US BUSINESS SCHOOLS FOSTER COMPETITION OVER COOPERATION, DISADVANTAGEOUSLY
(Originally sent to Fukuzawa and Friends Sat, 14 Dec 1996)
It seems to be a bit of a slow time here on Fukuzawa, so I thought I'd put out one of my ole "Cultural Issue" posts as food for thought. By "Cultural Issue", I mean less of the stats, more of the fluffy stuff about the US-Japan relationship in microcosm, i.e. in my experiences.
What follows is a narrative excerpt from my 1000-page novel manuscript. Its thesis is that US Business Schools, particularly those which stress rational choice theory, go out of their way to make scholarly environments competitive rather than cooperative. And this hurts America's chance to compete in Asia, particularly Japan, because they tend to teach our future businesspeople that businesses and consumers are atomistic, price-oriented economic animals, instead of realistically studying the machinations of enforced and non-enforced cartelization and nationalistic sales tactics.
I isolate a case of this down to my Alma Mater, The Graduate School of International Relations and Pacific Studies (IRPS), at UC San Diego, 1990-91. The course talked about here, Policy Workshop, is a real course, and Alex Kane is a real professor. For IRPSies out there (particularly the ones who founded DFS), this may be a walk down memory lane. For others, this may come as some or no surprise as to how Americans are, in my opinion, being blinkered as to the efficacy of Industrial Policy.
(There are two characters to this tale--Fumi, a Japanese woman newlywed to an American student, Chris Abernathy. They have just gotten off the boat for Chris's final year at IRPS.)
We arrived at UC San Diego and started my final year at IRPS. Out of the car and into the hypertensive American college student groove. We had one week to get tuition in order, buy books, choose classes, secure our apartment, arrange our bank accounts, find a job, and make friends. Though after five years' of college experience I could easily shift gears, Fumi couldn't keep up, and I found her fretting away the first weeks with worry dimples galore. I tried to soothe her as best I could; the day she started worrying about how we would make ends meet was the day I came home with student loan applications and TA job offers. The moment she started worrying about our apartment was hours before we signed the lease. Nevertheless, she had trouble understanding what was happening because I couldn't explain fast enough. I was trying to say it all in Japanese, and found I couldn't recall key words.
"So why don't you talk to me in English? We're in America now." she said in English.
"Sorry, Fumi, I don't think that's a good idea," I replied in Japanese.
I switched to English. "Because it would defeat the purpose of spending that awful year in Shiunshu [my IRPS internship in Niigata-ken]. I have to achieve a certain level of language proficiency, averaging to a '2' on a foreign service equivalency exam, in speaking, reading, and writing Japanese. Or else I can't graduate from IRPS. My test is in six months, which gives me plenty of time to lose my abilities. I can feel them draining away this very moment. Look, I have to say all this in English."
"But Kurisu, what about MY English? I couldn't really understand what you were saying now," she said in Japanese.
"Hey, this is America. You have plenty of opportunities to practice. Just walk out the front door. But I need you to speak Japanese to me when we're alone so that the spell isn't broken." She agreed.
There was another factor I didn't mention--competitive advantage. IRPS is a business school, and life as a student there amounted to little more than a series of quantitative competitions. However, I had an advantage over my fellow Japan-major students--a Japanese wife--and I needed to exploit it to the fullest in order to keep a step ahead of everyone else.
Look at that!, I thought. Not three weeks back in the States and I'm already thinking like a cutthroat MBA student.
The atmosphere in key courses fostered this overcompetitive spirit. Taught under the Socratic method, teachers called on us to give answers to complicated issues, and would make a fool of us if we flubbed. No passive lecture-hall learning was allowed. This tightened up on people who didn't do their homework, but it also made a lot of bright people who weren't fast on their feet feel like losers. Since articulate people generally impress in the West, IRPSies respected only those who said intelligent things every single time. This was bit of a jar after Nagaoka--the afore-mentioned "Japanese Default Mode", i.e. being silent, or saying "dunno" when you don't know (often even when you do know), didn't apply. Silence was taken as a sign of stupidity, and ready answers were best. Unfortunately, ready answers were not my forte. I had come to this school precisely because I knew so little about business. When I was zapped with a question, "dunno" was my favorite word.
