The Coming of Post-Industrial Society

by Daniel Bell

  Of the three, only Alfred P. Sloan has put down directly the principles he employed. His account, My Years With General Motors, is fascinating, and one can take his sketch as prototypical of the corporate mode of mid-century America. The most striking aspect of Mr. Sloan’s book is its language. Sloan’s key terms are concept, methodology, and rationality. Throughout the book, Sloan uses these terms to explain the innovations he made in General Motors: “Durant had no systematic financial methodology. It was not his way of doing business.” “The spacing of our product line of ten cars in seven lines in early 1921 reveals its irrationality.” “In product variety only Buick and Cadillac had clear divisional concepts of their place in the market.”

  The language is not an accident or an affectation. It is surprising only to those who associate such language with the academy and not with the analytical necessities of organization. The language derives in part from Sloan’s training as an engineer (he took a degree at MIT in 1895); but more, it derives directly from the revolution in organization that Sloan introduced: the initiation of detailed planning, of statistical methods, and of financial controls. In explaining why he relied on market research and forecasting rather than salesmen’s intuition, he remarked: “... In the automobile industry you cannot operate without programming and planning. It is a matter of respecting figures on the future as a guide.” 5

  The reasons for the success of General Motors can be attributed, in simplified fashion, to two elements: a market strategy based on a “clear concept” of product lines and an organizational form which combined decentralization of operations with coordination of policy.6 The organizational structure of General Motors is commonplace now, and has been widely copied by most large corporations. At the time of its innovation, it was a novelty. Stated most simply, the principle of organization is to have a complete breakdown of the costs of each unit, and to exercise control of operating divisions through stringent budgets. Before the system was instituted, divisions in GM sold their parts to other divisions (e.g. a battery division to a car division) on the basis of cost plus a predetermined percentage. But the corporation at the top did not know which units were profitable and which not. “It was natural for the divisions to compete for investment funds,” Sloan wrote, “but it was irrational for the general officers of the company not to know where to place the money to best advantage.”

  What Sloan did was to treat each division as a separate company, with the corporate group at the top acting as a “holding company,” and to measure the performance of each division by the rare of return on investment consistent with attainable volume. The rare of return is thus a measure of performance and a means of ranking each division, not on the basis of its absolute profit alone, but on the rate of return on capital invested. The measure, in short, is the margin of profit multiplied by the rate of turnover of invested capital. Through these measures, the corporate group at the top could determine how to allocate the corporation’s money in order to achieve a maximum return for the whole.

  All aspects of corporate policy became subordinated to that end. In specifying the corporation’s philosophy, Sloan was explicit:

  To this end [he writes] we made the assumptions of the business process explicit. We presumed that the first purpose in making a capital investment is the establishment of a business that will pay satisfactory dividends and preserve and increase its capital value. The primary object of the corporation, therefore, we declared, was to make money not just motor cars. Positive statements like this have a flavor that has gone out of fashion; but I still think that the ABC’s of business have merit for reaching policy conclusions.7

  The economizing system of each corporation locks with each other to create a social system. Earnings per share of common stock becomes the balance wheel around which the system turns. If the earnings of a firm drop, it may find it difficult to attract capital, or may have to pay more for capital vis-à-vis other firms. Thus, the allocation of capital in the economy follows the same principle as it does within the corporation. Locked thus into competition, the degree of freedom of any single corporation to break away from this measuring rod—the rate of return on investment—is limited. Any change in the system has to be a change in the entire system.

  Profitability and productivity, thus, are the indices of corporate success. They are the tests of meeting the demands of the marketplace and the demand for the efficient distribution of resources within the firm and between members of the society. This is the rationale for the economizing mode for the corporation, as for the economy.

  Limits of the Economizing Mode

  The theoretical virtue of the market is that it coordinates human interdependence in some optimal fashion, in accordance with the expressed preferences of buyers and sellers (within any given distribution of income). But what ultimately provides direction for the economy, as Veblen pointed out long ago, is not the price system but the value system of the culture in which the economy is embedded. The price system is only a mechanism for the relative allocation of goods and services within the framework of the kinds of demand generated. Accordingly, economic guidance can only be as efficacious as the cultural value system which shapes it.

  The value system of industrial society (communist as well as capitalist) has been centered around the desirability of economic growth; and the cultural value of Western society, particularly American society, has been the increase of private-consumption economic goods. There are, however, three drawbacks (at least) to this system.

