; LEARN ING TO MAN AGE OUR FU TURES; New York; Wiley; 62 Wood ward, Joan; IN DUS TRIAL OR GA NI ZA TION: THE ORY AND PRAC TICE; Lon don; Ox ford Uni ver sity Press; 1965.

25 From Riches to Rags at a Time of Prosperity 17 Part Two The Economy Though the o ret i cally sound in its ide als, the U. S. econ omy, and many oth ers like it, are flawed in prac tice. Amid the pre cept that the com mu nity is better off when ev ery one pur sues his or her own best in ter est, we have ris ing and per sis tent un em ploy ment, mas sive fail ures of fi nan cial in sti tu tions, chron i cally wors en ing trade def i cits, gi gan tic borrowings from less af flu ent coun tries, and the pros pect of con tin u ing and un com - fort able wor ries and un cer tain ties. These wor ries and un cer tain ties are not par ti san. They are shared by work ers, en tre pre neurs, char i ties, small and large em ploy ers, young peo ple en ter ing the la bor force and older peo ple who have re tired from it. Part of the prob lem is with the sys tems we use to mea sure our econ omy. The mea sures we em ploy are by na ture and de sign im per sonal. They are de signed to sys tem at i cally screen out all val ues and maybe mean - ing ful ob ser va tions of a sub jec tive na ture. Con sider one of our most im por tant mea sures Gross Do mes tic Prod uct. The GDP is a cost driven mea - sure. It as sumes that if we spend money on some thing, it must be valu able. It as sumes that the mod ern day an es the tist who ad min is ters an aes thetic at com pen sa tion of half a mil lion or more dol lars per year is per - form ing a ser vice in fi nitely more valu able than the Fran cis can nuns who for merly per formed the same ser - vice at the Mayo Clinic for the vow of pov erty. This tran si tion has al lowed the sta tis ti cal GDP to in crease, be cause the new sys tem costs more. The same could be said for the evo lu tion of the work ing mother. When moth ers re mained at home and un - paid, the work was never re corded as part of the gross do mes tic prod uct. Now that so many have at tained work out side the home, for eco nomic rea sons or other rea sons, the GDP has greatly in creased on the as - sump tion that the work of the home maker was val ue less. So, this sec tion of the book ar gues for a more qual i ta tive form of eco nom ics. In deed it pru dent to tab u late the mar ket value of trans ac tions. How ever, it is ar gued that the transactional cost of some thing is only one of sev eral con sid er ations we must em ploy to de ter mine if we are pro gress ing or los ing ground eco nom i - cally. We also ar gue that prices paid, the cost of ex ter nali ties, so cial im pacts, and the im pact on the ac cu - mu la tion of skills should also be con sid ered. Only a few of the nu ances of our mal func tion ing econ omy will be dis cussed in this manu script which is in tended only to heighten our in ter est in more thor ough anal y sis. The great changes we are ex pe ri enc ing should cause us to pause and re flect. The au thor is hope ful that the se ries of es says pre sented here will lead to some thing more in sight ful. These are only questions.

26 18 Part Two The Economy U.S. Economy Hampered by a Lack of Producers MINNEAPOLIS STAR TRIBUNE -- Jan u ary 20, 1991 Need ev i dence that our econ omy is sick? Check these con di tions: Un prec e dented con sumer debt; Government deficits several times the amount formerly regarded as astronomical; The quick tran si tion of the United States from the world s larg est cred i tor to its larg est debtor; Vol a tile cap i tal mar kets; Mon u men tal trade def i cits; And a pleth ora of un friendly and un der-an a lyzed cor po rate take overs. The time is long past where we need more in sight ful anal y sis about what ails the econ omy. Our pres ent an - a lyt i cal meth ods are not bring ing re sults. As with many other socio-technical sys tem prob lems, ques tions sur face re gard ing the cause of eco nomic dif fi cul ties. Is it the lag ging char ac ter of pro duc tion ca pa bil ity? Or, is it the in creas ing bur den it must bear? Should pro duc tion be in creased? Or is it nec es sary to re duce the ex pen di tures of the non-pro duc ing part of the sys tem?. Man u fac tur ing and other forms of tan gi ble pro duc tion, along with es sen tial main te nance ser vices, pro vide the real eco nomic wealth of the na tion, for all of its peo ple. The fu ture of the U.S. econ omy is in es cap ably tied to the ef fi ciency and qual ity of its tan gi ble pro duc tion. In the in ter est of eco nomic sta bil ity, a more fa - vor able bal ance must be de vel oped be tween pro duc tion and con sump tion. Yet, in the past 40 years we have wit nessed a fall ing ap pre ci a tion for tan gi ble pro duc tion (man u fac tur ing, con struc tion and min ing). We have ne glected it to con cen trate on other things. In 1900, 48 per cent of the non ag ri cul tural la bor force was en gaged in tan gi ble pro duc tion. Even as late as 1950, this fig ure was still at 41 per cent. By 1988, it had dropped to 24 per cent. And the U.S. gov ern ment has is sued a pro jec tion that it will be 21 per cent by the year Mean while, em ploy ment in fi nance, in sur ance, real es tate, gov ern ment and ser vices (gross na tional over - head) has mush roomed from 13 mil lion peo ple in 1950 to 32 mil lion to day. Min ne sota con tin ues in the same vein. Dur ing the past two years, the state has lost 13,800 man u fac tur ing jobs but added 20,700 gov - ern ment jobs. The prob lem of gross na tional over head goes far be yond gov ern ment, how ever. We are all part of it. Fi - nance, in sur ance and real es tate em ploy ment has more than tri pled since Ser vice em ploy ment has in - creased nearly five times, while es sen tial ser vices re main un af ford able to many cit i zens. Ed u ca tion has bur - geoned in cost dur ing the same pe riod and become less effective. The growth in ser vice sec tor em ploy ment has placed an ex treme tax on the peo ple and com pa nies en gaged in tan gi ble pro duc tion. Our prob lem is not that our peo ple and com pa nies do not know how to de sign and build good prod ucts. In the last qual ity sur vey, nine U.S. auto mod els s beat Nissan in over all qual ity. Amer i can cars con sis tently do better than cars from any other coun try ex cept Ja pan, and they are at least as good as most Jap a nese mod els. Our abil ity to com pete glob ally is se verely im pacted by ex cep tion ally high over head cost. High over head costs are a so cial con cern. These costs re sult in plant closings and job losses. There is sim - ply no way that 25 mil lion peo ple en gaged in tan gi ble pro duc tion can sup ply all of the food, man u fac tured goods, build ings, roads and raw ma te ri als for the 225 mil lion peo ple who are not en gaged in pro duc tion. The sit u a tion is not sus tain able eco nom i cally. A closer anal y sis of Amer ica s cost of com pet ing is re veal ing. Di rect la bor is not a big prob lem be cause U.S. wages are equal to or lower than ma jor com pet i tors. Emerg ing coun tries do have lower wages, but la - bor ac counts for a small enough per cent age of to tal prod uct costs to keep di rect la bor from be ing a ma jor ob sta cle to world-class com pe ti tion. La bor qual ity is more of a prob lem. The U.S. ed u ca tion sys tem is vastly in fe rior to those in other in dus trial na tions. It is not as thor ough and it cov ers the wrong sub jects.

27 From Riches to Rags at a Time of Prosperity 19 Ma te ri als are no prob lem be cause the world mar ket keeps U.S. costs at com pet i tive lev els. In ter nal over head is a great bar rier to U.S. com pet i tive ness and is likely to re main so. Even though the ranks of U.S. mid dle man age ment are be ing re duced, gov ern ment s pro pen sity to shift so ci etal costs to com pa nies is keep ing in ter nal over head costs high. Ex ec u tive com pen sa tion also re mains too high and im - pedes co op er a tion. Ex ter nal over head is the big gest prob lem of all, and it is not all pub lic over head. Ser vices, fi nance, in sur - ance, ed u ca tion and gov ern ment all need to be come much more cost-ef fec tive for the U.S. to con tinue as a vi a ble na tion. We can not con tinue to si phon re sources out of the pro duc tive units of our so ci ety and ex pect those units to re main com pet i tive in world markets.

28 20 Part Two The Economy Prosperity: Prepare to encounter posterity CITYBUSINESS -- March 27, 1998 As Ash Wednes day kicked off the be gin ning of Lent, we were marked with ashes with the ad mon ish ment, Re mem ber that you are dust, and to dust you shall re turn. The phrase took on spe cial mean ing to some of us who may be closer to dust than oth ers. In the midst of our im mense pros per ity, the clam or ous stock mar - ket and ram pant op ti mism in cor po rate Amer ica, any re minder of our mor tal ity is a bit un set tling but help ful. It s good for us to con sider that there may be a pur pose more im por tant than our own pros per ity. The thought oc curred to me that the ad min is tra tion of ashes would n t be a bad prac tice for board meet ings. Some of us have ques tioned the mag ni tude and na ture of the pros per ity we are ex pe ri enc ing. What does it mean? What are our re spon si bil i ties? Do we sim ply get to live in these pros per ous times and con sume and en joy the wealth? That would be nice, but it sounds too easy. There must be a catch. Apart from any theo log i cal im pli ca tions, which I will leave to those better pre pared, I have a con cern for how pros per ity is af fect ing the way we do busi ness. We in vest and the mar ket goes up. Of ten, we are richer not be cause we de signed any thing any better or built any thing any better, or be cause we served our cus - tom ers any better or even be cause we in vested any better. At times, our wealth seems to be ac cu mu lat ing for no rea son other than the fact that, through no fault of our own, we ex ist dur ing good times. The key ques tion is, has busi ness be come so easy that we have lost touch with the fun da men tals? And, if our pe riod of pros per ity ends, will we know how to re build it? There are, of course, some com pa nies that have not lost these skills. Bermo is one of the best metal stamp - ers in the coun try, and they are do ing some solid in vest ing. Their plants are mod els of state-of-the-art au to - ma tion and good equip ment. Clearly, it s one of the best in the U.S. but, to put this ex per tise in per spec tive, there is one com pany in Sin ga pore that is ap prox i mately six times Bermo s size, also with very up-to-date equip ment. There are other over seas com pet i tors. Remmele Engineering is also a world-class out fit, with what is per haps the best com ple ment of equip ment in the Up per Mid west. For a long list of pres ti gious cus tom ers, Remmele can ma chine parts rang ing in size from one mil li me ter in length to sev eral tons in weight all with the ut most pre ci sion. Remmele is an - other for ward-look ing Min ne sota com pany that is not afraid to in vest. So are Medtronic, Dy namic En gi - neer ing, HEI, Starkey, Cus tom Mold, Kurt, Hor ton and oth ers. But, not ev ery one is do ing this in vest ing. In this age of as set uti li za tion, there is an un whole some de gree of cau tion about hav ing too much in vested in equip ment or hav ing a bal ance sheet that is in suf fi ciently le ver - aged, or in vest ing too much for long-term gains. There seems to be an em pha sis on buy ing, rather than de - sign ing or mak ing, and outsourcing seems to be the lat est man a ge rial fad. The div i dend-pay out ra tio has in - creased from about 40 per cent in the late 60s and early 70s to around 70 per cent to day. Since profit rates are lower now than they once were, the per cent age of rev e nue be ing re in vested for the fu ture is sub stan - tially smaller than it once was. The irony co mes when the cap i tal in vest ments of these ma jor man u fac tur ers are com pared to other ex pen - di tures. The state bond ing bill, hos tile take over at tempts, huge amounts of good will placed on cor po rate bal ance sheets from over priced merg ers and ac qui si tions, the di ver sion of re sources away from in dus try to fi nan cial in sti tu tions. We should won der if Min ne sota is pre par ing ad e quately for an in dus trial fu ture. Some com pa nies, are, of course, many of them pri vate. But, over the years, we seem to have ac cu mu lated a length en ing list of com pa nies pre par ing only for me di oc rity. Mar ket val ues are in creas ing be cause the mar - ket is up. Yet we are not ad e quately pre par ing for ag gres sive world com pe ti tion. The U.S. trade def i cit re cently reached a nine-year high. The prob lems of South east Asia will im pact our com pa nies. South east Asia is like It aly. The gov ern ments and the banks may be broke, but the mod ern pro - duc tion equip ment and trained work ers are still in place. Many of the Asian in dus trial com pa nies re main vig or ous com pet i tors. The re cent changes in ex change rates will al low them to more ag gres sively com pete on price, and some U.S. com pa nies are not po si tioned for this on slaught. I am aware that ev ery one says the econ omy is great and the U.S. eco nomic sys tem is the envy of the world. Per haps this is true, but time passes quickly. Our pros per ity is still in dus tri ally based. Con sider these facts:

29 From Riches to Rags at a Time of Prosperity 21 The 38,600 em ploy ees in Min ne sota s in stru ment in dus try earn a half a bil lion dol lars a year more than the nearly 150,000 Min ne so tans em ployed in the res tau rant and bar in dus try. The 75,000 Min ne so tans em ployed in the in dus trial ma chin ery in dus try earn about half of what 450,000 peo ple earned in re tail trade. The 31,100 peo ple em ployed in Min ne sota s pa per in dus try earn 8 per cent more than all of the 70,600 Min ne so tans em ployed in car deal er ships, auto re pair and ser vices, and 11 per cent more than all of the 45,530 Min ne so tans em ployed in all banks and nondepository fi nan cial in - sti tu tions. The 10,840 peo ple em ployed in Min ne sota s chem i cal in dus try earn al most as much as the 25,000 Min ne so tans em ployed in real es tate. Clearly, with so much of our state s real pros per ity de pend ent upon tan gi ble pro duc tion, it is in our best in - ter est to keep it strong for the fu ture. Rob ert Wolman, chief econ o mist for BusinessWeek, re cently made an in ter est ing ob ser va tion in a talk at the Humphrey In sti tute about his lat est book, The Ju das Econ omy. The re turn on cap i tal is out strip ping the re turn from work. When that hap pens for long pe ri ods, the ca pa bil ity to per form fun da men tal tasks first at - ro phies and then de clines. In this con nec tion, and in oth ers, the ashes make sense. We can t be here just to con sume. We have ob li ga - tions to pre pare for the fu ture of those who come af ter us. This is hap pen ing with some el e ments of our so - ci ety but not enough.

