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Monday, Nov. 6, 2000

Profit, but at whose expense?

Strategists should focus on the long-term payoff


Amartya Sen, winner of the 1998 Nobel Memorial Prize in economics, says consumers who seek maximum gains and companies that seek maximum profits are "rational fools." The Oxford University professor also says behavioral standards of consumers and companies should be based on "commitment and sympathy."

True to Sen's words, companies are making contributions to social well-being and protection of the environment that have little to do with profits. Because they are not "rational fools," they give priority to contributions to society and protection of the environment, rather than profits. Prosperous individuals and companies are willing to give precedence to protection of the environment, human rights, nature and culture over profits. This is known as "postmaterialism." Values are changing in East and West alike.

Things are different in Japan, however, where advocates of market fundamentalism are calling for the pursuit of maximum profits.

The traditional Japanese system, based on commitment and sympathy, is not conducive to the "rational consumer and corporate behavior" mentioned in economics textbooks. For example, most Japanese companies still basically favor full employment. Thanks to these customs, the number of unemployed in Japan was in the range of 1-2 percent in the high-growth era through the 1960s. After the oil crises in the 1970s, the rate rose to the 2-3 percent range. Even in the economic slowdown of the 1990s, the rate was less than 3 percent. If hit by a similar recession, the United States would have posted a double-digit unemployment rate.

It is clearly illogical for companies to be saddled with excess labor. During Japan's economic boom in the late 1980s, however, experts used to attribute Japan's success in low-cost mass production of quality products to the traditional employment system. They said the Japanese system in general, which included many illogical elements, contributed to their great success.

The idea was that since the economic slowdown would be short and would be followed by a robust recovery, it would be more cost-effective to keep surplus labor for a limited period, unlike U.S. companies that resort to immediate layoffs in bad times. If the economy recovered, companies would have to increase employment; securing and training new workers would be costly and time-consuming.

In the late 1980s, many economists praised the "rationality" of the Japanese system, giving many reasons. They said the U.S. system might be rational in the short run, but would be irrational in the medium-to-long term. However, when Japan was hit by a prolonged economic slowdown in the 1990s -- and the U.S. continued to enjoy prosperity -- experts said the Japanese system was inefficient. They said Japanese companies should learn from U.S. management strategies to help revitalize the economy.

After all, the efficiency of a management strategy is a function of the stage of economic development. In the 1980s, Japan was in the final stage of the industrial society and was led by industries that mass-produced electronics components and systems. At that time, the Japanese management system was the most suitable. In the 1990s, at the dawn of the postindustrial age, the U.S. system was the most adequate.

In the first decade of the 21st century, the postindustrial society is likely to be affected by its own contradictions. These will include the likelihood of a single company or group dominating market competition, rapidly widening income gaps between and within nations, an increase in the number of outcasts, and deterioration in the quality of public health-care service and education. Companies seeking maximum profits are bound to aggravate these problems.

"Commitment and sympathy" should be added to corporate behavioral standards. This is the best way to prevent problems from getting out of hand in postindustrial society. At the same time, many inequities inherent in the Japanese system must be removed.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Economics Research Institute.


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