What's Ahead for Business?

John R. Bunting

SINCE the end of World War II, the American economy has performed with unparalleled efficiency. True, there has been some inflation, especially during the immediate aftermath of the war, but that was neither unexpected nor inexcusable. Four short, shallow recessions blemish the record too; and for the past five years Americans have come to be conscious of a persistent balance of payments problem, plus an inability to get the economy to a position of full employment.

By any comparative standards, however — whether its own record, or the past or present record of any other national economy — the eighteen years since the war have been the most prosperous, trouble-free years in the history of the American economy.

Yet, during this period significant changes have taken place in the basic structure of our economy. At the outset it may be helpful to list three important forces making for modification in the structure of our business society: 1) the Maximum Employment Act; 2) the emerging dominance of the corporate conglomerate; 3) automation.

The Maximum Employment Act was formalized in 1946. In large measure, its spiritual conception occurred a decade earlier in the New Deal. It was a natural outgrowth of the social reform that swept through the United States in the wake of the Great Depression. Despite the fact that the Act has been in existence for some time, few businessmen have properly assimilated into their thinking the tremendous institutional changes it has wrought. Of course, an overwhelming majority of the business community did not agree with this Act when it was passed. Many still hold out against it. No businessman, however, should fail to realize how it has changed the cost structure of business.

Now there is every good economic reason for business to assume everyone in the labor force as a fixed cost. After all, what this Act means is that each person in the labor force is to be employed, or to receive income while temporarily unemployed. One way or another, business is going to pay labor whether working or not. Obviously, then, from the point of view of the economy as a whole, operations are more efficient at full employment because the unemployed remain in the overall cost figures, even though they make no contribution to production.

What this could mean in the not too distant future is that big business, at least, will assume all employees as a fixed cost much as industry in Japan and in some of the European countries does. All workers would be put on a salary basis and treated the same as office workers. Profits would bear the brunt and reap the reward of the vagaries in business activity.

The likelihood of this eventuality is reinforced by the growing dominance of the corporate conglomerate in the business world. The conglomerate is a large corporation diversified to the extent that within itself separate subcompanies operate in vastly different markets. The idea is to stabilize the income and earnings of the whole unit. But more than just a strong desire for stabilized income and earnings is powering the drive toward conglomeration. Corporations, huge and dominant in their own field, are inhibited by a sense of propriety — and a suspicion of what the “antitrusters” would do — from further expansion there. Awash in depreciation reserves, in retained earnings, and in other vestiges of cash flow, they seek profitable outlets for their funds and skills in other sectors of industry.

Many businessmen who are deeply involved in diversification deplore this trend. They recognize that the actions of the corporate conglomerate frequently are not in strict conformity with a market economy. These businessmen believe strongly that for a market system to work, business must try to maximize profits in each market. But the growth of the diversified large enterprise does not allow them to operate in this manner.

A firm that produces a variety of products and operates across many markets does not necessarily regard a particular market as a separate unit for determining business policy. Therefore, it does not need to attempt to maximize profits in the sale of each of its products. Some products may be classified as money-making items, some as convenience goods, and some as loss leaders.

The diversification of the large firm minimizes loss in one part by setting it against profit in another. This is a source of strength to the firm. In economic terms, however, such a spreading of risk nullifies, or at least blunts, the effect of changes in prices, costs, and profits as guides to economic activity. Profits from one activity subsidize the continuance of another. Survival of the fittest is abrogated. The selective forces of competition are ineffective.

Of course, management of a huge firm desiring to maximize profits may expand the profitable facilities and eliminate the others. But this does not follow automatically. The allocation of costs is usually the result rather than a source of a policy decision.

Most important, however, huge size, by necessitating the development of a corporate social conscience, strikes at the very foundations of the market system. The modern corporation cannot play the economic game in the traditional manner. It cannot convince itself, even, that an “invisible hand” will cause its selfish actions to be for the common good. It cannot pull out all stops to kill off competition. It cannot try to make as much profit as it might. Business actions can no longer be predicated on the simple motive of self-interest.

Large firms respect one another. Competition among them is intense, but there is a feeling of live and let live, cooperation, and recognition of priorities of interest in the hope of reciprocal recognition. There are even unwritten rules that cause large firms to refuse to try to win away important customers of a large rival. They have to pull their punches in dealing with smaller rivals too. frequently, it is wiser to let them live than to compete so viciously as to kill them off and bring on antimonopoly proceedings of some sort. So the game can never be played on an all-out basis.

1 his is leading to a new concept of the American economic system. Economists have long held such a concept. Now the businessman himself is slowly coming to the conviction that he has a responsibility to discipline himself. He can no longer enjoy the luxury of believing in an economic system in which the lure of gain and an invisible hand would steer everyone and the whole economy in the right direction and at the right pace.