30 22 Part Two The Economy Trade deficits endanger our future CITYBUSINESS -- No vem ber 27, 1998 Re cently it was an nounced that for the third time this year, the United States trade def i cit again reached a new re cord high $16.8 bil lion in a sin gle month. The mat ter gets lit tle at ten tion in the news and vir tu ally no at ten tion at all in po lit i cal cam paigns. It is tragic that a de vel op ment which can so com pro mise both the pros per ity and so cial fab ric of our en tire na tion gets so lit tle at ten tion. Yet its im por tance is not lost on the se ri ous ob serv ers of our time a few ac a dem ics, some busi ness peo ple who travel in ter na tion ally, stu - dents of cen tral cit ies, rep re sen ta tives of in dus trial un ions and peo ple who par tic i pate ac tively in the in dus - trial econ omy. If these trade def i cits con tinue as they are, we must rec og nize that be fore long, we will no lon ger be a prom i nent na tion, a mil i tary power, an eco nomic gi ant or a ha ven for the world s sav ings. Eco - nomic trends, fu eled by geo met ric pro gres sions, take place quickly. Such a dire pre dic tion is ri dic u lous, you say. The U.S. is clearly the pre em i nent world econ omy one of the few that is func tion ing re li ably at the mo ment. We are fully jus ti fied in be ing con cerned about Rus sia, South east Asia or Brazil, but not about the U.S. If any thing, our econ omy has been over heated to the point that the big gest prob lem voiced by em ploy ers is the lack of avail abil ity of qual i fied peo ple. Our sta tis ti cal un em ploy ment rate is ex ceed ingly low while the stock mar ket, though vol a tile, gets higher ev ery year. Be neath our ap par ent pros per ity, how ever, are more wor ri some events. Some of these merely in di cate a re - turn to more usual eco nomic times, such as slip ping con sumer con fi dence, re duced prof its, or grad u ally de - clin ing job for ma tions. Oth ers seem more fun da men tal per haps more en demic. Among these are de clin - ing rates of in vest ment among U.S. in dus trial com pa nies, ex cep tion ally low sav ings rates, a shrink ing base of sup pli ers of cru cial in dus trial com po nents, and the to tal exit of U.S. com pa nies from stra te gic in dus tries. There are bright signs such as the emer gence of Nucor as one of the world s pre em i nent steel com pa nies and the strong com pet i tive po si tions held by U.S. com pa nies in air craft and pa per. But the list of where we ex cel is grow ing shorter. The U.S. counts for noth ing in ship build ing, an in dus try that spawns many other in dus tries and much em ploy ment. We have slipped greatly in elec tri cal equip ment, com put ers and in stru - ments. Our mar ket pen e tra tion in ma chine tools is mi nus cule com pared to what it was, even though Haas and a few oth ers are turn ing out some good units. U.S. man u fac tur ing is grow ing in non stra te gic ar eas such as of fice par ti tions, cook ies, burial cas kets and greeting cards. We welcome the employment, but these are not industries that foreshadow an industrial future. From its peak in 1979, the U.S. has lost roughly three mil lion man u fac tur ing jobs. Im proved meth ods and au to ma tion have per haps re duced man u fac tur ing em ploy ment but the em pir i cal ev i dence is in ter est ing. We are not cur rently los ing much em ploy ment in the in dus tries that are in vest ing in better meth ods. We are los - ing em ploy ment in in dus tries where in vest ment is low. We have too many laid-back com pa nies that lack the skills nec es sary to com pete ag gres sively in world mar kets. Their task is no doubt made more dif fi cult by an ever-bur geon ing pub lic sec tor even dur ing a pe riod of sup posed bud get-bal anc ing. Dur ing the same pe riod that U.S. man u fac tur ing em ploy ment de clined by three mil lion, gov ern ment em ploy ment in - creased by four mil lion. Higher taxes from a healthy econ omy are pro vid ing more rev e nue but gov ern ment em ploy ment is con tin u ing to grow and with it, ever-ex pand ing fu ture re tire ment ob li ga tions. The de cline of man u fac tur ing is sin is ter enough na tion ally, but dev as tat ing to some com mu ni ties. Re gret ta - bly, man u fac tur ing is de clin ing more where the jobs are most ur gently needed in ma jor cit ies. The sta tis - tics are fright en ing. From 1988 to 1995, dur ing a pe riod of high pros per ity, man u fac tur ing em ploy ment de - clined by 31 per cent in Bal ti more, 33 per cent in Brook lyn, 34 per cent in Phil a del phia and 27 per cent in Un ion County, New Jer sey. Most ma jor met ro pol i tan coun ties, in clud ing both Ramsey and Hennepin in Min ne sota, are los ing man u fac tur ing jobs. Some of the lost jobs are made up by in creas ing em ploy ment in ser vices, but there is a catch. Many ser vices do not do well in re ces sions. Re cently re leased cor po rate earn - ings point out that earn ings were down 9 per cent in man u fac tur ing, but down 19 per cent in ser vices. To the em ploy ees and the gen eral com mu nity, the vari ance in eco nomic yield be tween in dus trial seg ments is huge. Con sider these facts: * The 39,000 em ploy ees in Min ne sota s in stru ment in dus try earn a half a bil lion dol lars a year more than the nearly 150,000 Min ne so tans em ployed in the res tau rant and bar industry. * The 75,000 Min ne so tans em ployed in the in dus trial-ma chin ery in dus try earn about half of what 450,000 peo ple earn in re tail trade.

31 From Riches to Rags at a Time of Prosperity 23 * The 31,000 peo ple em ployed in Min ne sota s pa per in dus try earn more than all of the 70,000 Min ne so - tans em ployed in car deal er ships, auto re pair and auto ser vices, and more than the 45,000 Min ne so tans em - ployed in all banks and nondepository fi nan cial in sti tu tions. * The 11,000 peo ple em ployed in Min ne sota s chem i cal in dus try earn al most as much as the 24,000 Min - ne so tans em ployed in real es tate. Man u fac tur ing is the one ma jor in dus try where the per cent age of Min ne sota s wages is much higher than the per cent age of jobs. No where is this vari ance in in dus tries more no tice able than in vol un tary fringe ben - e fits, which vary from vir tu ally noth ing in some ser vice in dus tries to more than $10,000 per em ployee per year in some man u fac tur ing in dus tries. The U.S. trade def i cit can be greatly re duced, but at ten tion is needed. In an ef fort to ap ply broad eco nomic the o ries, pub lic of fi cials (both ex ec u tive and con gres sio nal) have lost touch with the de tail. The cur rent ad - min is tra tion has fo cused on the pro tec tion of mov ies and mu sic per haps with an eye to the huge po lit i cal con tri bu tions avail able from the en ter tain ment in dus try. How ever, gov ern men tal ini tia tives have re sulted in a flood of im ports and di min ished ex ports. Wages are not the driv ing fac tor in trade def i cits. Much of our trade def i cits in re cent years ac tu ally oc curred with higher-wage na tions than the U.S. The U.S. runs trade def i cits be cause we have not re garded the mat ter as im por tant. We have failed to un der stand the con nec - tions be tween the in dus trial economy of today and prosperity in the future. The matter deserves attention.

32 24 Part Two The Economy Economy shares similarities with the side shows of old Prob lem is not an emo tional one, but rather a ques tion of pre cisely how does it all add up. MINNEAPOLIS STAR TRIBUNE -- De cem ber 7,1998 It was pretty tran quil grow ing up in ru ral Min ne sota in the 1950s and 1960s. Not much gam bling. Not much spec u la tion. Peo ple had an old-fash ioned view of wealth ac cu mu la tion - they earned it. There were im per fec tions, of course, but on the whole most folks were con tent with a more grad ual in - crease in their stan dard of liv ing. It had been less than two de cades since the Great De pres sion, so peo ple were keenly aware that wealth ac cu mu la tion is of ten bi-di rec tional. Most folks were pretty con ser va tive. It did n t mat ter much if some one had more. The trick was to make sure one did n t have less. The most ex otic form of risk and re ward oc curred at the county fair. Once a year peo ple would flock there to show their an i mals or their crafts or to par tic i pate in 4H pro jects. These were harm less enough. But then there was the mid way - a place where we could wit ness real dis hon esty in ac tion. One fel low must have thrown 50 base balls to win a `gen u ine sil ver brace let, which turned out to be alu mi num. There were other ex am ples. The econ omy of the 1990s has pe cu liar sim i lar i ties to the car ni vals and side shows of 50 years ago. The stock mar ket is reach ing new highs ev ery week. Merg ers and ac qui si tions are at sky-high prices. There is ram pant con sumer spend ing co in ci dent with neg a tive sav ings rates. Prob lem atic fi nan cial and real-es tate mar kets af fect us from thou sands of miles away. And U.S. trade def i cits pro vide tan gi ble ev i dence that ev - ery month our coun try buys $15 bil lion more than it sells. The car ni val is on - with all of the ca ve ats P.T. Barnum had to of fer. How can an econ omy with so des per ate a need to make in vest ments re main com pet i tive with out sav ing any thing? What does it mean when one bank pays $13.5 bil lion for $4 bil lion worth of net as sets in an other bank? If these big banks are so smart, why don t they make as much money as small banks? Arithmetic problem. To ex press con cern about the work ings of our econ omy is not to be a prophet of doom. Along with oth ers, I ap plaud the ef fec tive ness of the U.S. in dus trial sec tor and the op por tu ni ties we have be fore us. My prob - lem is not emo tional but arith me tic. I can not fig ure out how our pres ent econ omy com putes. There are some bright spots to be sure. It was a great plea sure to visit a plant of Nucor Steel, the most prof - it able steel com pany in the United States - though not the larg est. Talk about pro duc tiv ity - the rev e nue per per son at that plant was $1.3 mil lion per year. Ken Iverson, the com pany s well-re garded chair man has con ducted phone in ter views with our Cap stone Class at St. Thomas where he ar tic u lated some of the be liefs cap tured in his book, Plain Talk.. The peo ple at Nucor make me feel better be cause they are in vest ing, train ing peo ple, im prov ing qual ity and be com ing more ef fi cient ev ery day. These things com pute. I get sim i lar feel ings when vis it ing a host of other companies. On the other hand, we have many in dus tries where train ing, in vest ment, lead er ship and in no va tion are not tak ing place - or at least not at the pace that can lead to sur vival. I also drove around a Beth le hem Steel plant that very much ex uded a lack of train ing, a lack of in vest ment and a lack of car ing. It has since been closed. There are many plants like this, too. The re cently an nounced merger of Amer ica On Line and Netscape Com mu ni ca tions pro vides a vivid ex am - ple of the kew pie doll econ omy. These two com pa nies now have a com bined mar ket cap i tal iza tion of $42.1 bil lion, about the same as Gen - eral Mo tors with its $165 bil lion in rev e nue, $2.6 bil lion in earn ings, its vast in vest ment and its 693,000 em ploy ees. The AOL/Netscape com bi na tion has rev e nues of $3.1 bil lion, 10,885 em ploy ees and a com -