  The most important consideration is that it measures only economic goods. But as E. J. Mishan has pointed out, and as a once popular refrain once had it, “the best things in life are free.” Clean air, beautiful scenery, pure water, sunshine, to say nothing of the imponderables such as ease of meeting friends, satisfaction in work, etc.—they are “free goods” either because they are so abundant that there is little or no cost, or because they are not appropriable and saleable. Such free goods contribute greatly to our total welfare. But in our present accounting schemes, priced at zero, they add nothing to the economist’s measure of wealth. Nor, when they disappear, do they show up as subtractions from wealth.

  The second consideration is that growth, as measured by our present economic accounting, tends to generate more and more “spillovers” which become costs borne directly by other private parties or distributed among the society as a whole. These are what economists call “externalities.” Externalities (or “external costs”), as economists define the term, are the unintended or unplanned impact, the “fallout” on Third Party C (and often D, E, and F, as well), of a private transaction between parties A and B. The result is a social cost (though frequently a social benefit, too). The most obvious example of a social cost is air pollution—the result, in part, of the increasing number of private cars in the society. In every elementary economics textbook, air was once the classic illustration of the “free good.” Yet the irony is that in the next 30 years one of the most scarce resources we may have (in the sense of proportionately sharply rising costs) will be clean air. The costs of automobile disposal are not charged to the automobile owner; similarly, the costs of salvaging a depressed coal mining community are not charged to the companies selling the competing fuels which may have driven coal off the market. Moreover, because air and water belong to no one, the market economy treats them as free resources. Firms pay for raw materials and labor, but until now they have not had to pay for the discharge of effluents into the air and water. Thus their prices have not reflected the true costs of their activities.

  The third problem with the economizing mode is that the value system of American society emphasizes, as the primary consideration, the satisfaction of individual private consumption; the result is an imbalance between public goods and private goods. In the popular psychology, taxes are not considered as the necessary purchase of public services that an individual cannot purchase for himself, but as money “taken away from me by them.” Taxes, thus, are not conside
red as an addition to welfare, but as subtractions from it. This is reinforced by politicians who claim that taxes are too “high” (but by what standard?) rather than asking: Are there needs which can be met only by public goods, and what are the taxes buying?

  Thus, if one is trying to assess welfare (or the quality of life) in some optimal fashion, the problem is not only the simple commitment to economic growth, but the nature of the accounting and costing system of the economizing mode which has served to mask many of its deficiencies. Our fascination with Gross National Product is a good illustration.

  GNP, Private Costs, and Social Costs

  Conventionally we measure economic welfare primarily through the figures of Gross National Product. These accounts allow us to sketch the macroeconomic levels of activity in the society, and through them to measure economic shortfalls, the potentials of full employment revenues and the like, as a means of deciding on economic policy. But there are several drawbacks as well, particularly if we are concerned not only with wealth but the welfare of the society.

  GNP measures the value of goods and services bought and sold in the market. But the measure itself is only “additive.” It does not discriminate between a genuine addition to welfare and what, in effect, may be a subtraction but is counted as an economic plus. Thus, in the conventional example, the output of a steel mill is a value added to GNP. But if the steel mill pollutes a lake, and then uses additional resources to clean up the lake, that new expenditure is also added to GNP. Similarly an increase in environmental deterioration over time would not show up as a decline in real output because the flow of benefits from the environment is not counted as an output to begin with (e.g. the usability of a lake or river for swimming). But expenditures designed to reduce environmental deterioration would show up as increased real output.

  More important, however, is the fact that in assessing public services we do not have a means of estimating actual benefits or values. In items that are sold in the market, such as automobiles or clothing, we have market prices as the value individuals place on the products. But how do we value publicly provided services such as health, or education, or protection? Our accounting system does so only by the “input” costs, not by the output values. Thus the “output” of police services is measured by salaries paid to members of the police department, the costs of police cars, etc., not by the social and economic value of crimes prevented or violators apprehended; the value of health services is measured by the costs of doctor’s fees and drugs, not by the reduction of time lost on account of illness; the value of education is measured by the cost of teachers’ salaries, equipment, etc., not by the value imputable to the gain in pupil knowledge.

  This is a central problem in the question of how much money should be spent on “public goods.” People grumble over taxes, but there is no way, at present, of showing that the benefits received for these services may be far greater than the costs. And while there is no way of knowing, it is likely that public services of this kind are “under valued,” and therefore less appreciated.