I had a couple of bad days in a little doozy of a course called "Policy Workshop", required for second-years. Dr Alex Kane, the man at the podium, was an incredibly wiry guy who thought like lightning and expected everybody else to keep step. He was the epitome of "no-nonsense", smelling bullshit in any answer, and goading you into pushing your mind. He relentlessly uncovered ignorance in his students, as methodically as a boy searching for worms before a fishing trip. He was, in two words, quite terrifying.
One day, Professor Kane zapped me with the dreaded "cold call".
"Mr Abernathy. Do you have the answer to my question?"
"Huh?" said I. Classroom chuckles.
"Mr Abernathy, stop daydreaming. What is the solution to this formula?"
Tuts, titters and chortles.
"Alex, I'm sorry but you lost me somewhere between this differential and that integral."
"Okay, I'll explain again." He did. "Now do you get it?"
"Sorry, no." More sniggers, which irked me no end. "Alex, with all due respect, I don't understand why we're learning differential calculus anyway."
Alex was not in the least perturbed by that remark. He was a man who enjoyed people challenging his theories. That's why he was a teacher and not a boss.
"Now look, Mr. A, this is a formula for consumer demand..."
"I'm sorry, Alex, but again, why are we bothering with this?" Scoffs and intakes of wind.
"Because if we do not, we are no nearer to having a model predicting the way consumers are going to choose your product. And you will not learn how to sell."
"Alex, I don't need to learn calculus to learn how to sell. I have to learn what the nationals of a foreign country, depending on their preferences and tastes, want for their money."
"Mr. A, you are answering me in pleasant but meaningless clouds of fog. I understand this school of thought, where 'culture instead of calculus', 'language and immersion instead of mathematical regressions', should be studied. But until you start to try and measure the dynamic of the market, you get nowhere. You have to create a quantitative model to lend predictive power to whatever you are studying. You must get down to the bare bones of profit and pricing for your company, then tease out the market in the form of consumer demand. Or else you just end up shooting in the dark.
"Your method, studying this ephemeral thing like 'culture', is worse than 'hit or miss'. It is like shooting at sparrows in a country where a sparrow is no more than an ill-defined concept. Not the way to make money. And it shows in your sinking stock price, Company 12."
Ouch, that hurt! The class really laughed at that.
However, allow me to give you the background behind that comment. Brace yourself for a bit of business talk:
In Policy Workshop, every student in class was participating in a computer-simulated marketplace. In the simulation there were two nations: "A-Land" and "B-State". In each nation there were six companies--Companies 1 through 6 in A-land, and Companies 7 through 12 in B-State. I was CEO of Company 12.
All the companies were competing with each other to make and sell only two products, "X" and "Y", completely fungible except if we patent a "new and improved X", gleaned after R&D investment. We had our own factories, storage facilities, and sales outlets, so our goal was to produce enough quantities of X and Y to meet projections of market demand, store enough units so as to avoid a sell-out, then price everything to sell above cost yet undercut our rivals.
The two governments had an overseeing and tinkering role. They could stimulate their economies with fiscal policy (such as defense procurements), and fine-tune with monetary policy (such as money supply and interest rates). Trade barriers and subsidies were not out of the question.
But before I bury the reader in jargon, let me simply diagnose Company 12's major problem: market forces. Everybody was undercutting each other to the point where they were selling below cost, and some companies' pricing schemes were so cock-eyed that over half the companies were deep in the red. Ours included.
We were working in a functioning ersatz market. By creating a large number of factors and actors that each the power to affect each other, Alex had created a very complicated little game. So many people with unpredictable opinions made getting enough information impossible. People started to second-guess each other, others began talking ambiguously like true economists (lending truth to the old joke, "ask advice from ten economists and you'll get eleven different opinions"), and others just short-circuited and threw darts at the blackboard. Our company was in the third camp.