33 From Riches to Rags at a Time of Prosperity 25 bined loss of $23 mil lion. Even these fi nan cial re sults may be sus pect. The Se cu ri ties and Ex change Com - mis sion has in ter vened twice in the past few years re gard ing AOL s ac count ing treat ments. Gambling exploits. A few years ago I was puz zled about the bank ruptcy of Olym pia & York when it was re vealed that some of the world s larger banks had com bined to loan one fam ily $26 bil lion - but the fam ily did n t han dle the money well. Not dis sim i lar, I sup pose, from the multi-bil lions loaned to an ex-salomon ex ec u tive whose bi zarre gam bling ex ploits were fea tured in the book, Li ars Poker.. The re sult ing $3.6 bil lion bail out of his ag gres sively named firm, Long Term Cap i tal Man age ment, re - quired the in volve ment of the Fed eral Re serve Bank of New York and will cost U.S. in ves tors for de cades to come. Now the most hal lowed of all West ern Eu ro pean banks, Deut sche Bank, has de cided to ac quire Bank ers Trust, that warm-hearted pro fes sional firm that has re cently been in ves ti gated for rack e teer ing, gave us de - riv a tives and pro vided money for the le ver aged buyout of North west Air lines. AT&T lost bil lions of its share hold ers eq uity on poorly thought-out unstrategic ac qui si tions and then spun off its pre mier re search in sti tu tion, Bell Labs. Avon branched out from per fume to health care with smelly re sults. The lost fo cus at Bausch & Lomb re sulted in a flurry of law suits and se ri ous charges from reg u la tory au - thor i ties be cause of im proper ac count ing. Af ter a se ries of di sas trous stra te gic de ci sions, the lights went out at West ing house and the com pany that was at one time larger than Gen eral Elec tric is no lon ger a player in elec tri cal equip ment. Lastly, 75 years af ter be ing bro ken up as part of the Stan dard Oil Trust, Ex xon and Mobil plan to merge. Things are not yet de light ful in the de vel op ing world, ei ther. Within the past years, the li quid ity ra tio of the In ter na tional Mon e tary Fund (IMF) has fallen to 19 per cent with still more money needed for Brazil, Rus - sia and many other places. We should have the com pas sion to help dis tressed peo ple in de vel op ing coun tries, but there is some ev i - dence that this mu nif i cence does not al ways get to the peo ple in tended. In spite of some oc ca sional good work and laud able ob jec tives, the IMF op er a tions of ten act to bail out fool ish bank ers and crooked pol i ti - cians si mul ta neously. For its part, the Clinton ad min is tra tion seems con tent to pos ture the United States as the im porter of last re - sort, at great cost to the na tion s man u fac tur ers and in dus trial work ers. It is true that we can be thank ful for the pros per ity that ex ists at the mo ment. But, at a time when it is im - per a tive to pre serve a strongly com pet i tive econ omy, we seem to be ne glect ing some of the ba sics - such as sav ing, in vest ment, pru dent stew ard ship, re spon si ble lead er ship and plain, old-fash ioned hon esty. Maybe there is sci ence to our pres ent spec u la tive mode. Maybe there is sound fi nan cial man age ment on the part of the peo ple we have trusted with the na tion s sav ings. But, it does seem a bit like a side show. I just hope that there is at least an alu mi num brace let in there some place.

34 26 Part Two The Economy Whose productivity? Ris ing U.S. pro duc tiv ity raises some ques tions about what gets mea sured, what does n t and how our for eign ri vals are per form ing MINNEAPOLIS STAR TRIBUNE -- Feb ru ary 21, 2000 Along with oth ers, I was pleased to learn that pro duc tiv ity had grown by 4.8 per cent dur ing the fourth quar ter of Even more im pres sive was the 10.7 per cent pro duc tiv ity gain in man u fac tur ing, which has long been the pro vider of much of the na tion s wealth. Pro duc tiv ity is a key in gre di ent to pros per ity, and the stock mar ket re sponded fa vor ably - but then slipped. The re ported re sults are im pres sive, but should be kept in per spec tive. Mea sure ments and es ti mates of U.S. pro duc tiv ity have been made and pub lished al most con tin u ously since the Hand and Ma chine La bor Re port in No sta tis tics are flaw less and pro duc tiv ity sta tis tics are no ex cep tion. The task is made es pe cially dif fi cult in part due to the in tri cacy of mea sur ing cer tain trans ac - tions and the awe some task of per suad ing a huge num ber of em ploy ers, agen cies and in dus tries to fill out lengthy re ports. But com pe tent peo ple and co op er a tive peo ple are in charge of these ef forts. John Duke and his as so ci ates at the Bu reau of La bor Sta tis tics (BLS) are both prac ti cal and ea ger to help. Pro duc tiv ity cov er age through out the econ omy is by no means uni form. With the lat est ex pan sion of the BLS In dus try Pro duc tiv ity Da ta base, pro duc tiv ity es ti mates are now re ported on in dus tries cov er ing about 54 per cent of U.S. em ploy ment, but the de gree of cov er age var ies greatly by sec tor. Min ing and man u fac tur ing are nearly fully cov ered ( 96 per cent and 100 per cent) but are not ex pand ing. Ser vices, which is ex pand ing, is about 16 per cent cov ered. Fi nance, in sur ance and real es tate is about 19 per cent cov ered and whole sale trade about 2 per - cent. Med i cal ser vices, so im por tant to our wel fare and our econ omy, are not cov ered at all. So what do we re ally know about the pro duc tiv ity of so many of us?. One of our fac ulty mem bers at the Uni ver sity of St. Thomas, George Gleeson, sug gests that the last pro - duc tiv ity im prove ment in ed u ca tion was dust less chalk. We have not re ally fig ured out mean ing ful ways to mea sure whether or not most of us are be com ing more pro duc tive. There may in deed be im prove ment - but we may not be able to find ev i dence in the fed eral sta - tis tics. Per haps the most valu able mea sure in the pro duc tiv ity sta tis tics is unit la bor costs - a key de ter mi nant of our long-term com pet i tive po si tion. Com par ing the fourth quar ter of 1999 to the third quar ter, pro duc tiv ity grew more rap idly than com pen sa - tion (4.8 per cent ver sus 3.6 per cent), so unit la bor costs de creased 1.2 per cent. That im pressed ev ery one. But the year-to-year com par i son was not quite so glam or ous. Com par ing the fourth quar ters of 1998 and 1999, out put per hour grew by 3.3 per cent, com pen sa tion by 4.5 per cent. So unit la bor costs rose by 1.2 per cent. A lit tle less im pres sive. We have competitors. If unit la bor costs con tinue to in crease ver sus those of our com pet i tors, we will find it more dif fi cult to pros per. And we are not alone in mak ing pro duc tiv ity im prove ments. Our in ter na tional com pet i tors are get - ting more pro duc tive as well and of ten in much greater in cre ments. From 1995 to 1998, the unit la bor cost of a trade-weighted mix of in ter na tional com pet i tors de clined by 19 per cent vis-a-vis the United States.

35 From Riches to Rags at a Time of Prosperity 27 Look ing at the prob lem an other way, be cause of ex change rate changes and eco nomic con di tions in lo cal coun tries, av er age man u fac tur ing wages (in U.S. dol lars) in creased 8 per cent in the United States while they de clined 12 per cent in Ger many, 24 per cent in Ja pan, and 32 per cent in South Ko rea. Given the fact that there are roughly six times as many sci ence and en gi neer ing grad u ates be ing turned out in South east Asia as in the United States, we should not as sume that we have a God-given en ti tle ment to pro duc tiv ity and pros per ity im prove ments. The fact is that many of the world s most re spected tech ni cal ad vance ments now take place out side of the United States. Month af ter month of re cord-set ting trade def i cits is, of course, the best tes ti mo nial to the emerg ing tech ni - cal prow ess of our com pet i tors dur ing a time when their unit la bor costs are de creas ing. An other im por tant ca veat should be ob served when con sid er ing pro duc tiv ity sta tis tics. They deal only with the work ing pop u la tion. Dur ing a time when our work ing pop u la tion is show ing in creased pro duc tiv ity, we can ob serve dis turb ing trends in the ra tio of re tir ees to work ers - soon to reach a ra tio of about 2 to 1. Last week, it was an nounced that the Min ne sota Pub lic Em ployee Re tire ment As so ci a tion is run ning short of funds. Sur prise! Sur prise! For years, Min ne sota has had gen er ous pro grams for early re tire ments for pub lic em - ploy ees dur ing a time when we are all liv ing lon ger. At the same time, we have many more peo ple in pub lic oc cu pa tions. Dur ing the 1950s, the United States had about 2.5 times as many peo ple work ing in man u fac tur ing as in the gov ern ment. Now we have 1.5 mil - lion more peo ple work ing in the gov ern ment than in man u fac tur ing. As pro duc tive as our in dus try has be - come, it will prob a bly not gen er ate the cash suf fi cient to fund fu ture cost-of-liv ing-ad justed, de fined-ben e - fit ob li ga tions for peo ple who will live 40 years af ter they quit work. Gain ing by sub trac tion?. With an other per spec tive, Pro fes sors Co hen and Zysmann of the Uni ver sity of Cal i for nia have ar gued that we have achieved pro duc tiv ity im prove ments largely through sub trac tion - that is, we have closed mar ginal busi nesses. While we are show ing sta tis ti cal prog ress, we are ex pe ri enc ing wide spread cor po rate restructurings, which may not have been fully ap praised. A re lated cau tion also is in or der. If we do more outsourcing, par tic u larly over seas outsourcing, we will have the same gross out put with fewer la bor hours and our sta tis ti cal out put per la bor hour will ap pear to increase. This anom aly is par tially ad dressed with multifactor pro duc tiv ity sta tis tics, but these are not yet wide - spread. It is quite pos si ble that much of the ob served pro duc tiv ity im prove ments are due to the rapid ex pan - sion of outsourcing through the in dus trial econ omy. We are liv ing in very good times and we should be quite thank ful. We are mak ing some gen u ine im prove - ments. But, the United States needs to look re al is ti cally at our cur rent eco nomic situation. Yes, a lot is be ing sold - but much of it on credit. Yes, the stock mar ket has been high - but more than 60 per cent of stocks are lower than they were last sum mer. And dur ing 1999, mar gin debt in creased from $140 bil lion to $230 bil lion. Un prof it able com pa nies amount ing to lit tle more than hubs on the Internet have been bid up to mar ket val u a tion mul ti ples in ex cess of some of our most de pend able, tech nol ogy- and as - set-rich cor po ra tions. We have come to be lieve that bolt ing to gether a few hun dred dol lars worth of Chi nese com - puter parts and call ing it a PC is tech nol ogy when many of our grad u at ing high school se - niors could n t fix a mis aligned cover on their CD player. So, yes, pro duc tiv ity is up - but so is ev ery body else s. In ad di tion, we have al ready prom ised some of the ex pected re ceipts. If we do not make some sub stan tive im prove ments in ed u ca tion, al lo ca tion of re sources, and our coun try s in dus trial strength, on-go ing pro duc tiv ity im prove ments - and the pros per ity that co mes with them - might be harder to ob tain.

36 28 Part Two The Economy Quality and economic self-interest To day s U.S.-made cars are more re li able and of ten cheaper than the im ports. And by buy - ing Amer i can, we help pre serve our coun try s sag ging in dus trial base. MINNEAPOLIS STAR TRIBUNE -- Sep tem ber 28, 2003 My fa ther har bored a mild dis trust of large busi nesses, so we of ten had off-brand cars: Hudsons, Nashes, Kaisers, Packards and one Studebaker - which was enough. At an early age, I took an in ter est in the tech nol ogy of these cars and com pared them with the Chev ro lets, Fords and Chrys lers in our area of ru ral Min ne sota. In some ways, the off-brand cars were quite ad vanced. The Nash, in par tic u lar, had many safety, con ve - nience and econ omy fea tures and gen er ally su pe rior ma chin ing tol er ances. Hudsons were fast cars with good han dling. Packards were very quiet, lux u ri ous, with good drive-train de sign. It sad dened me to watch these man u fac tur ers dis ap pear from the Amer i can land scape. The Kai ser was last pro duced in 1955, Hud son in 1957 and, alas, the once glo ri ous Packard left the stage in Studebaker, then 114 years old, ceased pro duc tion in Nash con tin ued un der the name Amer i can Mo tors un til its ac qui si tion by Chrys ler in Each of these com pa nies, though smaller than the Big Three, was a sig nif i cant part of the U.S. econ omy. Both Willys-Over land and Hud son di rectly em ployed 21,000 peo ple at their peak, with many more jobs cre ated in sup plier and dealer or ga ni za tions. Kai ser em ployed 20,000 and Amer i can Mo tors 33,000. Rem - nants lin ger here and there but this once-vi brant sec tor of our na tion s his tory is largely gone - re placed by a flood of im ports. New Big Three. To day, there is a new Big Three. Toy ota re cently sur passed Chrys ler in U.S. auto sales. The de cline of Chrys ler, at one time the na tion s sec ond-larg est auto pro ducer, had been brew ing since the 1998 take over by Ger many s Daimler-Benz, an event chron i cled in the 2001 book Taken for A Ride: How Daimler-Benz Drove Off With Chrys ler," by Bill Vlasic and Bradley A. Stertz. Though Chrys ler made it into the cor po rate name, a col league of mine well-steeped in Ger man busi ness cir cles once asked if I knew how to pro nounce Chrys ler in Ger man. He went on, You don t. In Ger man, Chrys ler is si lent.". We can keep giv ing away our in dus try, I sup pose. Other coun tries have done it. But its de ple tion will af fect a lot more peo ple than those di rectly em ployed in these in dus tries. Cor po ra tions are cit i zens. They pro vide jobs and fringe ben e fits. More im por tantly, they pro vide per sonal dig nity and a sense of ac com plish ment for which there is lit tle sub sti tute when in dus try de clines. In dus trial cor po ra tions give rise to much of the ser vice econ omy. How ever, the em pir i cal ev i dence shows, there is n t much of a ser vice econ omy in the face of de clin ing in dus try. Chrys ler could have pre vailed as a sep a rate com pany. This seg ment of Daimler Chrys ler still gets most of its sales from ve hi cles de vel oped dur ing the pre-merger era; the PT Cruiser, the minivan, the Dodge Ram pickup, the Chrys ler 300. Re cent Daimler-ini ti ated ve hi cles, such as the Pacifica, have sold poorly. U.S. man u fac tur ers are putt ing forth ex cel lent prod ucts dur ing this in tensely com pet i tive era in au to mo tive his tory. The re cently re leased J.D. Power sur vey of ve hi cle de pend abil ity placed four U.S. makes in the top 10: Bu ick, Ca dil lac, Lin coln and Mer cury. Sev eral of the oth ers, in clud ing Honda and Toy ota, are mostly man u fac tured in U.S. plants. The bot tom of the list in cludes three Ko rean makes, three Jap a nese, three Eu ro pean and an other prod uct from Daimler Chrys ler. Iron i cally, Dodge, Plym outh and Chrys ler all scored higher in the J.D. Power qual ity sur vey than Mercedes-Benz, which was 11th from the bot tom. U.S. man u fac tur ers can hold their heads high on pro duc tiv ity, too. Two of the top 10 plants in la bor pro - duc tiv ity are Gen eral Mo tors plants and two are Ford plants. Ford and GM are both de liv er ing qual ity

