Academic journal article Contemporary Economic Policy

Economics and Organizational Innovation

Academic journal article Contemporary Economic Policy

Economics and Organizational Innovation

Article excerpt

design seems to be spontaneously occurring in Russia. But far and away the most important core investors have been the people who have made a lot of money during the last two or three years, mostly in trading, in export and import business, in intermediating the trade between state enterprises. As in every developing country in the world, the first fortunes are accumulated through trade, and the people who made these fortunes then become investors in industrial companies.

The question always arises: Have these people gotten their money in legal ways? I cannot possibly understand why that is an interesting question. These people have accumulated their own fortunes. They are becoming long-term investors in these industrial enterprises. They have to be tough since they Hirshleifer: This session is on Economics and Organizational Innovation. The sequence of speakers and their topics will be as follows: Michael Jensen on "The Modern Industrial Revolution and Failure of Internal Control Systems;" next will be Robert Hall, "Does the Stock Market Send the Right Signals;" number three will be Andrei Shleifer, "Privatization and Governments," with special reference to Eastern Europe; and number four will be William Meckling on "The Evolution of Organizational Forms."

Jensen: Thanks, Jack.

I want to make three points. First, I will try to convince you that we are in the middle of a full-fledged industrial revolution, that we have been for the last couple of decades, and that it will continue for a couple more. This has broad-reaching implications. It is the biggest change I think we have seen since the mid-19th century in the United States in what Al Chandler characterized as the second industrial revolution. This would be the third, brought about by massive changes in technology and revolutions in political economy that are taking place throughout the world.

The implications of these changes are dramatic and are very confusing for policy makers and even for many of us economists and financial economists who have puzzled with these issues for some time. These changes are associated with worldwide excess capacity in a large number of industries. We are having a substantial increase in the average productivity of labor but a decrease in the marginal productivity. There is downward pressure on wages, or at least a downward pressure on the rate of growth of wages, much like what happened in the 19th century. The parallels between these two periods are really quite remarkable.

Most important, all of this is making us better off in the aggregate. We cannot help but be better off in the aggregate as efficiency and productivity go up, but there are major pockets of pain and adjustment that must take place. And the policy implications of trying to wind our way through this without getting lost or sidetracked and shooting ourselves in the foot, are major.

And third, I will talk about what this excess capacity means for downsizing and exit and how that has revealed, over the last couple of decades, what I believe is the massive failure of the internal control systems in modern corporations. There is major asymmetry between growth and decline. And to me this sets the agenda for the 1990s, how we think about making these organizations efficient.

Let me now talk about what I have characterized as the third industrial revolution. If I were to pick a beginning date, I would pick 1973, with the 10-fold energy price increase of 1973 to 1979. Since then, we have had excess capacity in industry after industry--oils, chemicals, autos, tires, steel, computers, airlines, banking, financial services, retailing, real estate, construction, defense, telecommunications, metals, machinery, the list goes on--much as in the 19th century industrial revolution, which brought about mass manufacturing and distribution, also brought about massive excess capacity that could not be wrung out of the system through cartels, pools, or associations. …

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