Yet above this fray, Alex stood and told us how he was going to be grading us. Companies would get high grades depending upon their share prices and profitability at the end of the term. Governments were to be judged by their trade surpluses, exchange rates, and even popularity polls (inexplicably incorporated into the software). However, Alex knew that there was a certain amount of luck involved in any market scenario (since determining, say, an equilibrium market price, or a suitable level of money supply can be as scientific as shooting dice), so he found a way to test our analytic skills as well. He required us to submit, at the end of every week, a floppy disk full of our public decisions and personal projections. Each company had to reach decisions on how much X and Y to produce, on the selling price, and whether or not to reinvest in plant and equipment, R&D, or whatnot. Then, each person had to input personal predictions for next quarter on where exchange rates, our stock price, and other leading market indicators would go. The closer our predictions came to the governments' economic reports, on average, the higher our grades would be.
I always got lost at this point. As Alex pointed out, I had no idea even how to start analyzing a market.
Our Company 12 was a cluster of four Japan specialists, and each of us had spent over a year studying business practices in Japanese companies. And what had we learned? Not much, it seemed.
At the beginning of the simulation, we had tried to "think Japanese", i.e. shoot for the high-tech end of the market. We got cheap loans from B-State and put it all into R&D. Since we were investing the highest sums in the world in research, we were assured of being the first to get a patent on the next generation of X and Y. Or so we thought. In fact another company, in A-Land, got there first and made a killing. When we asked why, Alex said, "Inventions occur almost purely by chance, regardless of how much money you throw at them. Didn't you understand that?" So we had gambled and lost big. Several quarters into the simulation, Company 12 had amassed the most debt of any company in the history of Policy Workshop. Our returns on assets and equity were abysmal, and rumor had it our share price could actually go negative.
We were the laughing stock of the course. That's why Alex's comment about my lack of vision hurt.
Enough background. Back to the day Alex and I were sparring in class. I jabbed back: "Alex, you're taking cheap shots at me. This simulation is designed by you using your models and theories. It may not reflect the real world at all, and the systems you've designed here are probably not the same as the ones I'd have to deal with in Japan."
There were a couple of scornful "tut"s but Alex sluiced them off with a sweep of his arm.
"Okay, good point, Mr A. Yes, the Japanese system has some differences, I'll admit. It has found ways to cheat or tamper with market forces by, say, rigging the bond market, or building share price ramps before an election. Fine. Learn how that is done too. But remember this: a market is a market, and the fundamental ways of answering questions of scarcity between consumer and producer are essentially the same under any variant of capitalism, be it American or Japanese.
"I teach you my model, yes. Maybe it is modelled too much on the American system. However, you don't expect me to stop teaching this class just because of a few bugs in the master program, right?"
That was obviously a rhetorical question, so I shut up. The class had probably had enough of me for one day.
This time Alex continued: "Let me put one question to you this time, Mr A. How do you measure the elasticity of demand?"
Oh Christ, I thought. He wants a formula.
"No, not a formula, Mr A. In simple English, what is price elasticity?"
"Professor Kane," somebody else piped up. "Change in quantity over change in price." It was Trisha Smythe [an adversary of mine in a previous chapter], back from Nagaoka, with a shit-eating grin.
Alex smiled. "Correct. Very simple, right? You see, Mr A? How can you expect to be a winner anywhere if you can't even define a simple thing like price elasticity? That exists everywhere there are prices. Last I heard, there are prices in Japan too."
Ouch again! I hated him saying that, but he was right. From that point on, I studied his models more closely and tried to see things his way. At least until after the final exam.
However, the point I was trying to get at in our exchange was this: I wondered if MBA models for consumer behavior would work when applied to Japanese buyers. It is entirely possible that the Japanese are as different as they themselves maintain. My repeated culture shocks in America were showing me that rather palpably.
I realized that a case could be made that a lot of the problems Americans were having with penetrating Japanese markets may in fact be their own doing. Sawada back in Nagaoka would say neatly that Americans were "not trying hard enough". Maybe, maybe not. But in IRPS, I started feeling that maybe American MBA-trained businessmen were not looking hard enough at concepts they dismissed as "foggy", such as culture. Indeed, in many business institutions, classes dealing with "culture" (along with "ethics") are treated as aside topics or assigned to optional courses.