37 From Riches to Rags at a Time of Prosperity 29 prod ucts at rea son able costs, and con trib ut ing to the wel fare of their coun try by do ing it. Com pare the qual - ity. Com pare the val ues. And, es pe cially, com pare the price of parts. U.S. prod ucts in this in dus try are very good. Leg acy costs. U.S. pro duc ers have ob sta cles to over come, of course. Chief among them are leg acy costs: re tire ment and health care ben e fits ac cu mu lated over the 100 years Ford and GM have been in ex is tence. The bills are large, amount ing to sev eral bil lion per year for both com pa nies. Gen eral Mo tors cost for re tire ment and health ben e fits adds up to $1,360 per ve hi cle, far higher than for many for eign pro duc ers. Still, U.S. automakers have not done as steel com pa nies Beth le hem and LTV did: file bank ruptcy and let the re duced pen sion ob li ga tions be taken over by the fed eral Pen sion Ben e fit Guar an tee Corp. The auto work ers are do ing their part. The United Auto Work ers re cently reached agree ments with Ford, GM, Chrys ler and parts sup pli ers Delphi and Visteon that will pro vide some ma neu ver ing room on other costs as the ben e fits are main tained. There is team work in this in dus try. I am proud of the U.S. auto com pa nies. They have com peted ef fec tively. Their ve hi cles are good to ex cel - lent. Im por tantly, they have kept their com mit ments dur ing a time when that char ac ter trait is not uni ver sal. But there is an other di men sion to U.S. auto pro duc ers: Many of the peo ple who work there care deeply about the coun try. Lew Veraldi, for mer se nior vice pres i dent of new car pro grams at Ford, was a friend of mine and help ful to us at the Uni ver sity of St. Thomas. As the leader of Ford s suc cess ful Taurus/Sa ble pro ject and many other pro grams, he was elected Auto In - dus try Ex ec u tive of the year in Three years later, I at tended his fu neral at a mod est Cath o lic church near De troit. Lew cared deeply about his coun try and the con struc tive role that Ford could play in main tain ing the na - tion s pros per ity. The Taurus/Sa ble pro ject, de liv ered at re cord speed and un der bud get, launched a whole new way to de velop prod ucts, which we now call si mul ta neous en gi neer ing. I can dis tinctly re mem ber one of Lew s com ments in one of our last dis cus sions: Fred, tell these stu dents not to worry about how much money they make. Have them do some thing that is good for the coun try.". The U.S. auto in dus try has pro duced many other ide al ists who have ad vanced the way we live our lives; Charles Nash, Wal ter Chrys ler, Douglas Fra ser, Char lie Wil son and many oth ers. Dur ing World War II, this in dus try pro vided 92 per cent of the per son nel car ri ers, 75 per cent of the air craft en gines, 56 per cent of the car bines and a va ri ety of other prod ucts needed for the con flict - in clud ing 10 per cent of the air craft. Dur ing peace time, the auto in dus try has pro vided pros per ity to com mu ni ties across the land. So what are we sup posed to do? Buy a bunch of over priced for eign cars with lit tle re gard to the im pact on the pros per ity of the na tion? Let the na tion s $50-bil lion-per-month trade def i cit con tinue for ever? Let our cit ies see if they can ex ist with out in dus try?. We don t have to make hard choices. Sev eral U.S. makes rank higher on the lat est qual ity sur veys than BMW, Mercedes, Nissan, Audi, Volks wagen and Mitsubishi and they are, for the most part, less costly. Hav ing strong in dus try is clearly in the na tion s best in ter est, and the best in ter est of car own ers as well.

38 30 Part Two The Economy NWA woes will ripple through MN economy MINNEAPOLIS - ST. PAUL BUSINESS JOURNAL -- Sep tem ber 23, 2005 The bank ruptcy of North west Air lines will likely have a sub stan tial and pro longed im pact on al most all the in dus tries in Min ne sota. Lend ing in sti tu tions will have a few more prob lem loans. Hous ing prices will ease in some ar eas. In - come-tax re ceipts will be re duced, thus ex ac er bat ing Min ne sota s bud get dif fi cul ties. Busi ness ex pan sion may slow, tar nish ing the per ceived prom i nence of the Min ne ap o lis/st. Paul mar ket place. Yes, Min ne sota s econ omy is cer tainly large enough to sur vive, but it is un likely to sur vive with out im pact. Af ter all, 15 years ago North west had the larg est pri vate pay roll in the state, and it re mains one of the larg - est. North west s bank ruptcy has to be seen as a sad event that has been an tic i pated for years. Doug Carroll, a re porter for Money, wrote in 1992: Be fore the air line s $3.65 bil lion le ver aged buyout in mid-1989, North west had one of the in - dus try s stron gest bal ance sheets and most fis cally con ser va tive man age ments. To day, North - west is reel ing from three years of heavy losses and a still-stag ger ing debt load left from the buyout. And no body laughs when you say North west and Chap ter 11 in the same sen tence. For the quar ter ended June 30 of 2005, North west re ported tan gi ble as sets of $12.3 bil lion, but li a bil i ties of $17.9 bil lion a tan gi ble net worth def i cit of $5.3 bil lion. Add to that the air line s underfunded pen sion li a bil ity of $5.7 bil lion and re cent op er at ing losses. North west is likely now in the hole by about $12 bil lion a di sas trous sit u a tion by it self but par tic u larly hor rific when com pared to the strong fi nan cial con di tion of ear lier years. Taxes and law yers have the most priv i leged po si tions for pay ment dur ing bank ruptcy. Taxes must be paid and the pro ceed ings are likely to be lengthy, so fees will be high. North west s se cured cred i tors are owed nearly the full value of the air line s tan gi ble as sets. It is hard to see how there will be much money left over to pay the $5 bil lion owed to un se cured cred i tors, so some bank debt may have to be com pro mised. Credit cards and other loans is sued to for mer em ploy ees may not be paid in the usual man ner. Many peo ple need - ing to find other jobs may in flu ence lo cal hous ing mar kets. The role of the Twin Cit ies as a re gional cen ter may be trimmed with this bank ruptcy if pat terns ex pe ri - enced in other air line bank rupt cies are re peated. In the cases of the Braniff, East ern, US Air ways, and United bank rupt cies, com pet ing air lines took over larger shares of mar kets. Since no other ma jor air lines are hubbed here, North west s weak ened po si tion may re sult in an over all re duc tion in the pros per ity gen er - ated by the MSP air port. In ad di tion, the Met ro pol i tan Air ports Com mis sion is owed $275 mil lion dol lars as a re sult of Min ne sota s poorly ad min is tered bail out of North west in North west s bank ruptcy will be felt na tion ally as well. The fed er ally spon sored Pen sion Ben e fit Guar an tee Cor po ra tion (PBGC) is al ready strain ing from the re cent bank rupt cies of Beth le hem Steel, LTV and oth ers. It is es sen tially an in sur ance fund with out pre mi ums. If the PBGC has to now pick up the li a bil i ties of un - funded air lines pen sions, a new in fu sion of cash from the fed eral gov ern ment will be nec es sary at a time when Ka trina, Iraq and a weak ened econ omy are al ready plac ing strains on the cred i bil ity of the na tion s currency. Not with stand ing the enor mous costs to be paid by cit i zens of our state and na tion, the per pe tra tors of the 1989 buyout did not do badly for them selves. Ac cord ing to the pub lic re cords, Al Checchi sold $29 mil lion worth of NWAC stock, Fred Malek sold $1 mil lion, and Gary Wil son sold $34 mil lion in the past two years. What they sold pre vi ously is not readily avail able. The bank ruptcy of North west is a tragic event that hope fully will be fully in ves ti gated by the state of Min ne sota, the De part ment of Jus tice, the Se cu rity and Ex change Com mis sion and other ap pro pri ate agen cies. But, it is not an un ex pected event. Bank ruptcy was both pre dicted and prob a ble fol low ing the am a teur ish and unfortunate leveraged buyout of 1989.

39 From Riches to Rags at a Time of Prosperity 31 Look to technology for the long-term fix The re cent stim u lus pack age may help the econ omy a bit in the short run, but elec tion-year tac tics are no sub sti tute for thought ful, long-term in vest ments in our coun try. MINNEAPOLIS STAR TRIBUNE February 11, 2008 "The best hopes of any com mu nity rest upon that class of its gifted young peo ple who are not en cum bered with large pos ses sions. It is not large pos ses sions, it is large ex pec ta tions, or rather large hopes, that stim u late the am bi tion of the young." Rutherford B. Hayes, au thor of that state ment and the 19th pres i dent of the United States, is not dis cussed much to day. But he did sign a bill al low ing fe male at tor neys to ar gue cases be fore the U.S. Su preme Court, ve toed many pend ing laws that he thought were un fair to black peo ple, and in sisted on the ap point ment of only qual i fied and hon est peo ple to high po si tions -- an ap proach that drew an guish from members of Congress. He was also wounded four times dur ing the Civil War and re fused to cam paign for any of the po lit i cal of - fices he ul ti mately held. Then, when elected pres i dent, he held fast to one term. One won ders how he would feel about to day's fre net i cally con structed eco nomic stim u lus pack age. The pack age no doubt will cre ate some spend ing and will prob a bly help the econ omy in time for No vem - ber's elec tions. It is sure to pass. But the elec tion-year pop u lar ity of knee-jerk re ac tions to deeply rooted struc tural de fi cien cies does not pro vide sustainable value. I re cently re ceived an in ter est ing draft pa per from one of Min ne sota's most re spected econ o mists, Re gents Pro fes sor Vern Ruttan of the Uni ver sity of Min ne sota. He de scribes how the pe ri odic de vel op ment of "gen - eral pur pose tech nol o gies" spurs economic growth. The arrival of such technologies as the steam engine, railroads, electrical generation, the automobile, tur - bine-pow ered air craft and com put ers have al ways been fol lowed by ro bust pe ri ods of eco nomic ac tiv ity where the good ef fects of these break through tech nol o gies spill over into many industries. But, in or der to qual ify, not any tech nol ogy will do. To spur these mon u men tal eco nomic ef fects, the tech - nol ogy must be per va sive (wide spread), ca pa ble of im prov ing pro duc tiv ity and lead to fur ther innovations. The prob lem in Min ne sota and the United States is that we have not had many of these gen eral-pur pose tech nol o gies emerg ing lately. The elec tri cal grid is an cient, au to mo biles are pro duced all over the world and com put ers are now commodities. The re sults of our tech nol ogy de pri va tion is show ing up in our sta tis tics. From 1980 to 2005, the per cent - age of col lege grad u ates re ceiv ing de grees in en gi neer ing, phys i cal and bi o log i cal sci ences and math e mat - ics de clined from 18.6 per cent to 14.9 per cent. From 1988 to 2003, the U.S. share of world wide ac a demic ar ti cles in sci ence and en gi neer ing de clined from 38 per cent to 30 per cent. From 1963 to 2006, the share of U.S. pat ents awarded to for eign en ti ties rose from 18.6 per cent to 48.3 per cent. Does it look as though we are on our way to developing new breakthrough technologies? It's not easy to sus tain pros per ity in to day's highly com pet i tive world -- especially when the fundamental pre pa ra tory skills are weak. We might ask, where will the pros per ity come from? Will it come from our trou bled K-12 ed u ca tion sys tem? Will it come from the su pe rior at trib utes of our well-run fi nan cial in sti tu - tions? Will it come from our highly sub si dized sports and en ter tain ment in dus tries? Will it come from world-lead ing U.S. man u fac tur ers? From 1979 to 2005, this coun try has lost 5.4 mil lion man u fac tur ing jobs -- 4 million of them production jobs. We might won der what will be the re sult of the soon-to-be-en acted stim u lus pack age. Will more tele vi sion sets from China help our econ omy in the long term? There are many things gov ern ment could do to more fun da men tally strengthen the U.S. econ omy.

