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Sunday, June 21, 2009

Productivity and the Internet

What do you think of Robert Waldmann's theory?:

The Internet and the Productivity Speedup, Angry Bear: The unexpected increase in US productivity growth in the 90's and naughties is an economic puzzle. At the time it was widely argued that investments in information and communications technology had finally finally paid off, that computers and the internet allowed vastly improved corporation wide inventory control and the increased output given inputs reflected lower work in progress inventories. ... hmmmm maybe. ...

I ... think it has to do with office workers and, in particular, middle management. ...[M]iddle managers and affiliated secretaries and janitors and such count in the denominator of labor productivity. In the 90s there was a wave of downsizing and delayering. Basically top management in many firms decided to thin the ranks of middle management on the grounds that middle managers weren't doing anything useful. The outcome says that the top managers were ruthless and right.

To me the key figure is the almost completely forgotten and hated by the few who know who he is Phillip Caldwell. He's the guy who replaced Henry Ford II as CEO of Ford about the time Ford president Lee Iacocca was fired went off to save Chrystler. Iaccoca was very famous for a while, the guy after Caldwell -- Donald Peterson -- was a corporate hero for a while. Caldwell was a subject that the business press preferred to avoid. When he arrived, he laid of 30,000 people from Ford headquarters staff. He totally disrupted the lives of hard working people who were doing the jobs they were assigned and who had no responsibility for any strategic mistakes (made by various actual human Fords and Mr Iacocca). What a total jerk.

However, no one noticed a decline in the contribution of Ford headquarters to Ford, and, by the way, Ford is not bankrupt.

An even earlier example was the ruthless Jack "the ripper" Welch at GE. Ruthless layoffs in his first years, record profits later.

Basically I think the story is simple -- Parkinson's law -- bureaucracies naturally grow without limit. That includes the management of large corporations. Everyone knows that middle managers are mainly making work for other middle managers writing memos and calling meetings and stuff, but top management does not want to lay people off and especially not managers who are sort of like them instead of production workers who are sort of like equipment.

Before the productivity speed up there was the takeover wave. Corporate predators who converted huge amounts of equity to debt had to be ruthless to survive. Current top management decided they had to do what a predator would do after a takeover to avoid a takeover. They discovered that it was actually quite easy (middle managers don't riot or even strike) and very very profitable. The Drexel Burnham Lambert turned out to have roots as solid as Burham woods, junk bonds turned out to be junk, gambling S&L's went bankrupt and the takeover wave ended.

But CEOs had found a source of huge flows of profits -- slash middle management, and decided to keep the money for themselves paying themselves monster compensation for their ruthlessness.

That's my theory. ...

    Posted by on Sunday, June 21, 2009 at 02:27 PM in Economics, Productivity | Permalink  TrackBack (0)  Comments (34)

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