Result: The idea of "how something sells" to a young, receptive American student gets founded upon general unifying theories of consumer behavior, arrived at by American business schools analyzing Western markets. I think whole phalanxes of MBA holders believe that consumer behavior can be accurately calculated by numbers, price being the most significant variable in the equation. "People are people," they say, "and if they have a choice, they'll generally choose the cheaper good." I feel that's a fatal overstatement--cultural values and human preferences cannot be that easily reduced.
Don't get me wrong. I'm not saying that the American trade deficit with Japan is completely due to American shortsightedness. There is a plethora of evidence that Japan has deliberately protected its market from foreign goods using legal and structural means, and I will get to that in a few pages.
However, the belief in the West that their consumers and capitalist systems can serve as a model applicable anywhere, is haughty. It's like saying, "Japanese have the same tastes as Americans, and if our stuff isn't selling over there, it's because their markets aren't suitably opened up". Turn the argument on its head and look at Japanese businessmen in America.
Even without fancy MBA calculus, Japanese businessmen seem more receptive to subtleties in foreign tastes. They can design, say, cars that over 20% of American car buyers have chosen over a domestic. The counterargument may be that Japanese have more access to the American market than vice versa, but the point still stands that Japanese are taking advantage of that opportunity. How? I say by being more aware of the differences, not just the similarities, between America and Japan, and tailoring the product accordingly. An American MBA to rely on a calculator when he needs an open mind, sharpened in terms of absorbing cultural values as well as the calculus.
In sum, my opinion at the time was that American hubris, reinforced by MBA shortsightedness, are major reasons why the Japanese can, comparatively speaking, pander better to foreign consumers. To be sure, I appreciated Alex's models for what they were trying to do--reduce the uncertainty in the complex dynamic of market forces. I just wondered if they would be any use to me at all should I end up in Japan.
These arrogant MBA attitudes latent in our students showed themselves clearly one day, when I attended a meeting of B-State company CEOs.
Convened by the government, this was to be a planning meeting, a secret summit between high government officials and the engines of national growth. Things had not been going well for B-State recently despite current economic trends. Thanks to favorable exchange rates, B-State's companies were making their goods cheaper than A-Land's. We should have been able to saturate and dominate another market in the simulation--a third-world undeveloped country named "T-World" (which had no producers and limited government). But something was not working properly. B-State's president, Victoria Kaiser, raised the issues of 1) negative income statements, which had eliminated any government tax revenues, and 2) our sluggish exports. She then opened the floor to our input.
I started lobbying. I pointed out that our main problem from the corporate point of view was that we were pricing our products badly. Most of us were selling below cost. But I could see a solution. If all of our companies would cooperate, collectively agreeing to a floor on price levels, we could stop undercutting one another. This idea was not pie in the sky or economic gobbledegook--it was genuine policy in some countries in the real world.
"You mean enact a cartel?" said Rhonda Bones, the CEO of Company 7.
"That's a swear word in my book, man," said Morgan Tate, whose company, number 8, was doing the best in the world. Breaking even, with very little corporate debt, their share price was the only one stabilizing.
"No," I disagreed, "a 'cartel' is a nasty and misconstrued way to put a simple matter of 'cooperation'. What I mean is that if we managed to line up our prices across the board at a level where everybody could actually make a profit, the consumer would have no choice but to buy it as such and our nation as a whole would benefit."
"In other words, enact a cartel." reiterated Rhonda.
"Then wouldn't consumers here or in T-World buy imports from A-Land?" said President Kaiser.
"Not necessarily. Our currency is worth less than theirs. We can sell for much less than they can anywhere because our input costs are comparatively lower. Just make sure our floor price will undercut the average prices of A-Land products, and we could all sell and make a profit."
Rhonda: "I can't believe we're seriously discussing this! Goes against all principles of free trade. If the other country hears about this they'd slap punitive tariffs on us."
I continued: "We could do the same if a trade war's what they want. But they'll still lose in T-World, which has no trade barriers and only buys based on price. Still, I don't think it'll come to that. Besides, how would A-Land hear about our little arrangement? Is it in anyone's interests here to leak it to them?"
Morgan: "Look, even if we try to fix prices amongst ourselves, one of us will always have an incentive to cheat. Anyone and everyone knows that they'll get an extra unit of sales if they just drop their price a penny. And if we have a floor price, we know exactly what price to undercut. That's capitalism, Chris--constant pressure to lower prices. I believe at least one of us here's going to undercut us, and he'll be the one laughing to the bank. Face it, Chris--Gentleman's Agreements don't work in the business world."