40 32 Part Two The Economy Re tire ment ages could be in creased. Is it help ful for so many peo ple to be able to re tire in their mid-50s, while oth ers have to work into their 70s to sup port them selves? Taxes could be col lected. Es ti mates in di cate that un col lected taxes ex ceed $300 bil lion each year. This money could help fund re search and de vel op ment into new and better ma te ri als, better wa ter pu ri fi ca tion, ad vanced bat ter ies and other tech nol o gies that we'll need for the future. We could de velop tax sys tems that will dis tin guish be tween in vest ment (which is good) and spec u la tion (which merely shifts wealth to a few). In stead of dis si pat ing ad di tional bor rowed funds to stim u late con sumer spend ing, much of which will go for im ported goods, we could use these funds to shore up our rap idly de te ri o rat ing in fra struc ture. If we have to go even fur ther into debt than we are now, per haps we could at least fix something. Hayes was on to some thing that con tem po rary pol i ti cians in both ma jor par ties have missed. If we re ally want to stim u late the econ omy, we should work on sci ence, schol ar ship and art. If we fail to en er gize the cre ative en gines of tech no log i cal ad vance ment to solve our press ing en ergy, in fra - struc ture, ed u ca tion and en vi ron men tal chal lenges, our econ omy is likely to stag nate and spur so cial un rest that we won't have the resources to address.

41 From Riches to Rags at a Time of Prosperity 33 We have a stake in Detroit Three's woes Bank rupt cies and bail outs alone won't solve the prob lems fac ing U.S. auto com pa nies -- or the na tion. MINNEAPOLIS STAR TRIBUNE December 7, 2008 It is with great sad ness that I read about the plight of the U.S. auto in dus try, where I have spent much time. Though some cov er age seems use ful, the flip pant rec om men da tions, of ten made by peo ple who have never walked a fac tory floor, sur prise me be cause of their bra zen simplicity. "Bank ruptcy is the best op tion for GM," a Wall Street Jour nal ed i to rial writ ten by a for mer North west Air - lines ex ec u tive said in No vem ber. Con sider the source. I take no po si tion on the bail out of this im por tant in dus try. The prob lems ex tend well be yond the auto in - dus try itself. Only a ma jor re struc tur ing of fi nance, in sur ance, ser vices and gov ern ment -- as well as in dus try -- would lessen the prob lems we have be fore us. We should keep in mind that our cur rent di sas trous econ omy did not be gin be cause Ford and GM built subprime trans mis sions. Our prob lem atic econ omy re sults from mis - man age ment, greed and wealth de struc tion orig i nat ing in other sec tors, as well as prob lems in the auto industry itself. Bank ruptcy would change things for large in dus trial firms. It is true that they may be able to re ne go ti ate la - bor, health care and pen sion ob li ga tions. But emer gence from bank ruptcy re quires pos i tive op er a tional cash flow -- and GM's op er a tional cash flow was neg a tive $7.8 bil lion this past quar ter. Per haps other fruit ful trim ming would be made eas ier. But how would bankruptcy work? GM is $60 bil lion in the red Gen eral Mo tors, as an ex am ple, has $60 bil lion more li a bil i ties than as sets. How would the gap be made up? Taxes, at tor neys and se cured cred i tors would be paid first, be cause of bank ruptcy's pay ment pri or i ties. Un se cured cred i tors would get paid next -- if any thing were left. There would be end less hag gling, but pre - dict able re sults. The vast ma jor ity of GM's bank ruptcy cost would be borne by tax pay ers and un se cured creditors -- the sup pli ers of parts, supplies and services. GM may be able to dump its pen sion ob li ga tions to the Pen sion Ben e fit Guar an tee Corp., an arm of the gov ern ment. The PBGC, which had a $23 bil lion fund def i cit in 2005, is es sen tially an in sur ance com pany with out pre mi ums, with short falls made up by tax pay ers. One es ti mate sug gests that the tax payer pen sion cost of a GM bank ruptcy would be an additional $23 billion. To emerge from Chap ter 11, GM would re quire a fresh line of credit, called "debtor-in-pos ses sion" fi nanc - ing. In the past, fi nanc ing of this type has of ten been pro vided by such pin na cles of fi nan cial acu men as GE Cap i tal, J.P. Mor gan Chase & Co. and Citigroup. Would they be able to pro vide it? Or would this, too, fall to the taxpayers? GM's vast cadre of sup pli ers also would fare poorly. The carmaker cur rently owes $62 bil lion in ac counts pay able and ac crued ex penses. In to day's frag ile econ omy, these es sen tial sup pli ers to our na tion's in dus - trial ca pa bil ity would face a dev as tat ing loss of fu ture busi ness, along with the high like li hood of not get - ting paid for work they already performed. Be cause many of these sup pli ers also pro vide parts or ser vices to aero space, ag ri cul tural equip ment, ma - chin ery and other im por tant in dus tries, the coun try's in dus trial strength would be se verely imperiled. To the credit of the peo ple in volved in the U. S. auto in dus try, they still make good ve hi cles. Mer cury, Bu - ick, Ca dil lac and Lin coln all con tin u ously rank near the top of J.D. Pow ers de pend abil ity sur veys. Ford sur passed Toy ota this past year with the most ve hi cles in first place in the Ini tial Qual ity Sur vey. True, GM and Ford do make more trucks than cars, but some times we need trucks. Try mov ing a re frig er a tor in a Prius and see how that works out. And GM and Ford are prof it able over seas. For sure, both of these com - pa nies have the ex per tise to compete internationally.

42 34 Part Two The Economy Bold ac tion is re quired What will hap pen? I don't know. But clearly, the mat ter of our in dus trial pres ence should not be dealt with sim plis ti cally, of flip pantly. Se ri ous in quiry and bold man age ment is re quired -- not just on the part of the peo ple in these in dus tries, but by the rest of us as well. To be sure, man age ment of De troit's Big Three has not al ways been ex em plary. But some times it has been more en light ened than it is now. Lee Iacocca worked for $1 per year as Chrys ler was re cov er ing in the 1980s. Ford had ex cel lent man age ment with Phillip Caldwell and Don ald Pe ter son (from Pipestone, Minn.) dur ing this same pe riod. GM had good man age ment in the 1970s, not so much in the 1980s and spo rad i - cally since. To day, man age ment needs to dis play more com pe tence and more per sonal ded i ca tion than in the recent past. Crit i cism of auto com pa nies car ries with it some irony. What ac tiv ity is better run? Fi nance? In sur ance? The air lines? Pro fes sional sports? Ed u ca tion? Gov ern ment? As a prac ti cal mat ter, man u fac tur ing, ag ri cul - ture and min ing have sup plied nearly all of the U.S. pro duc tiv ity im prove ments in the past 30 years. Leg acy costs for pen sions and health care cre ate the ma jor cost dis ad van tage for U.S. auto com pa nies. But gov ern ments are far more im bed ded with un funded or underfunded pen sion and health care li a bil i ties than any auto com pany. Min ne sota teach ers, as an ex am ple, are in re tire ment for an av er age of 27.4 years, nearly as long as some of them have worked. What should we say when the pub lic-em ployee pen sion fund man ag ers come clam or ing to leg is la tures for more funds? Should we say, "Let them go bank rupt," as some have sug gested with our industrial companies? The prob lems of the auto in dus try be long to all of us and we are all likely to share in their res o lu tion -- one way or an other.

43 From Riches to Rags at a Time of Prosperity 35 Part Three The Stock Market Fi nan cial mar kets har bor enor mous re spon si bil i ties be cause they fa cil i tate the life-giv ing in vest ments that pro vide re sources, vigor, and in no va tion to world econ o mies. Be cause of their im por tance, it is im per a tive to treat stock mar kets with re spect, but also with sur veil lance and dis ci pline. In practice, these world financial markets are becoming increasingly scattered, irregular, and increasingly self serv ing. Fi nan cial mar kets re quire ac cess to sav ings so that in vest ments can take place. Since other coun tries save more while this coun try saves less, a grad ual but per cep ti ble shift is tak ing place in the pres - tige, power, and lo ca tion of world fi nan cial mar kets. De cades ago, U. S. fi nan cial mar kets ac counted for the highly dom i nant share of world mar ket val ues. In re cent years, vig or ous mar kets have emerged in Hong Kong, Shang hai, Ja karta, Sao Paulo, Mumbai, and other lo ca tions to sup ple ment the al ready mar kets in Eu - rope and the United States. This pro lif er a tion of re spect able mar kets in many lo ca tions has pro vided in ves - tors with a pleth ora of at trac tive op por tu ni ties. But mar ket ac tiv ity in the U.S. and in other places has not al ways been a re li able in dex of in vest ment worth. Some times, these im por tant ac tiv i ties have been per me ated with the ex u ber ant mar ket ing of ques - tion able in vest ments. On other oc ca sions, the prices of par tic u lar stock have var ied with such enor mity that it is hard to be lieve that the prices stem from ra tio nal in vest ment anal y sis. In any case, our mar kets are im por tant and we are jus ti fied in scru ti niz ing mar ket ac tiv i ties with the care and dil i gence they de serve. The es says in Part Three dis cuss some mar ket char ac ter is tics that merit some concern.

44 36 Part Three The Stock Market Fundamentally less monkey business The de flated mar ket and slow ing econ omy could help re store the vir tues of thrift and hard work, ush er ing in an era with... Fun da men tally less mon key business MINNEAPOLIS STAR TRIBUNE -- De cem ber 31, 2000 Groucho Marx vis ited the New York Stock Ex change in the 1930s and be gan to sing very loudly. As the sole mem ber of the Marx Broth ers with a pro cliv ity for in vest ing, he had bought heavily in the 1920s only to see much of his net worth evap o rate in the 1929 melt down. When up braided by ex change of fi cials for dis rupt ing the de co rum, Groucho of fered one of his quick re - torts: Look, when any body takes me for a quar ter of a mil lion dol lars, I get to sing.". Other no ta bles were af fected too. Re gret ting the per for mance of his port fo lio, gang ster Al Ca pone re - marked: Some of these stock mar ket guys are crooks!. Well, it takes one to know one I sup pose, but the coun try did sur vive the down turn. The 1930s was a pe - riod of great prog ress where the coun try got back to busi ness ba sics. Cir cum stances forced com pa nies and in di vid u als to de velop better prod ucts, work harder, be more hon est with their cus tom ers and par tic i pate less in busi ness chi ca nery. Though the hard ships of the 1930s were ap par ent, the era did pro duce many im prove ments. Cars got better. Re frig er a tion be came com mon. Ra dio emerged. Tele vi sion was in vented. Work ing peo ple achieved greater voice. Sav ings rates in creased, and peo ple re turned to do ing real work. The United States needs some of these at trib utes to day. It should be a sur prise to no one that the over val ued NASDAQ is ap proach ing more re al is tic lev els. Yet it is still over val ued. Cisco Sys tems Inc. and Maplewood-based 3M Co. earn sim i lar amounts of money, but even af ter a 50 per cent de cline, Cisco s mar ket val u a tion is six times greater. Af ter its stock price de clined from $104 to un der $2, Priceline.com is still val ued at $210 mil lion - a lot of money for a com pany that lost $192 mil lion last quar ter. Still, my ad vanced age has taught me never to pre - dict when a bub ble will end. More ir ra tio nal ex u ber ance may be com ing. But in the short term, our busi ness and gov ern men tal prac tices are likely to change for the better. Megamergers will re ceive greater scru tiny. Sound fis cal man age ment is likely to re turn as a vir tue. The in - vest ing pub lic is likely to be more skep ti cal of quick re turns from sim plis tic busi ness mod els that ig nore cus tom ers and do not in volve do ing any thing that oth ers can not do. Trade def i cits will mat ter. The GE model. Let s look at the Gen eral Elec tric model. Is it re ally ef fec tive? GE is, to its credit, a dis ci plined com pany. It has a huge mar ket val u a tion of $480 bil lion - more than Ford, GM, Tar get, Chev ron, Merck, Hewlett-Packard and 3M com bined. GE also has been a no ta ble ex porter of CEOs to 3M, Al lied Sig nal and many other com pa nies - not all of whom have done well. But with only $48 bil lion in eq uity, GE is also a com pany with $121 bil lion in short-term debt, $76 bil lion in long-term debt, more than $100 bil lion in in tan gi ble and other as sets, and a huge fi nance sub sid iary with $172 bil lion in re ceiv ables at a time when bor row ers may find it more dif fi - cult to pay. It is a good com pany, but prob a bly not the pen ul ti mate com pany. Our emerg ing pe riod of re al ism may pro vide us with an op por tu nity to re eval u ate our busi ness mod els - away from highly le ver aged merger trans ac tions to ap pro pri ate cash man age ment. Away from the il lu sion of plan ning the fu ture while los ing money to day. Away from the par a digm that pres sur ing sup pli ers is the quick est way to meet earn ings goals and to ward co op er a tive pro grams that en sure a strong sup plier base in the fu ture. The build-by-ac qui si tion strat egy tends to work better when mar kets are ex pand ing rather than when they are slid ing back. In boom times, even un suc cess ful ac qui si tions can some times get sold for even higher prices than orig i nally were paid. In more so ber times, the ac qui si tions have to be made to work, and that in -