RECENTLY, we have come to be aware of another factor which is transforming our business system: automation.

Changes growing out of technological innovations have always been notoriously difficult to measure and are almost always much broader than imagined. The automobile, for example, did infinitely more than just supplant the buggy. It replaced staying at home, and is now transplanting cities, towns, and the whole countryside. Now automation may be replacing certain skills; but, more important, it is transforming our educational needs.

I do not mean to suggest that we shall have to train workers to man the new automated equipment. Computers and other forms of automated equipment are giant morons, not giant brains. Even the highly regarded programming of a computer is difficult, not because of the inherent complexity of the computer itself, but because of the need to spell out every step in painstaking detail. Just as most of the jobs replaced by the computer did not call for high intelligence or creative people, neither does most work with the computer. On the other hand, the incessant load of information emptying from the computer begs for more general intelligence in its use and interpretation. A more theoretical bent in education as opposed to our traditional pragmatic bias in this country would seem appropriate if we are to take full advantage of automation.

At the present time, it is quite possible that a structural change is taking place in the role which private capital plays in our economy. All the talk about automation over the past decade or so would suggest that spending for new plant and machinery has been tremendous. Actually, it has been anything but. The shortfall in plant and equipment spending has been obscured by the magnitude of the raw figures. They have been impressive.

The failure of investment in plant and machinery is not a failure to grow, but a failure to grow enough to hold its proportionate part of GNP. There is a persuasive enough explanation for this. After the shortage-induced post-war boom in capital investment, a letdown was inevitable. Every capital-spending boom is bound to bring in its wake some excess capacity. In fact, the astonishing part is not that there has been a letdown, but that the letdown has been so gentle.

But an important part of the story remains untold. The amount of capital (plant and equipment) required per dollar of output — call it the capitaloutput ratio — has been declining. The Council of Economic Advisers has estimated that this ratio dropped from 2.3 ($2.30 of capital to $1.00 of output) in 1929, to about 1.8 in the period since the war. That is more than a 20 percent decline.

Other bits of evidence, difficult to validate, suggest that the capital-output ratio has been falling fairly consistently since 1900. All of this implies that quite possibly the American economy has reached the state where technological development is so productive that less is needed. In other words, the normal increase in productivity per man-hour will come from a lesser increase in capital.

What seems to be happening is that in an evolutionary way scientific processes, not just automation, are bringing the American economy to a point where smaller amounts of capital are producing larger outputs of consumables. In order that a relatively free market economy may adjust to this structural change, consumption expenditures as compared with saving must grow proportionally larger. In the absence of a steady stream of exciting new products, there is little chance of this just “happening” when needed. For a time, perhaps, the excessiveness of saving is disguised, as funds chase each other in the stock market and find outlet overseas. But if consumer spending stays at the same percentage of income, saving remains redundant and business activity is sluggish. In this situation, modern government moves in. Government spending in ever increasing doses is prescribed. After a time, however, it becomes obvious that government spending is growing larger absolutely and proportionately. Businessmen in particular become alarmed, and other antidotes are sought.

Unfortunately, it is particularly difficult for businessmen to see this problem in true perspective. First, they can scarcely admit to themselves the need for ever larger government spending and conversely smaller inputs of capital. Instead, they ask for larger profits, greater permissible allowances for depreciation reserves, and the like so that they can hike capital spending back to its former role in the economy. But their own efficiency and inventiveness prevent them from getting it there. It is a paradox not yet sufficiently comprehended that the very productiveness of capital is, in the spending sense, leading to its diminishing role.

Were he to admit to himself that what is outlined here is really happening, what should be the policy of the businessman? Should he sit back and watch government spending grow absolutely and proportionally to compensate for the increasing excess of savings over investment needs? I think not. Without being ridiculously conservative about this, I am still persuaded that increasing reliance on government weakens a society. But I think, too, that misguided efforts to secure tax laws that will restore capital spending to its historic role in the American economy can badly distort our business system. Already, the ability of business to finance itself largely from the internal flow of funds, such as depreciation and undistributed profits, restricts the flow of capital between industries and has helped produce much idle capacity.

Rather, it seems, business should favor measures that would inerease consumption at the expense of saving. I say this appreciating the difficulties of accomplishment. The schizophrenic businessman incessantly advertises to beguile the consumer into buying his product, but he has never identified himself with programs to raise overall spending at the expense of saving. This ambiguity has deep roots and will not be easily overcome.

