by Lester Thurow.
Last Updated: 31 Aug 2010

Head to Head

Nicholas Brealey; 336pp; £9.99.

Review by Robert Heller The headline-catching statement in Lester Thurow's book hedges no bets: 'Future historians will record that the twenty-first century belonged to the House of Europe'. This confident forecast rests on the premise that the Europeans, the world's largest market - with or without the East - will integrate 'because they have no choice... it will be far easier for the Americans and the Japanese to avoid doing what they must do if they are to win'.

Compelled into effective union, Europe will dictate the terms of world competition by virtue of its size. It is an attractive argument (for Europeans, anyway). However, this book, while full of penetrating insights, eye-opening facts and trenchant judgments, contains little support for its most striking thesis. Only one chapter out of nine deals with Europe - and mostly Eastern Europe at that. The greater part, by far, delivers a searing indictment of the relative decline of the American economy.

Those who deny that this decline is real, or believe that dramatic reversal is afoot, get cold comfort from Thurow. In his vision, supported by armfuls of damning facts, American industry, over-driven by the profit motive, has under-invested, abdicated markets by insisting on unattainable rates of return, neglected to build essential labour-force skills and generally managed in a self-defeating, even barbarous manner - with high labour turnover as both result and cause of failure.

'A turnover rate of 4% per month is about equally divided between quits and firings. Japan's turnover rate is just 3.5% per year - fewer job switches in a year than the United States has in a month.' As here, American failure is contrasted time and again with Japanese achievement. Only occasionally is the US compared unfavourably with Europe.

True, in contrasting American individualism with the more advantageous collective or 'communitarian' approach, German corporate arrangements are approved along with the Japanese. But Thurow pays scant attention to the abundant evidence that, in many vital areas like quality, where US performance is outshone by the Japanese, Western Europe is also in the economic dark.

Is the US any more likely to come into the light? Thurow contributes a long, well-reasoned and sensible programme for its economic reform - involving nothing less than conversion from a consumer economy to an investment-led society. Much of it reads like an agenda for the new president, except that it demands broad and sweeping changes that make the New Deal seem like mere tinkering. His proposals range from major rises in taxation levels (at present among the world's lowest) to turning Wall Streeters from financial opportunists into long-term financiers.

Whether any of these suggestions, if faithfully enacted, would check Japan's momentum is another matter. 'Japan had 5% of the American auto market in 1970; in 1990 it had 28%. In just 20 years it wiped out the American consumer electronics industry... In head-to-head competition its communitarian companies have been impossible to beat.' Thurow makes a rare mistake in this context: 'In 1990 IBM Japan's sales rose 1% while the total Japanese market was expanding 10%. Yet IBM is number one everywhere else in the world. Why is IBM incompetent in only one country?' Well before l990, IBM's competence had declined fatally, not just in Japan but worldwide. The hard truth is that America's leading corporations, protected initially after the war by an all-round superiority that Thurow describes well, lost the habit of true competition and sought shelter through protection when the reality of competitive disadvantage was brought sharply home.

The bent of the European Community is ominously similar. Proposals to limit Japanese cars, including those made in the UK, to 16% of the market are hardly the recourse of those who have nothing to fear. Thurow has an excellent passage debunking the pure theory of free trade, and has no difficulty in establishing its drawbacks. But what contribution is made to European competitive prowess by forcing consumers to pay more for less competently manufactured cars?

If Thurow's prescriptions carry less conviction than his descriptions, he is not alone. Never have more brilliant pundits had more abundant statistical and other evidence to support acute analysis of the status quo and its origins.

But their theoretical solutions to complex systemic problems are hardly more convincing than the policies adopted in practice by the politicians. Even Jacques Delors would baulk at this Thurow prescription: 'If the high science of the former Soviet Union and the production technologies of the German-speaking world are added to the design flair of Italy and France and a world-class London capital market efficiently directing funds to Europe's most productive areas, something untouchable will have been created. The House of Europe could become a relatively self-contained, rapidly growing region that could sprint away from the rest of the pack.' To that, the only possible retort is, 'Nice work, if you can get it.' But can you get it, even if you try?

Robert Heller is a former editor of Management Today.

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