Managers must demand what macroeconomic support they need to survive.
Since the economic humiliation of Great Britain Ltd in the autumn of 1992, British management has been spared in the fumbling search for scapegoats. Obviously a close connection exists between manufacturing's performance and the current account deficits that underlay sterling's collapse. But manufacturers can't be blamed for the years of economic mismanagement that preceded, followed and embraced entry into the ERM.
Industry and its spokesmen can be blamed, though, for toeing the party line. Before the deluge, even Peter Bonfield, whose brilliant management of ICL has been a textbook example to his peers, argued for toughing it out at DM2.95. True, macroeconomics is seldom a manager's strongest point, but you don't need an economics degree to see that nothing alleviates price competition so swiftly and painlessly as devaluation.
By the same token, nothing cripples competition more generally than an over-valued currency. In fact history has thrown up examples of how the embarrassing strength of a currency can be accompanied by marked success in world markets. Japan demonstrated this most recently when the yen took off against the dollar. But that was against a background of vigorous domestic growth, not against the British conditions of deepening domestic recession.
As business economists, British managers know that cost falls as output rises. But from 1979 to 1989, the peak-to-peak growth in manufacturing output was a mere 12.3%. The 4.8% average annual rise in labour productivity over that same period, the best in postwar history, thrashed Germany's 1.8%. That unprecedented managerial success flowed mostly into higher unemployment, not into raising exports and ousting imports with innovatory products.
High exchange rates from 1985 onwards played their part. But essentially this was a replay of the same old farce. The efforts of Britain's better managers have been vitiated time and again by central economic policies which have focused on the external value of the pound.
By and large, major companies have gone along for the ride to their own perdition. Under Conservative governments this can partly be explained by management's prevailing political hue, but even under Labour the consensus behind economic management policies was generally supportive.
In addition, managements have a legitimate and strong interest in stability. That has meant, however, backing policies which were violently destabilising - never more so than in the latest episode. As the leaking boat rocked, even managers whose companies were suffering from the parity claimed to fear inflation more than lost markets, more even than deflation. Given that so many were struggling with barely supportable debt, that was wildly quixotic.
There's a paradox between the awful performance of sterling externally and internally (where the purchasing power of the pound fell by 90% in 30 years) and the rising prosperity of UK citizens. Until the Lawson boom boiled over in 1989, for all the macroeconomic policy failures, the majority of people significantly improved their consumption and augmented their capital assets year after year - including managers.
Inflation played its part by devaluing debt and encouraging wage rises; governments played theirs in allowing consumption to grow faster than underlying output, especially when elections were imminent. Managements didn't complain about this, either. But why was underlying output so sluggish? Lawrence H Summers, chief economist at the World Bank, and J Bradford De Long of Harvard University did some multinational research into 1960-85 which offers a convincing answer. They discovered a "supernormal" impact from investment in plant and equipment, and concluded that, by raising investment in machinery from 2% of GDP to 5%, an economy would grow 20% more after 25 years.
Britain's low level of manufacturing investment, and its relatively high commitment to property and services, has long been notorious. But the De Long-Summers thesis has been known just as long. An intelligent industrial policy would have sought to maximise investment in new machines by lowering the cost of capital, providing large and consistent fiscal incentives, employing every means in government's power to encourage firms to modernise technology, equipment and their use, and ensuring that the exchange rate was never too high for comfort.
Instead, manufacturers have been treated to the highest real interest rates in history, a corporate fiscal regime of bewildering twists, a foolish belief that supply side improvement can be left to market forces, and indifference to the impact of the pound on competitive prowess. Not surprisingly, the country's ability to supply goods to itself, let alone other countries, has fallen far short of need.
If Great Britain Ltd were a real company, the chairman and the board would have paid the price of abject failure long ago. But the change process wouldn't have stopped there. New managements coming into chaotic systems can only succeed by replacing the system. Where large companies are still floundering, in America as in Britain, it's because established managements are trying to force established systems to change: the harder you push, the harder the system pushes back.
The current system of economic management can only stumble on to the next crisis. The men and women in the Treasury, the Bank of England and Downing Street aren't all foolish incompetents. They, as much as corporate Britain, are the victims of a system which lacks (a) independent sources of advice (b) checks and balances (c) open discussion of options (d) timely, accurate and full information (e) feedback of results and (f) flexible response.
Connoisseurs of corporate catastrophe will recognise the pattern at once. The chief executive, backed throughout by his board, listens only to his own staff. Nobody in top management, let alone further down, can influence decisions and actions. Meetings take place in secret, and their results are faits accomplis. The information system can't produce essential data, either at all or in time. Once a strategy is launched, adverse results are either not known or brushed aside. The whole company gets locked into destructive modes from which there is no escape - save through financial crisis.
That's where Britain got to on Black Wednesday. Real escape won't come, however, unless the system is changed. And the best way managers can encourage change is to demand, without political fear or favour, what macro-economic support they need to win success now. Tomorrow will be too late.