45 From Riches to Rags at a Time of Prosperity 37 volves con fi dence build ing, team work, prod uct in no va tion, cost ef fec tive ness and close co op er a tion with key sup pli ers. Public sector s duties. The gov ern ment, too, should mend its ways. U.S. trade ne go ti a tions have ex hib ited a re mark ably im prac ti - cal view of how trade ac tu ally works. We are all free trad ers, but it is not free trade if com pa nies in one coun try must abide by en vi ron men tal reg u la tions and la bor laws, pro vide health in sur ance and com ply with a myr iad of lo cally im posed re quire ments while its trad ing part ner does not. The United States cur rently is buy ing about $6.25 worth of Chi nese goods for ev ery dol lar s worth that it sells to China - hardly a two-way street. The U.S. trade def i cit - now run ning at an an nual rate of $385 bil lion - must be ad dressed and cor rected be fore the value of the U.S. cur rency is per ma nently eroded. We should re mem ber that per - for mance of the U.S. stock mar ket has helped to at tract money to the coun try - an at trac tion that might dim in the months ahead. Gov ern ment pol i cies have been re miss on other fronts. Too many merg ers have been per mit ted, re sult ing in an un for tu nate con cen tra tion of eco nomic power in sev eral in dus tries. Too much spec u la tion has been per - mit ted in eq uity mar kets. There is no en ergy pol icy. There are too many gov ern ment em ploy ees who can re tire in their mid-50s with cost-of-liv ing-ad justed, de fined-ben e fit re tire ment pro grams. But many of the dif fi cul ties that our econ omy will face in the months ahead we brought on our selves. We spent too much, saved too lit tle, spec u lated in se cu ri ties that were n t worth any thing and squan dered the tech ni cal ex per tise of some of our best com pa nies as they at tempted to ex pand be yond their base of ex per - tise. In the mean time, through our trade pol i cies, the United States has pro vided a golden op por tu nity for peo ple half a world away to move into our ma jor mar kets with out hav ing to com ply with the same re quire ments im posed here. As a re sult, work ers, share hold ers and the gen eral pub lic now ap pear to be los ing ground. Still, we should n t be sur prised by it. Singer Eddie Can tor and Groucho Marx fre quently would ex change stock tips. As the down trend of 1930 un folded, Can tor com plained: Jul ius (Groucho s real name), I lost a lot of money on that stock tip you gave me.". In his clas sic style, Groucho re plied, If any body takes stock tips from the Marx Broth ers, they de serve to lose money.". I am hope ful that the years ahead will be healthy for us as we move to ward a more fun da men tal style of management and more practical public policies.

46 38 Part Three The Stock Market Infatuation with technology stocks just the latest in a long series of fads ST. PAUL PI O NEER PRESS -- May 1, 2000 Will Rog ers once de scribed the fre netic am bi ence of the 1920s as a drunk we had been on whereas the 30s pro vided an op por tu nity to so ber up. Is the ir ra tio nal ex u ber ance of this era based on a sea change of eco - nomic for tune due to weighty tech no log i cal ad vances or is due to mind al ter ing forces that are less sci en - tific? Per haps his tory can pro vide some light on that ques tion but his tory is un likely to pro vide peace of mind. The in stances where we have fallen off the wagon in the past are quite nu mer ous not just in the US but else where. His tory does show that stock mar ket ex u ber ance has es ca lated with each ma jor tech no log i cal ad vance; rail - roads, steel, the au to mo bile, ag ri cul tural equip ment, ra dio, aero space, tele vi sion, the com puter and now the internet or the in for ma tion econ omy as if in for ma tion did not ex ist be fore. In the 1920s, Gen eral Elec tric stock rose to $201 per share be fore fall ing back to $8.50 a few years later. Gen eral Mo tors went from $115 to $7 5/8 while the Hud son Mo tor Car Com pany saw its stock de cline from $139 to $2 7/8. When the for - tunes of re tail ing proved to be less than the built up an tic i pa tion, Mont gom ery Ward stock fell from $158 to $3.50. Mean while in ag ri cul tural equip ment, Case stock fell from $467 to $17 while Deere fell from $690 to $3 5/8. Dur ing the early com puter era, Uni ver sity Com put ing stock de clined from $186 to $13. His tory also shows that mar ket ex u ber ance can de velop with out tech no log i cal un der pin nings as it did with the tu lip ma nia in Hol land, the Mis sis sippi Com pany in France and the South Sea bub ble in Eng land in the years long past or the fas ci na tion with rec re ational stocks in the 1960s. But mainly, his tory shows that in - vest ment en thu si asm peaked and then de clined sharply as the re wards and ex po sure of each new in dus try be came more widely un der stood. In a land mark ar ti cle from the Jour nal of Po lit i cal Econ omy (1995), re search ers Jovanovic and Mac Don ald tracked the tire in dus try from 1906 to 1973 where they tracked the num ber of tires sold, tire prices, rev e - nues, and share prices along with the num ber of com pa nies ac tive in the in dus try. Share prices rose steeply as more com pa nies en tered the in dus try and then fell steeply as com pa nies be gan to with draw. There were 275 tire com pa nies op er at ing in the United States early in the life of the in dus try but as com pa nies with un - ful filled goals be gan to with draw, the av er age prices of tire com pa nies de clined by sev enty per cent from 1919 to 1928, be fore the broad mar ket crash be gan. Over the long term, stock prices ul ti mately reach rea son able lev els lev els de pend ant upon good prod ucts, hon est and re li able cus tomer ser vice, and solid fi nan cial per for mance not upon hype. Thus the ul ti mate com pe ti tion for emerg ing in dus try stock val ues co mes from the share prices of more es tab lished com pa nies to which they will in ev i ta bly be com pared. Re gard ing the re cent tur moil in the tech nol ogy stocks, have they gone down enough? Prob a bly not. First of all, there is n t very much tech nol ogy. Peo ple all over the world are fully ca pa ble of bolt ing to gether a few off-the-shelf com puter parts as Dell and Compaq both do. High school and col lege stu dents are both ca pa ble of pro duc ing web sites. There is noth ing par tic u larly spe cial to war rant such high price earn ings mul ti ples. The qual ity is or di nary and many of these com pa nies have yet to de velop a vi a ble rec ipe for mak ing money over the long term. More im por tantly, this sec tor is ap proach ing the re al ism that so many com pa nies have achieved be fore. In the long term, share prices re flect ac tual value of an eco nomic in vest - ment. What does the in ves tor gets in the tech nol ogy stocks ver sus three old econ omy com pa nies, Ford, Cat - er pil lar and Winnebago?. The price earn ings mul ti ples of these com pa nies range from 7 to 13 com pared to a range of from 80 to in fin ity with Dell, Compaq, AOL and Am a zon.com. Earn ings are better, cash flow is much better, and fu ture sales are more pre dict able even if each must cope with some cyclicality in their own mar kets. Fur ther more, each of these old line com pa nies has ex cep tional qual ity, highly au to mated pro - duc tion fa cil i ties, key tech ni cal con tent and most rec og nized brand names in their in dus tries. Ul ti mately, mar kets al ways rec og nize fun da men tal dif fer ences. In spite of pe ri odic glam our as so ci ated with new in dus - tries, share prices ul ti mately com pete with those of es tab lished com pa nies and are ap pro pri ately ad justed. Ford, Cat er pil lar and Winnebago have a com bined mar ket cap i tal iza tion of $81 bil lion and they very con - sis tently earn around $8 bil lion per year. AOL, Am a zon.com, Compaq and Dell have com bined mar ket val -

47 From Riches to Rags at a Time of Prosperity 39 u a tion of $323 bil lion (four times as much) and they earn around $2.3 bil lion (one fourth as much) if it holds. So, even with the ad just ments of the past few weeks, there is still a long way to go. His tory sug gests that stocks are best judged by com par a tive value. Microsoft is a good stock. But, even with its re cent de clines, the mar ket val u a tion is still $343 bil lion over four times the mar ket val u a tion of Ford, Cat er pil lar and Winnebago com bined. Judg ing by Microsoft s re cent earn ings an nounce ments, the in crease of com pet i tors shelf space, IBM s an nounce ment to boost Linux, and Microsoft s an nu al ized cur - rent earn ings of $1.72 per share, it s a good $20 stock. Mean while, as widely re spected mar ket scholar Da - vid Dreman ob served in a re cent Forbes ar ti cle; Stocks like Am a zon.com and K-tel In ter na tional are more of a crapshoot than an in vest ment

48 40 Part Three The Stock Market Popular isn t always prudent Eco nomic his tory les sons should tem per our view of the Internet s "New Econ omy" MINNEAPOLIS STAR TRIBUNE -- De cem ber 13,1999 Wade Massad s ar ti cle ( Dig i tal pow er house: A peek `un der the hood at Net com merce shows the new econ omy is here to stay," Busi ness Fo rum Nov. 22.) cor rectly ar tic u lates the huge busi ness po ten tial avail - able with the de vel op ment of the Internet, but takes too short a per spec tive on stock val ues. No doubt, many of the Internet stocks be ing brought to mar ket will blos som and cre ate hand some re turns for some in ves tors. The ques tion is, which ones and how many?. Huge ex plo sions in stock of fer ings and great in fla tions in stock val ues have hap pened be fore with rail - roads, and steel, auto, tire, farm im ple ment and com puter com pa nies. As auto in dus try his to rian Arch Brown s fa ther re marked about Cord Au to mo bile Co. in an ear lier day, It makes an in ter est ing spec u la tion but a lousy in vest ment.". Stock mar ket trends as so ci ated with the emer gence of new in dus tries have been ex am ined be fore, in both ac tual prac tice and the ac a demic lit er a ture, with sim i lar re sults. In ac tual prac tice, Deere & Co. stock de - clined from $690 per share in the late 1920s to $3 5/8 a few years later. Al lied Chem i cal, U.S. Steel, Hud - son Mo tor Car Co., Stutz Mo tor and oth ers all were dar lings of the stock mar ket dur ing the emer gence of their in dus tries. In more re cent years, once-as pir ing com puter mak ers Sci en tific Data Sys tems, Honeywell, Bur roughs, Univac, RCA and Dig i tal Equip ment Corp. all ben e fit ted from the ex cite ment sur round ing a new in dus try. But most ex ited the in dus try. Some of us will re mem ber when Con trol Data stock was $145 per share in the late 1960s, only to plum met to $13 a few years later. `Mad ness of crowds. In an ear lier age, rail road stocks, many of them fraud u lent, were fash ion able spec u la tions. In his ex cel lent his tory of the U.S. rail road in dus try, his to rian John Stover sug gested, most of the post-civil War rail roads suf fered from the evils of in flated con struc tion costs, fraud u lent stock ma nip u la tions and in com pe tent man - agement.". The rail roads con trib uted might ily to the na tion s de vel op ment, but not all of them were in vest ment win - ners. Steel was the dar ling fol low ing rail roads, not only in the United States but else where. Coun tries with even min i mal in dus try seemed to lose face un less there was a prom i nent na tional steel com pany. In the United States, com pa nies such as U.S. Steel, mostly a re sult of the ac quis i tive ac tiv i ties of J.P. Mor gan, reached prom i nence in the 1920s, but few re main com pet i tive to day. Con glom er ates pro vided the ma jor ex cite ment of the 1960s. Gulf & West ern, LTV, ITT and Litton In dus - tries all cre ated im pres sive rev e nue and profit his to ries by ac quir ing com pa nies and add ing the rev e nues and earn ings to their base financials, well chron i cled in Rob ert Sobel s book, The Rise and Fall of Con - glom er ate Kings. The stock val ues of these com pa nies es ca lated for a while and then plum meted, and the com pa nies them selves drifted into ob scu rity. In his well-writ ten book Ex traor di nary Pop u lar De lu sions and the Mad ness of Crowds," Charles Mackay de scribes the great spec u la tions of the past, in clud ing the tu lip ma nia that af fected Hol land in the early 1600s. The ma nia con tin ued un til an un think ing sailor mis took a valu able bulb for an on ion and sliced it for his sand wich, thus di gest ing much of the owner s wealth. The point of Mackay s book is more se ri ous. Spec u la tions have costs, and ex ces sive spec u la tions can re - duce both the wealth and in flu ence of en tire na tions. Good com pa nies and ex cit ing new tech nol o gies were pres ent in each of these in dus tries, just as prom is ing Internet com pa nies are emerg ing to day. The ques tion now, as al ways, is how gen eral is the trend?" In a land mark ar ti cle from the Jour nal of Po lit i cal Econ omy in 1994, re search ers tracked the tire in dus try from 1906 to Tires are use ful. The av er age U.S. fam ily owns about 20 tires (cars, trail ers, lawn mow - ers, etc.), so the tire busi ness was a growth in dus try at some time dur ing its his tory.