  The second limitation of the accounting system, which derives from the growing existence of externalities, is the divergence between private and social costs. The idea of social costs is an old one, going back one hundred and fifty years to the socialist economist Sismondi. But it was not until about fifty years ago, when A. C. Pigou wrote his Economics of Welfare, that the phenomenon of social costs was integrated into the conceptual system of neoclassical equilibrium economics. Pigou pointed out that the investment of additional resources may throw costs “upon people not directly concerned” such as the “uncompensated damage done to surrounding woods from railway engines.” 8

  But for almost half a century, this idea of divergence between private cost and social cost was almost completely neglected. Now with the rising concern with environmental spoliation, the second-order consequences of technological change and the increase in “externalities,” the problem has moved into the center of social policy. In the next decade one of the major social questions will be the determination of who is to pay the costs of such externalities, and how the amounts will be assessed. Which costs ought to be borne by the parties that generate the costs, and which, legitimately, should be borne by the society as a whole, will be one of the most difficult questions in the political economy of the future. What we have now is only the beginning awareness of the problem. What we lack is a genuine total cost matrix which, for particular instances, would be able to assess the costs and benefits of particular actions and policies.9

  The Sociologizing Mode

  Important as all these issues are, they do not go to the heart of the matter, which is that the economizing mode is based on the proposition that individual satisfaction is the unit in which costs and benefits are to be reckoned. This is an atomistic view of society and reflects the utilitarian fallacy that the sum total of individual decisions is equivalent to a social decision. Yet the aggregate of individual decisions has collective effects far beyond the power of any individual to manage, and which often vitiate the individual’s desires. Thus, every individual may value the freedom and mobility which a personal automobile provides, yet the aggregate effect of so many autos on the roads at once can lead to clogged transportation. We might all accept, in the abstract, the principle that the automobile has become a vehicle of uglification; yet lacking a social decision about which alternative modes of transportation might best serve an area, I might have, willy-nilly, to go out and buy a car. Each of us, individually, may see the consequences of an individual action, but lacking a social mechanism to assess it, we become helpless, drift, and thereby accelerate it.

  In effect, in contrast to the economizing mode of thought, one can specify—I apologize for the heavy-handed clumsiness—a sociologizing mode, or the effort to judge a society’s needs in more conscious fashion,10 and (to use an old-fashioned terminology) to do so on the basis of some explicit conception of the “public interest.”

  Two fundamental questions are involved.

  First, the conscious establishment of social justice by the inclusion of all persons into the society. If the value system of a society is made more explicit as a means of guiding the allocative system (pricing) of a society, this value system must also establish, however roughly, the “right” distribution of income in the society, the minimum income available to all citizens, etc.

  The second is the relative size of the public and the private sector. Economic goods, to put it in textbook fashion, are of two types, individual and social. Individual goods are “divisible”; each person buys the goods or services he wants—clothes, appliances, automobiles—on the basis of free consumer choice. Social goods are not “divisible” into individual items of possession, but are a communal service—national defense, police and fire protection, public parks, water resources, highways, and the like. These goods and services are not sold to individual consumers and are not adjusted to individual tastes. The nature and amounts of these goods must be set by a single decision, applicable jointly to all persons. Social goods are subject, therefore, to communal or political, rather than individual demand.

  A man cannot ask for and individually buy in the marketplace his share of unpolluted air, even if he were willing to pay extra for it. These are actions that have to be taken in coordinated fashion through public channels. We can assign the costs of air pollution to its source, whether industrial, municipal, or individual, in order to force culprits to reduce the pollution, or we can use the money for remedial measures. In the same way, the laying out of roads, the planning of cities, the control of congestion, the organization of health care, the cleaning up of environmental pollution, the support of education—all these, necessarily, become matters of public policy, of public concern, and often (though not necessarily) of public funding.

  To say, in effect, that the public sector of the society has to be expanded, is not to assume, naively, that the failures of the market will now be remedied. Each arena has i
ts own problems, and the beginning of political wisdom is to recognize the ineluctable difficulties in each. Public decision-making can easily be as irrational and counterproductive as private decision-making. The major sociological problem ahead will be the test of our ability to foresee the effects of social and technological change and to construct alternative courses in accordance with different valuations of ends, at different costs.

  Varieties of Planning

  A considerable amount of planning goes on already. Every major corporation today necessarily operates in accordance with a one-year fiscal plan and a five-year market strategy in order to meet competition or to expand its size. Each company plans singly and each introduces its own new technologies—yet no one monitors the collective effects. The same is true of the planning of various government agencies. In considering social effects, one finds this kind of planning unsatisfactory.

  The first flaw is the fallacy inherent in single-purpose planning itself.11 Most engineers, developers, industrialists, and government officials are single-purpose planners. The objective they have in mind is related almost solely to the immediate problem at hand—whether it be a power site, a highway, a canal, a river development—and even when cost-benefit analysis is used (as in the case of the Army Corps of Engineers) there is little awareness of, and almost no attempt to measure, the multiple consequences (i.e. the second-order and third-order effects) of the new system.