THERE are measures that might be expected to increase spending at the expense of saving. One of these involves changes in tax rates. A steeply progressive income tax to redistribute income from the wealthy to the poor can reasonably be expected to increase spending. There are two fairly strong arguments against this. It has already been used rather extensively, thereby minimizing potential benefits from further income equalization. Perhaps most important, any increase in “progressiveness” might have most unfortunate side effects. Incentives are blunted as taxes near what high earners consider to be confiscatory levels. Already some in our society seem discouraged by tax rates. To incline the rate more steeply would not seem wise in spite of the fact that it could be expected to raise consumer spending proportionately.

The trend toward security is working in favor of spending increases. Job and income insecurity make prudent rather large savings even for those who are in the low income bracket. Conversely, the partially successful quest for security has raised spending to a larger proportion of income than would otherwise have been the case. If in the future more workers move from a wage to a salary basis, it would enhance the feeling of security and increase spending at the expense of saving.

Dollars going for research and development might mean more consumer spending. A steady stream of new civilian products is much to be desired. Nothing gives more momentum to spending than an exciting new product. Competitive pressure once seemed to squeeze new products out of our business system without a cent being spent directly on research and development. Times have changed. Now huge companies set aside equipment, space, and personnel to work adventurously on new things. Unfortunately, military and space requirements have caused government needs to dominate research. Civilian needs have suffered.

As unlikely as it may sound, a major change in advertising emphasis could be helpful. Protestations to the contrary, advertising has changed very little, except in technique, from what it was in its infancy. At its most effective it is gimmicky. At its worst it is an insult to the intelligence of ungifted children. Even so-called “institutional advertising” is usually a thinly disguised recital of the necessity for high profits.

I am not calling for educational advertising. Nothing would be duller than a steady diet of objective, thorough, educational ads. What is needed, I believe, is advertisements with broader perspective, advertisements that would have as their goal the widening of living horizons for Americans, advertising programs that would show Americans the way toward more enjoyable, worthwhile living.

It would be difficult to accomplish this kind of advertising within the present institutional arrangements. Individual companies want identification for their products to increase company sales. I am asking advertising to lift consumers’ sights. Individual company sponsorship would prejudice the goals narrowly and defeat the purpose. Mass business support, financial and psychological, would be required. Even more important, divorcement from sponsor pressure would have to be secured lor the advertising agency involved. Perhaps the agency handling such an assignment would work on no other. The best marketing, economic, and advertising minds in the country would be called together for such a venture. It could evolve into the American answer to government planning.

Finally, and perhaps most important, the corporate-profits tax must be eliminated so that total profits of corporations can be reduced. Many industries have a relatively inflexible demand for their products. In other words, sales are not dramatically affected by changes in price within certain limits. Also, some of these industries are dominated by firms with the power to administer prices. Although the case is not black and white, it is very probably true that given these circumstances firms will pass along the incidence of the corporateprofits tax to the consumer in the form of a higher price. Such action restricts demand.

There are those economists who grant the theoretical sense of eliminating the corporate-profits tax, but aver that removal would not result in lower prices. In their view, firms would maintain present price policies and pocket the share now going to the government. I think they are wrong. The businessman does not admit it openly, but he is aware of the broad changes that have taken place in the American economy.

Truly our business society knows it is unrealistic to expect profits to be as high as in decades past. Formerly, high profits were needed to lure cash from current consumption into necessary investment in productive facilities. Now more current consumption is in order. Formerly, high profits seemed only just compensation for the tremendous risks undertaken. Financial panic could bring on depression, and ruin the soundest corporation. Now depressions are “against the law,” and even recessions do not always check yearly advances in GNP. In this changed environment, are high profits necessary to finance proportionally less investment? Formerly, corporations did not generate as much of their investment funds internally. They had to show good profits to get needed money for expansion. Now huge depreciation allowances permit corporations to generate their own funds. It is clear to sophisticated businessmen that profits up to former standards are inappropriate to the times.

What all this means is that business can adjust to the structural change that a steady stream of scientific developments, including automation, is foisting onto our economy. To adjust, however, businessmen will have to change some of their long cherished biases. They will have to promote policies that will raise consumer spending at the expense of saving, give employees even more security, and accept as normal a somewhat smaller return as profit. Government will have to have the political courage to eliminate the corporate-profits tax. This tax is not what it seems to be. It has caused higher prices and has indirectly influenced corporate policies in a way that results in larger savings. Corporations seeing half of their profits taken by government, and not sure they can pass the tax on to consumers, probably are led to put emphasis on larger depreciation allowances. To the unsophisticated, however, elimination will seem to be a gift to the businessman.

If society does not go along with something like the prescription I have advocated, it is possible that government spending as a proportion of total spending will continue to rise.

In next month’s issue Professor Neil W. Chumberlain of Yale will discuss “What’s Ahead for Labor.”