49 From Riches to Rags at a Time of Prosperity 41 In their study, re search ers fol lowed the num ber of tires sold, tire com pany rev e nues, and share prices along with the num ber of com pa nies ac tive in the in dus try. In 1922, there were 275 tire com pa nies op er at ing in the United States. But share prices turned out to be re lated not to the num ber of tires sold, in dus try rev e nue or the sell ing prices of the tires sold. Share prices were re lated to the num ber of com pa nies en ter ing and leav ing the in dus try. Share prices rose steeply as more com pa nies en tered the in dus try and then fell steeply as com pa nies be gan to with draw. Will this hap pen again with Internet stocks? The older I get, the less need I feel to pre dict any thing. But it might. AOL is good, but at $181 bil lion in mar ket cap i tal iza tion, is it re ally worth three times as much as Ford Mo tor Co.? Is Am a zon.com, which is los ing even more money than in the past, re ally worth twice as much as Caterpillar?. Op por tu nity cost. The Internet is won der ful and rev o lu tion ary. But in the long his tory of world eco nomic de vel op ment, is it more im por tant than elec tric ity, rail roads, the au to mo bile, steel, plas tics, air craft, re frig er a tion or Borlaug wheat? (The wheat, by the way, is named for Uni ver sity of Min ne sota grad u ate Nor man Borlaug, who won the No bel Peace Prize in 1970 for his re search in hy brid iz ing wheat to in crease crop yields. Borlaug be - came known as the fa ther of the Green Rev o lu tion). The Internet is a phe nom e non. But then, so was Fisk Tire Co. The con cern I have with the in fla tion of Internet-re lated stock val ues is the op por tu nity costs we may un - wit tingly be pay ing. Maybe it is to our ben e fit to be on the ground floor of an ex cit ing new in dus try. And clearly there are opportunities there. How ever, while this is hap pen ing, we are los ing our po si tion in some of the best wealth-cre at ing in dus tries we have had in the past. In many crit i cal in dus trial com po nents such as switches, encoders, bear ings, com - pres sors, pumps, ships, mo tors, valves and gen er a tors, the United States no lon ger is the leader or, in some cases, even a ma jor player. More re cently, we have be gun to see an ero sion in the high-value end prod ucts made from these crit i cal com po nents, such as air craft and even med i cal de vices. Sure, the econ omy is good now, and maybe we re ally are in a new econ omy" that is fun da men tally dif fer - ent from the rev o lu tion ary econ o mies of the past cre ated by the au to mo bile, rail roads, com put ers, elec tric - ity, met al lurgy, pharmaceuticals and ev ery thing else. If this new econ omy turns out to live up to its hype, none of us will be dis ap pointed. But if it turns out that we have been mort gag ing the fam ily farm to buy rare tu lips, we may wish to look more closely at the fun - damentals.

50 42 Part Three The Stock Market Shareholders should look again at Honeywell buyout Why trade shares in an ex cel lent firm for stock in a me di o cre one? MINNEAPOLIS STAR TRIBUNE -- June 14,1999 The Honeywell-AlliedSignal merger has at tracted much at ten tion for its im pact on Min ne ap o lis neigh bor - hoods, Honeywell work ers and the larger Min ne sota com mu nity. Mar ket pur ists will say that what is good for Honeywell share hold ers should pre vail. I do not quar rel with that po si tion. But I think the Honeywell-AlliedSignal merger is quite likely to be bad for the com mu nity, bad for work ers and bad for share hold ers - all at the same time. Let s ex am ine the sit u a tion more care fully. At the root of the prob lem is the fact that AlliedSignal may not be a cor po ra tion that cre ates ex cel lence over the long term. Since 1980, AlliedSignal has con sum mated 101 ma jor ac qui si tions, di ves ti tures, joint ven tures and merg ers. In or der to ac com plish these stra te gic ini tia tives, the com pany has raised $3.7 bil lion in com mon stock and paid-in cap i tal. At the end of 1998, the com pany bal ance sheet listed share holder eq - uity of $5.3 bil lion. But there is a catch. Much of this eq uity (77 per cent, or $4.1 bil lion) was tied up in in tan gi ble as sets (good - will and other as sets) which, when sub tracted from share hold ers eq uity, leaves only $1.2 bil lion in tan gi - ble net worth. That s not much for a large multi-na tional com pany seek ing to fi nal ize a deal worth $15.8 bil lion. Some of us oc ca sion ally use an other term - bank able eq uity - to pro vide some in sight into the re serve bor row ing power of cor po ra tions. We can com pute bank able eq uity, an ad mit tedly con ser va tive fig ure, by de duct ing half of the value of the com pany s in ven tory from tan gi ble net worth. Why? Be cause bank ers typ i cally loan money on only half of a com pany s in ven tory. By do ing this, we can ap prox i mate how much money a com pany can ex pect to bor row from a good banker. In the case of AlliedSignal, it s $49 mil lion - yes, mil lion, not bil lion. AlliedSignal also car ries quite a lot of debt. The com pany had a cur rent ra tio (or cur rent as sets over cur rent li a bil i ties) of only 1.08 in In other words, for ev ery dol lar s worth of cur rent li a bil i ties, AlliedSignal has just $1.08 in cur rent as sets - hardly a banker s dream - es pe cially when the com pany has $2.3 bil lion tied up in fairly slow-mov ing in ven tory. Also, the com pany s tax ac crual is grow ing - al ways a bad sign be cause it in di cates that the earn ings re - ported to the gov ern ment are quite a bit dif fer ent than earn ings re ported to stock hold ers. Per haps these dif - fer ences should be ex plained to the pres ent own ers of the 127 mil lion shares of Honeywell stock. Honeywell looks better than AlliedSignal both fi nan cially and tech ni cally. Honeywell prod ucts tend to be more re spected and fetch a higher mar gin. AlliedSignal s gross profit rate is 24.1 per cent while Honeywell s is 32.6 per cent. Honeywell spent $481 mil lion on re search and de vel op ment last year, or 5.7 per cent of rev e nue. AlliedSignal spent $394 mil lion or 2.6 per cent. Honeywell has a higher cur rent ra tio ($1.47 in cur rent as sets for each dol lar of cur rent li a bil i ties) and a better-look ing bal ance sheet gen er ally. One of the rea sons why the Honeywell bal ance sheet is better is be cause Honeywell has a better sense of how to cre ate cor po rate ex cel lence over the long term. The com pany has n t done ev ery thing per fectly. None of us has. But, over the years, Honeywell has nur - tured a suc cess ful com bi na tion of em ployee de vel op ment, solid re search, ef fi cient pro duc tion and loy alty among cus tom ers. Its prod ucts are widely known and highly re spected. Hodgepodge collection. AlliedSignal is a dis jointed amal gam of un re lated busi nesses loosely sorted into re mark ably di verse stra te - gic busi ness units. The aero space unit, for in stance, in cludes wheels, light ing and avi on ics. The trans por ta - tion unit in cludes an ti freeze, fil ters and spark plugs.

51 From Riches to Rags at a Time of Prosperity 43 AlliedSignal s 1998 sales in creased in aero space sys tems and tur bines, but were flat in spe cialty chem i cals and de clined in per for mance poly mers and trans por ta tion prod ucts. Cap i tal ex pen di tures dropped 10 per - cent from 1996 to Or der back logs de clined slightly. In ven to ries of un sold fin ished prod ucts in creased by $269 mil lion from 1997 to We are all well aware that fi nan cial mar kets of ten re spond fa vor ably to big deals and highly le ver aged trans ac tions. But, the em pir i cal track re cord of big deals is quite mixed. AT&T lost $4.5 bil lion on NCR. North west Air lines is clearly not a better com pany since the le ver aged buyout. Big banks make less money than me dium-size banks. Though AlliedSignal has done a lit tle better than some, the for mula of most ac quis i tive con glom er ates is sim i lar: Abide by the prin ci ple that if we can not man age what we have, we had better man age some thing else. Then go buy some thing and lay off enough peo ple to make the num bers work. In the mean time, ex per tise is lost. Tech ni cal com pe tence dis ap pears. Cus tom ers drift away, of ten to for eign sup pli ers. Then, af ter the busi ness is se verely com pro mised, some new CEO can di vest, re struc ture or spin off the same, but less-valu able, busi ness with the ar gu ment that the unit is no lon ger a stra te gic fit. The list of house hold-word in dus trial com pa nies that have been touched by the AlliedSignal tur bu lence is long and pres ti gious. Bendix, Warner-Swasey, Ampex, Amphenol, Prestolite, Re vere, Budd, Garrett In dus - trial Sup ply, AMP, and oth ers. All of these com pa nies were healthy and re spected in dus trial com pa nies at one time. Frag ments of these op er a tions still ex ist in some places but many have been closed, liq ui dated, re struc tured or sold. In the af ter math, for eign com pet i tors have of ten moved in to fill voids and trade def i cits have in creased to re cord lev els. This brand of cor po rate can ni bal ism is hard on com mu ni ties such as South Bend, Ind., which was a re search cen ter for Bendix, but it also not good busi ness. John Ad ams, a Uni ver sity of Min ne sota ge og ra phy pro fes sor, has a phrase for this pro cess. He calls it eat - ing our seed corn.. The prob lem with a deal like the Honeywell-AlliedSignal merger is that AlliedSignal might screw it up. It won t be easy to trans fer the tech ni cal ex per tise and man a ge rial com pe tence of a no ble com pany like Honeywell to New Jer sey - a high-cost, in ef fi cient state that leads the na tion in the per cent age of man u fac - tur ing jobs lost. Honeywell has long pro vided a re serve of man a ge rial com pe tence and tech ni cal ex per tise to Min ne sota, which ex tend be yond its role as a good cor po rate cit i zen. Top man ag ers of Medtronic, ADC and many other com pa nies served their ap pren tice ships at Honeywell. En gi neer ing stu dents at both St. Thomas and the Uni ver sity of Min ne sota en joy Honeywell schol ar ships. It has been a great com pany and I wish more peo ple were con cerned. I wish the gov er nor would rec og nize the fact that the sec ond-most-im por tant com pany in the his tory of Min ne sota in dus try is about to de part. (I rank 3M Co. first.). But the con cern of this ar ti cle is for Honeywell share hold ers. They, of course, have the right to ex change their shares in a world-re nowned com pany for shares in a hodge podge col lec tion of busi nesses. But more in for ma tion should be pro vided be fore they do so.

52 44 Part Three The Stock Market What were we thinking? As in ves tors grap ple with their mis for tunes and the post-bub ble fin ger-point ing on Wall Street con tin ues, it s worth ask ing how much we our selves are to blame. MINNEAPOLIS STAR TRIBUNE -- June 29, 2002 It was com mon un til about 1952 for most fru gal peo ple to drive pre-world War II cars. Mike Curry was no ex cep tion. Mike was a re tired law en force ment of fi cial, a highly suc cess ful in ves tor and a very kindly neigh bor. One day, some body ran into his 37 Ford and caved in the left door, but he con tin ued to drive it. Months later, when asked when he was go ing to get his car fixed, Mike qui etly re plied, As long as it still has a right door, it is just as good for me as it ever was.". Mike thereby ex hib ited a qual ity that has come to be rare in re cent times: the grace ful ac cep tance of mis - for tune. Dur ing this time of de clin ing stock val ues, mis be hav ior at com pa nies and chi ca nery on Wall Street, it is al - ways com fort ing to have some one to blame. It could n t be us, af ter all. Our losses should be cov ered - by some one. Let s find some one to cover us. The 1990s pro duced mar ket ex pan sion, spec u la tion, fraud u lent be hav ior, in ef fec tive over sight and, from early 2000 un til now, dra matic mar ket re ver sals. Ac count ing firms were weak and too com pli ant. The na - tion s se cu ri ties laws were poorly en forced by both the Se cu ri ties and Ex change Com mis sion (SEC) and De part ment of Jus tice. The qual ity of in vest ment anal y sis was low. The scan dals of the past sev eral months are in deed trou bling and should not be con doned. But they are not a sur prise. Ev ery se mes ter, I have the great priv i lege of read ing about 100 term pa pers. Many of the stu dents ex am ine the strat e gies, tac tics and com pet i tive ness of in di vid ual com pa nies and then com pare them with other for - eign and do mes tic com pa nies op er at ing in the same field. They ex am ine op er at ing ra tios and bal ance-sheet in teg rity, as well as the com pany s cus toms and man a ge rial prac tices. Over the years, our stu dents have cor rectly pre dicted the de mise of Mid west Fed eral, K-Mart, Mont gom ery Ward, Con trol Data, WorldCom, LTV, Daewoo, Sun Coun try and Qwest, among oth ers. They have cor - rectly analyzed weaknesses at Enron, AT&T, Cisco, and, at an early stage, Gen eral Elec tric. If the stu dents can fig ure it out, why could n t the fund man ag ers, se cu ri ties an a lysts and the SEC staff dur - ing the go-go years of 1993 to 2000? Be hind the bo gus num bers. Ac count ing lax ity and the fail ures in cor po rate gov er nance have been well-doc u mented in to day s press. What has been less well-cov ered are the weak nesses in en force ment and the gen eral na ivete of many in - vest ment bank ers and in ves tors. In his 2000 book, Ir ra tio nal Ex u ber ance, Yale pro fes sor Rob ert Shiller warned that the mass over pric ing in spec u la tive com mon stocks was far out strip ping the eco nomic fun da men tals of that era. In 1996, Fed eral Re serve Chair man Alan Greenspan de liv ered a sim i lar mes sage to Con gress, us ing the phrase that served as the ti tle of Shiller s book. Da vid Dreman and War ren Buffett have been preach ing the vir tue of sen si ble value in vest ing for years. A care ful read ing of the fi nan cial state ments and fil ings of the now-de famed of fend ing com pa nies yielded plenty of warn ings early on. AOL had been chal lenged on rev e nue rec og ni tion as its mar ket value was ex ceed ing that of Gen eral Mo - tors. New and pe cu liar ac count ing terms were em ployed to dis play prog ress in com pa nies where no se ri ous busi ness model ex isted.

