Back to economic basics: make better products

A SUCCESSFUL high-tech entrepreneur recently suggested a cure for the American economy: Get rid of all the business schools. One might expect Lester Thurow, the MIT economist, to agree. In his most recent book, ``The Zero Sum Solution,'' and in a torrent of other writings, Dr. Thurow has called the MBA mentality to task for showing more interest in glitzy takeover battles and corporate asset shuffles than in enlarging the nation's productive base.

``We have made industry into a plaything for finance,'' Thurow said in a recent Monitor interview.

But Thurow isn't giving up on the business schools just yet. In June, he becomes dean of one of the nation's leading business schools, the MIT Sloan School of Industrial Management, where he will have a chance to try to steer the next generation of executives away from the sirens of leveraged buy-outs and portfolio management and back to the economic basics of designing better products and producing them well.

Thurow's appointment has been cause for excitement among MIT faculty members committed to reviving the production arts. It gives him an opportunity, rare among economists, to put his ideas into practice. But Thurow himself is restrained. ``One of the difficulties of being dean,'' he says, ``is that there are very few things you can give orders about.''

Over the last decade, Thurow has been a respected - and prolific - maverick in the public policy debate. ``I didn't go into economics with the idea of being an academic,'' he says. A Democrat, he has shown more interest in the productive economy than in conventional liberal concerns like welfare. And he has riled orthodox liberals by arguing, among other things, that the antitrust laws and the corporate income tax are outmoded.

At the same time, Thurow has questioned the basic premises of conventional economic thought. For more than 200 years, economists have viewed people as isolated integers of acquisition - ``covetous machines,'' as John Ruskin, the English writer, put it. In his book ``Dangerous Currents,'' Thurow pointed out that this notion isn't just distasteful; it's also just partly true. In life, people temper their acquisitiveness with such qualities as loyalty to a company, desire to spend more time with their families, or plain old laziness, he says. While obvious enough to most people, among economists this viewpoint is like a medieval astronomer suggesting that the Earth revolves around the sun.

The insight is central to Thurow's sense of where America has gone wrong economically. Economists had always assumed that when individual molecules of self-seeking were joined together into business firms, efficiency would be the natural and necessary result. They assumed that bureaucracy and waste were to be found only in government. That left little for economists to do but work the levers of tax and monetary policy in Washington, goading individuals on with tax ``incentives'' and the like.

But Thurow was among the first to observe that American companies were lagging because they weren't managed very well. They were top-heavy with management, their time horizons extended only to the next executive bonus, and they regarded workers as a cost to be slashed at every opportunity rather than as partners who should share in the success of the firm.

Production is a social activity as well as an individual one, he and others argued. For that reason, tax ``incentives,'' and other conventional ``policy tools'', can be of only limited effect.

For a number of years, Thurow has been proposing numerous reforms to strengthen the social setting of American production. Pay differentials between management and employees should be much less, as in Japan. Executive bonuses should be based on long-term performance, so managers won't defer new investments just to make the next quarter's balance sheet look rosy. Workers should share in productivity gains instead of feeling that new technology threatens their jobs. And so on down the line.

This was all part of redefining the nation's economic debate. In place of the orthodoxy that put ``business'' in one corner and ``workers'' and ``consumers'' in the other, it was now producers - workers and management alike - on the one hand, and on the other the arbitrageurs and other financial operators who take slices of the pie without helping to make it bigger. No small agenda for a business school dean.

``Intellectual ideas don't persuade anyone,'' Thurow says. ``Events persuade you that your old ideas are wrong.'' He speaks like a man who writes on deadline and has neither words nor time to waste. Yet he retains the easy, small-town geniality of his native Montana. With corduroy dungarees and a sunny, boyish face, he could almost be mistaken for a graduate assistant.

Business schools have pushed number-crunching and finance largely because these are sophisticated and given to elegant computer models, he says. (``I often think Harvard's motto should be `Pulchritude' instead of `Veritas,' he adds, only half joking.) But the economic decline of the last decade has brought people down to earth, he says. Econometric forecasts were twice as wrong during this period as they were during the decade before. ``The faculty in management schools realizes something has gone wrong,'' he says.

Its not just business schools that encourage short-term thinking, of course. Under the present rules, pressures in that direction are built right into the game. In ``The Zero Sum Solution,'' Thurow recounts what happened a few years ago when ITT executives cut the company's stock dividend to invest in new technology. The company's stock fell and corporate raiders began circling overhead, all because the executives tried to look ahead. Only Congress can address problems like that. But Thurow thinks business schools have definitely made things worse. ``We can at least reduce our contribution,'' he says.

But will students buy a less glamorous career track? The prodigious salaries in investment banking are a mighty lure, Thurow acknowledges. But he sees an increasing demand for managers who understand products and how they are made. In West Germany and Japan, top executives come overwhelmingly from engineering, but close to 80 percent of top American managers have backgrounds in law, finance, and marketing. The reason, Thurow says, is that these skills seemed most important in the '60s, when America faced little competition from abroad. ``Ten years from now, a high percentage in top management will come from technical backgrounds,'' Thurow predicts.

As part of MIT, the Sloan School is in an ideal position to produce such managers, he says. (See ``More Engineers for Factory Floors,'' March 9.) And in at least one respect, business schools are a good place to challenge economic orthodoxies generally. Unlike academics, executives need to understand how the world really works. Rather than building careers around econometric models, for example, they need to know where these break down. ``You want to convey areas of uncertainty'' Thurow says, so managers won't panic at predictions of downturns or inflation.

Thurow stresses that he isn't against finance. He just wants it in its rightful place. His model is an MIT PhD in chemistry who went on to the Fidelity Fund and the Cabot Corporation, specializing in high-tech investments. Thurow can't resist another dig at the other institution up the Charles. ``I would be perfectly willing to let someone from Harvard Business School finance McDonald's,'' he says.