In September of last year, Hedrick Smith wrote an opinion piece in the New York Times entitled “When Capitalists Cared.” He put forward Henry Ford as the hero who, with other high-minded executives, helped to create the postwar American middle class. They promoted a “virtuous circle of growth” built on “stakeholder capitalism.”
“American business and political leaders have dismantled the dynamics of the ‘virtuous circle’ in pursuit of downsizing, offshoring and short-term profit and big dividends for their investors.” Jack Grayson gave an interesting response on the APQC Blog. He focused his attention on the seeming disconnect between increased productivity and wages.
If wage earners are not sharing in the benefits of increased productivity, then we can expect slow growth and reduced competitiveness, not to mention the general discontent of the public. It reminds me of Deming’s Chain Reaction. The idea that quality helps competitiveness and job creation becomes less believable if productivity gains are due mostly to offshoring.
Harry Moser of the Reshoring Initiative has done a lot to counter this trend. Buying agents usually have incentives tied to cost savings, but this neglects the total cost of ownership. Rarely is there an objective model in place to evaluate the alternatives. Ironically, the most critical issue currently is not hidden costs, which are easy enough to grasp, but rather rising wages in low cost countries.
What’s the take away for those who would promote Deming’s Chain Reaction or stakeholder capitalism? Many find it difficult to grasp that trade is a two-way street. Rarely does only one party benefit from trade. Protectionism may seem like an obvious solution, but history has proven that those who choke the flow of commerce starve.
Is there an alternative defensive maneuver? To be sure, increasing productivity by offshoring will not lead to the wished results. Even so, there’s no getting around the need for increased productivity.
Just as capital knows no borders, the same is true of technology. Those who apply new technology effectively will increase their productivity and attract capital investment. If investors spend capital according to local costs, they can expect lower total production costs. It’s a hard pill to swallow, but everyone’s job is efficiency if jobs are the priority. There is no such thing as a free lunch.