53 From Riches to Rags at a Time of Prosperity 45 The fi nan cial state ments of Honeywell s fu ture ac quir er, AlliedSignal, were not im pres sive, ei ther, since it was bur dened with huge debt, low mar gins, a weak bal ance sheet, slow-mov ing in ven tory, and pe cu liar look ing fi nan cial state ments well be fore its merger with Honeywell. There were many other ex am ples. Why would we ever have ex pected any in vest ments in these com pa nies to work out? The fre netic ac qui si - tion of com pa nies went be yond the abil ity of man age ment to make the ac qui si tions suc cess ful. The pre dict able re sult? De mor al ized em ploy ees; money stripped from re search, prod uct de vel op ment and op er a tions to pay for ac qui si tions at highly in flated prices, and of fen sive ex ec u tive com pen sa tion. Why would we ex pect suc cess?. The Wall Street Jour nal re cently re ported that U.S. merger and ac qui si tion ac tiv ity reached 15 to 16 per cent of the Gross Do mes tic Prod uct from 1998 through 2000 but has fallen to 2 per cent to day. Among the big acquirers were:. WorldCom: more than 70 ac qui si tions. AT&T re cently sold ca ble com pa nies it ac quired in the 1990s to Comcast at a loss ex ceed ing $35 bil lion. Cisco: 70 ac qui si tions. First Un ion: 90 bank ac qui si tions. Many of these ac qui si tions have com mon at trib utes - heavy debt, low in vest ment in prod ucts and man u fac - tur ing, out-of-touch man age ment and the crass treat ment of em ploy ees. Solid companies exist. Yet, all along the way, there have been many fine com pa nies. These are the com pa nies that stick to their knit ting, spurn ac tiv i ties for which they have no ex per tise, op er ate fru gally, em ploy rea son able ex ec u tive com pen sa tion, and fos ter a sense of pru dence and re spon si bil ity in their op er a tions. We have some big com pany ex am ples such as Nucor Steel, Deere, Medtronic and oth ers. And we have some well-run smaller com pa nies, as well - com pa nies that treat their em ploy ees, cred i tors, share hold ers and their com mu ni ties with re spect. The Old Log The ater in Ex cel sior has one of the lon gest re cords of prof it abil ity of any the ater in the United States. One eve ning, I called to get tick ets. A friendly voice promptly an swered the phone and grace fully took my or der. Since the voice was fa mil iar, I then asked who it was. This is Tom Stolz, came the re ply. Tom is one of the lead ac tors and I asked, Aren t you in the play? He re plied, Yeah, but I m be tween scenes.". Now, if WorldCom, Qwest and Global Cross ing would have op er ated as fru gally, un der stood their busi ness as well, and treated their cus tom ers with sim i lar re spect, maybe they would not be in quite so much trou ble. Is there some thing to be gained by su ing ev ery one re gard ing our de clin ing port fo lio val ues? Cer tainly there were ex cesses that should be pun ished se verely. I would like to see some of fend ers and lack a dai si cal en - force ment of fi cials not only go to jail, I would like to see them all in the same cell. From what I un der stand, they all have ob nox ious per son al i ties, and per haps pro longed im pris on ment with Gary Winnick or Bernie Ebbers would serve as a pow er ful de ter rent. But, maybe part of the prob lem was our own be hav ior. Should n t we have known better?. Mike Curry might have driven around with a big dent in his 37 Ford. But I can not imag ine him buy ing WorldCom stock.

54 46 Part Three The Stock Market Take a harder look at predatory investing Con cern has sur faced at the SEC and Con gress about the po ten tial down side of pri vate-eq - uity and hedge-fund ac tiv ity on many of the na tion's top com pa nies. MINNEAPOLIS STAR TRIBUNE -- Jan u ary 14, 2008 The nur tur ing and en cour age ment of pri vate eq uity is part of the Amer i can DNA, and most pol i ti cians are loath to tam per with it. How ever, pri vate-eq uity and hedge-fund ac tiv i ties have in creased to such an ex tent that we should now take in ven tory of where we are. What are the ben e fits, ex po sures, risks and ram i fi ca tions of the in creas ing ten dency to put much of in dus trial Amer ica in the hands of peo ple seeking a quick buck? The vol ume of pri vate-eq uity and hedge-fund ac tiv ity is enor mous and grow ing pre cip i tously. In 2005, it was es ti mated that such funds were then man ag ing around $500 bil lion, with po si tions in about 4,000 com - pa nies. Two years later the ac tiv ity is much larger, but de tails on these pri vate in vest ments are hard to find and harder to analyze. Mean while, many of Amer ica's stel lar com pa nies have been af fected. Chrys ler, Allison Trans mis sion, Rexnord, TRW, RJR Nabisco, Hought on Mifflin, Hertz and sev eral other ma jor firms al ready have been taken over. Alcoa, Dow Chem i cal and sev eral other prom i nent com pa nies are ru mored to be candidates. The sheer mag ni tude of re cent pri vate eq uity in vest ments is mind-bog gling: Among them have been a $48.5 bil lion of fer for a Ca na dian telecom group, a po ten tial $22 bil lion bid for a Brit ish ca ble tele vi sion com pany, and the $26 bil lion pur chase of Hilton Ho tels. The re search group Pri vate Eq uity In tel li gence sug gests that $240 bil lion of pri vate eq uity money was raised in the first half of 2007, well be yond the 2006 record of $459 billion. The Blackstone Group by it self re port edly has $98 bil lion worth of as sets un der man age ment. KKR has $86 bil lion. About $600 bil lion in buyouts were an nounced in the first half of Yet there are hon est ques tions re gard ing the role of what is of ten pred a tory in vest ing. Pri vate eq uity man ag ers have sketchy his to ries of bring ing pros per ity to com pa nies where they in vest. Of - ten, they have no prac ti cal ex pe ri ence in man ag ing the af fairs of in dus trial com pa nies. And the ef fects, such as with the di sas trous 1989 le ver aged buyout of North west Airlines, can be calamitous. Fre quently, the heavy debt needed to con sum mate take overs or ac qui si tions weighs so heavily on the ac - quired firm that its com pet i tive ad van tages erode. Tax col lec tions are in vari ably re duced be cause com pany prof its are al most al ways di min ished or elim i - nated by the heavy (and tax-de duct ible) in ter est pay ments as so ci ated with huge debts nec es sary to fi nance the trans ac tions. Ven dors, com mon tar gets for cost and cash sav ings, of ten suf fer with dic tated lower prices and delayed payments. The cost to so ci ety There is often a large societal cost because employees, communities, creditors and customers often find their own se cu rity has been se verely com pro mised as a re sult of take over transactions. Con cern about the po ten tial down side of ram pant pri vate eq uity fund ac tiv ity has sur faced at the Se cu ri ties and Ex change Com mis sion, the Fed eral Re serve and Con gress. Greater reg u la tion has been rec om mended on sev eral fronts, but these ini tia tives are meet ing strong re sis tance from the spe cial in ter est groups di rectly and in di rectly involved in these activities. My con cern is for the coun try's more ro bust and com pet i tive man u fac tur ers, util i ties and trans por ta tion companies. These companies are especially appealing candidates for predatory investments because they of ten have some thing other com pa nies do not: col lat eral that can be borrowed against. As we look at the list of com pa nies tar geted, or ru mored to be tar geted, by le ver aged buyout firms, it is not sur pris ing that some of Amer ica's most pres ti gious and long-es tab lished man u fac tur ers are among them.

55 From Riches to Rags at a Time of Prosperity 47 Think of how much col lat eral Alcoa must have, or Dow, or the Allison Trans mis sion unit of Gen eral Mo - tors -- col lat eral that, in some cases, took more than a cen tury to ac cu mu late. What will be come of these im por tant com pa nies if they fall into the hands of this in ex pe ri enced cadre of pred a tory investors? Dividend recapitalization One of the tech niques em ployed to make sure the pri vate eq uity funds look good and re coup their in vest - ments is through what is termed "div i dend re cap i tal iza tion." It is not a com pli cated trans ac tion: The ac quired firm, now un der the man age ment of the pri vate fund, bor - rows as much as it can against all avail able as sets to de clare a huge div i dend to the ac quir ing fund -- of ten suf fi cient for the firm to re cover its initial investment. The fund shows prof its, but the ac quired firm is im pov er ished. There is some ev i dence that the bloom might be off the rose on pred a tory in vest ment ac tiv i ties. Blackstone Group stock has been hov er ing at around $19 per share -- about 45 per cent be low its June high of $35 per share the day af ter its June 21 ini tial pub lic offering. Shares of For tress In vest ment Group, an other New York-based pri vate eq uity firm, is off about 57 per cent from its 52-week high. Al though many of us might re joice at the sud den re ver sal of for tunes for the pred a tory in ves tors, we may find that the bulk of this mis for tune will fall upon oth ers, rather than to the man ag ers of the pri vate in vest - ment funds. The two found ers of Blackstone, for in stance, sold $2.6 bil lion of stock dur ing that com pany's ini tial pub lic offering in June. It al ways sur prises me that elected pub lic of fi cials do not show more con cern about the crit i cal need to re - tain ef fec tive and high-qual ity busi nesses in the United States. Pred a tory in vest ing needs re view from the per spec tive of trade bal ances, tax col lec tions, the or derly work ing of markets and employment. Per haps we should ask our pub lic of fi cials what they are do ing -- be sides rais ing money for their own cam - paigns.

56 From Riches to Rags at a Time of Prosperity 49 Part Four Manufacturing From its peak in 1979, the U.S. has lost roughly seven mil lion man u fac tur ing jobs. Im proved meth ods and au to ma tion have per haps re duced man u fac tur ing em ploy ment but the em pir i cal ev i dence is in ter est ing. We are not cur rently los ing much em ploy ment in the in dus tries that are in vest ing in better meth ods. We are los - ing em ploy ment in in dus tries where in vest ment is low. We have too many laid-back com pa nies that lack the skills nec es sary to com pete ag gres sively in world mar kets. Their task is no doubt made more dif fi cult by an ever-bur geon ing pub lic sec tor even dur ing a pe riod of sup posed bud get-bal anc ing. Dur ing the same pe riod that U.S. man u fac tur ing em ploy ment de clined by seven mil lion, gov ern ment em ploy ment in - creased by six mil lion. Higher taxes from a healthy econ omy are pro vid ing more rev e nue but gov ern ment em ploy ment is con tin u ing to grow and with it, ever-ex pand ing fu ture re tire ment ob li ga tions. The de cline of man u fac tur ing is sin is ter enough na tion ally, but dev as tat ing to some com mu ni ties. Re gret ta - bly, man u fac tur ing is de clin ing more where the jobs are most ur gently needed in ma jor cit ies. The sta tis - tics are fright en ing. From 1988 to 1995, dur ing a pe riod of high pros per ity, man u fac tur ing em ploy ment de - clined by 31 per cent in Bal ti more, 33 per cent in Brook lyn, 34 per cent in Phil a del phia and 27 per cent in Un ion County, New Jer sey. Most ma jor met ro pol i tan coun ties, in clud ing both Ramsey and Hennepin in Min ne sota, los t man u fac tur ing jobs dur ing this pros per ous period. Some of the lost jobs are made up by in - creas ing em ploy ment in ser vices, but there is a catch. Many ser vices do not do well in re ces sions.