It would be preposterous to argue that inflation alone refashioned the American economy. Regardless of inflation, technology would have advanced. Personal computers and the Internet would have spread. Regardless of inflation, some verson of a global economy would have evolved. Recovered from World War II, Europe and Japan would have inevitably become our economic rivals. The notion that America could excel in every aspect of every industry—

a common view in the 1950s and 1960—was a patriotic fantasy. Still, inflation assumed a pivotal role in a transformation that transcended economics and also affected politics and popular culture. In a wise essay nearly twenty years ago, the late economist Herbert Stein cautioned against defining capitalism by a narrow list of economic characteristics. Capitalism, he noted, had to adapt to social realities. It had survived the political threat of the Great Depression and "had gone on to great successes" precisely because it could change.

[T]he capitalism that survived and succeeded was not the capitalism of 1929. The capitalism that will succeed in the next sixty years may not be the capitalism of the late twentieth century. Capitalism succeeded in large part because it adapted. Capitalism is not a blank slate upon which anything can be written; it has a central core that must be preserved if it is to remain capitalism. But the large penumbra around that core can change without ending capitalism, and it has to change from time to time if capitalism is to survive. The central core of capitalism, without which a society would not be capitalist, is freedom. But absolute freedom is impossible, and no one has satisfactorily defined the amount and kind of freedom that is essential to qualify as capitalism.27

Against Stein's elastic standard, the resurrected capitalism since the 1980s has permeated popular culture as well as the economy. It has altered mass beliefs, values and interests. Writing in 2004, journalist Roger Lowenstein noted that, in the 1970s, most newspapers

"carried at most a single account of the previous day's action on Wall Street, and television barely covered it at all." What happened to the stock market simply did not concern most Americans. "Today, at my daughter's middle school in New Jersey, an investing club is busily educating future market wizards, but in the '70s, through four years on an Ivy League campus, I didn't hear a mention of the stock market." Colleges and universities now offer courses in entrepreneurship, and successful business founders—say, Larry Page and Sergey Brin, Google's founders—are celebrated as heroes. Wealth creation is seen as a vital, risky and, to some extent, romantic undertaking; it is not, as in the 1960s and early 1970s, taken as the inevitable outcome of corporate investment and management (this effortless quality is why Lowenstein, the college student, heard so little of it). Popular culture and ideas have shifted in ways not discernible in economic statistics.28

The intellectual godfathers of the old order, Keynes and Gal-braith, argued that technocrats could control the economic system for the greater social good. Economists would conquer the business cycle; modern managers would produce technological advances. By contrast, the new order's leading economic philosophers, Milton Friedman and Austrian-born Joseph Schumpeter (1883-1950), thought that economic progress originates in free markets. Schumpeter coined the evocative phrase "creative destruction": Capitalism advances on waves of innovation that, though initially disruptive, ultimately make people better off. The most powerful competition involved "the new commodity [product], the new technology, the new source of supply, the new type of organization." Under the old order, growing national wealth and stability were assumed to be as sured and—properly managed—would solve pressing social problems, from poverty to pollution. Under the new order, economic growth was chancy. Because it depended on a willingness to invest and take risks, government had to maintain a supportive climate through its tax and regulatory policies.29

The shift was social as well as intellectual. It coincided with a generational transition in American business that reinforced new attitudes. The Depression and World War II wave of executives was retiring. Someone who was twenty-five in 1945 turned sixty in 1980. The new business leaders were not so politically defensive as their predecessors. They worried less about avoiding the class warfare of the 1930s and more about safeguarding the future of their companies in a hostile climate. They also saw themselves as more individualistic. To simplify slightly: The early postwar executives cast themselves as enlightened business engineers who smoothed capitalism's rough edges without crippling its productive capacity. They drew their identity from the group affiliation with their companies: U.S. Steel, IBM, General Motors. Their successors imagined themselves more as warriors and free agents, whose success depended on defeating their business rivals and scoring high on capitalism's standard achievement tests: market share, stock prices, return on investment and (not coincidentally) personal wealth. Jack Welch, Jr., appointed as CEO of General Electric in 1981, became the poster boy for the new type of manager. He focused singlemindedly on improving profits and GE's stock price; he showed no reluctance to fire workers or jettison underperforming businesses.

The contrasts emerge in two landmark business books of the past half century: My Years with General Motors, published in 1963 and written by Alfred P. Sloan, Jr., president and then chairman of GM from 1923 to 1946; and Only the Paranoid Survive, published in 1996 and written by Andrew Grove, president and then CEO of Intel from 1979 to 1998. Each headed the dominant company in a dominant industry—cars through the 1960s; computer chips now. The contrasts are dramatic. In Sloan's era, big enterprises seemed suited to serve mass markets through economies of scale in production and distribution. But they might founder if their size spawned chaos and waste. In the early 1920s, General Motors—the result of many mergers—was highly disorganized. Suffused throughout Sloan's account is confidence that competent management could overcome size's drawbacks and exploit its advantages. Here are some chapter tides: "The Concept of the Organization," "Co-ordination by Committee," "The Development of Financial Controls." These subjects now strike us as dull, but they were real challenges in creating suitable business methods. Sloan wrote:

I do not regard [GM s size] as a barrier. To me it is only a problem of management. My thoughts on that have always revolved around one concept ... the concept that goes by the oversimplified name of decentralization. The General Motors type of organization—co-ordinated in policy and decentralized in* administration—not only has worked for us, but also has become the standard practice in a large part of American industry.30

Grove exuded none of Sloan's confidence. Instead, he saw threats everywhere, and even when he couldn't see them, he feared they were there. "[W]hen it comes to business, I believe in the value of paranoia," he wrote. "The more successful you are, the more people want a chunk of your business and then another . . . until there is nothing left." Companies could not flourish just by producing quality products at low cost, or by excelling in research and development, or by expanding into new markets. Firms also had to overcome what Grove called "strategic inflection points"—a new label for "creative destruction." Strategic inflection points are new products, technologies or management methods that alter "the way business is conducted." Personal computers had dethroned IBM. Containerization had harmed some ports (New York, San Francisco) and helped others (Seattle, Singapore) that adapted faster. People always resisted change. In 1927, TheJazz Singer—the first successful sound movie—debuted.Yet, even in 1931, Charlie Chaplin, the famous silent-movie star, declared, "I give talkies six months more."31

Different life experiences separated Sloan and Grove. When Sloan's book appeared, the postwar boom was still in full swing, and U.S. companies seemed invincible. Grove, on the other hand, had witnessed successful challenges to many U.S. industries (steel, autos, televisions), and his own industry—on the cutting edge of technology—was in constant competitive turmoil. Sloan wasn't naive (as was perhaps Galbraith) about competition. Too much success for a firm, he warned about GM, "may bring self satisfaction. ... In that event, the urge for competitive survival, the strongest of all economic incentives, is dulled. The spirit of venture is lost in the inertia." That, indeed, helped explain GM's later distress. But for Grove, fierce competition was an everyday reality. It prevented complacency. A company might not sacrifice just a few points of market share. It might disappear. Old-style capitalism no longer seemed dated. "[N]obody owes you a career," Grove warned. That was the implicit promise of the old economic order; it wasn't of the new.32 Contrary to much commentary, government's size did not shrink in the new economic order. Government regulation remains pervasive. But there was a shift in its role and in perceptions and emphasis. Government became less ambitious, because people lost faith that new programs could solve all social and economic problems. That was a major political legacy of inflation and the failure to end the business cycle. Ideas changed. This was particularly true of economic policy. At the Fed, Friedman's view that money creation is at the core of inflation became conventional wisdom.*

"Central bankers over the past several decades have absorbed an important principle," wrote Alan Greenspan, Volcker's successor as Federal Reserve Board chairman. "Price stability is the path to maximum sustainable [economic] growth." Serving from August 1987 until January 2006, Greenspan was determined not to squander Volcker's gains:

* Not all of Friedman's ideas triumphed. His view that inflation is a monetary phenomenon was widely accepted. But he also wanted the Fed to follow a simple monetary rule, increasing the money supply by a given amount (say, 3 percent) a year. This, Friedman argued, would create just enough money to permit economic growth without kindling inflation. Though some recessions would occur, the Fed didn't know enough to do better. But a money rule wasn't permanently adopted, and most economists regard it as impractical, because devising a precise statistical definition of money is so difficult.

When I arrived, a very large part of the price inflation had been defused. Volckers actions in October of 1979 and following on into the 1980s essentially broke the back of inflation's acceleration. When I came, the real problem was that, as is often the case when you come from 12 percent—or whatever it was—down to four percent, then you get a bounce [back]____

I did not want to be involved in losing the significant progress that Volcker had achieved, which meant that there was a definite bias towards tightness.33

Four times, the Greenspan Fed raised interest rates to prevent higher inflation (1988-90, 1994-95, 1999-2000 and 2004-06). In July 1996, the FOMC debated the nature of price stability. It concluded that, given the technical difficulties of measuring price changes (higher prices for higher-quality goods—say a longer-lasting tire—should not count as inflation) and potential dangers of deflation (falling prices), an inflation up to 2 percent would be acceptable. Fifteen years earlier, the debate would have been impossible. High inflation seemed too intractable. By 2004, Greenspan declared victory: "Our goal of price stability was achieved by most analysts' definition by mid-2003. Unstinting and largely preemptive efforts over two decades have finally paid off."34

To be sure, the Fed had help. In the 1990s, productivity growth was high, oil prices were low, the spread of "managed care" held health costs—for a while at least—down, and stiff competition from imports, reflecting the strong dollar, helped restrain the prices of manufactured goods. One study estimated that all these factors, plus some technical revisions of the Consumer Price Index, might have shaved nearly one percentage point annually from inflation from 1994 to 1999. Good luck and good policy reinforced each other, but the two were connected. The good luck stemmed partly from good policy. If the Fed had tolerated higher inflation, oil prices would have been higher, the dollar would have been lower (and imports competition weaker) and the advent of "managed care" less effective.35

Subsiding inflation that eventually led to a crude sort of price stability was both cause and consequence of America's restored capitalism. But the new economic order also has manifest shortcomings, and just how it might—as Stein suggested—evolve and adapt in the future remains an open question partly dependent on how the American public weighs its relative strengths and weaknesses. Understandably, these issues have become the focus of fierce debate.

0 0

Post a comment