Me: "That's your opinion, Morgan. Anyhow, here we all are, facing each other. Is anybody going to say out loud that they'd want to stab somebody else in the back? Does everybody need a Sword of Damocles over their head before they'll cooperate?"
There was a contemplative lull, so I continued:
"Come on, people, be realistic. This is only a game. A computer simulation. All this talk about capitalism and theoretical whatever and what's the point? Real money is not going into your pockets, and you don't really win or lose no matter what you do. So why not cooperate? And if Victoria's administration could see fit to give us a few tax breaks or subsidies for our R&D costs, we will get profits in the short term and patents in the long. We'll have a leg up on A-Land very quickly. Let's just try this and see if it works."
It seemed as if I was persuading people. President Kaiser was noting this all down when suddenly Morgan doused my proposal:
"It's not going to work, Chris, because I see no incentive to cooperate and every need to cheat. Yeah, I will openly admit to you and everybody here that I will undercut every price you all agree upon. I make more money that way. It's a classic case of Prisoners' Dilemma. And if you want to stop me, design some arm of government to enforce it and make me toe the line. Until then, if it's legal, I'm going to do it. Every man for himself. That's the way business works in the real world, Chris."
Me: "Not everywhere, it doesn't. Come on, Morgan, just give it a try. It's good Industrial Policy."
The use of that term caused a couple of gasps.
Morgan: "Chris, I know you're in love with Chalmers Johnson, but he advocates a system where the government interferes with market forces and chooses winners. The US government is not designed to do that efficiently, and this simulation is modeled on the US system. Besides, economic theory clearly states that most interference in market forces causes inefficiencies and aberrations. What happens is a misallocation of funds, an incredible waste of the taxpayers' money, and the emergence of huge inefficient corporations like General Dynamics, growing fat and slow on the teat of government favoritism instead of lean and mean in the international market.
"No offense, Chris, but maybe you want government intervention because your Company 12 is doing so badly. I'm fine without any help. Sure, this is only a game, but you've got to learn to sink or swim by yourself. Just like in the real world. It's an existential fact about economics. Industrial Policy just doesn't work."
"It does in some countries. Japan or South Korea, for example."
"And it's failed in countries like the USSR, India, and Brazil. Get with it, Chris. Countries practicing free trade, like Hong Kong, Singapore, or West Germany, get rich. There's a lot of noise in this equation you're proposing. You can't really choose winners."
"I repeat, Morgan, this is only a game. There's no money involved. Let's just give it a try."
However, the opinion of the American executives was now more with Morgan than with me.
The summary opinion was that "fairness", a recurring theme in Western trade circles, was the "most just" allocator of opportunity and profitability. Leaving price-setting up to "individual actors", rather than a prearrangement that could control half the world's economy, was the best way to beat the market because it was the "fairest". Everybody would have the same probability of making money, there would no troublesome or costly enforcement mechanisms necessary, and, most importantly, nobody would get the blame for launching a failed Industrial Policy.
I weakly countered that I'd take the heat if my proposal flops, but President Kaiser noted that it was she, not I, who was answerable to the opinion polls.
I got one concession, at least: subsidies for R&D expenditures, but that was it.
A "fair" pricing scheme triumphed over a managed one. Competition over cooperation. Individuality even if it undercuts prices and cuts everyone's throat.
As the meeting broke up, I noticed Rhonda was using a nearby photocopy machine to copy notes for her company. I could see she had discovered a little trick with the machine so she could get her copies free. She loaded the paper into the paper feeder a special way, and somehow the copier, deciding it didn't need any coins, sucked in the paper to the job gratis.
When Rhonda was finished, I asked her how it was done. I needed to make a few xeroxes myself.
Rhonda gave me a funny look and said:
"Chris, what's in it for me if I teach you how to beat the system? Nothing. I spent time learning how to do this trick, and you want me to give you that information immediately? You should learn how to do it yourself, same as I did.
"No free lunches," she said summarily, walking away.
"Rhonda, no wonder the Japanese are beating us!"
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