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Wednesday, April 12, 2000

Fingleton deflates the New Economy

IN PRAISE OF HARD INDUSTRIES: Why Manufacturing, Not the Information Technology, Is the Key to Future Prosperity, by Eamonn Fingleton. Boston: Houghton Mifflin Company, 1999, 273 pp., $26 (cloth).

A 24-year-old Englishman with a ponytail waltzed into the offices of a London venture-capital company last month, gave a little talk and waltzed out again with a check for nearly half a million dollars. A recent graduate of Cambridge University, this young man had just made his first financial killing entirely on the strength of "a great software idea."

Is this a tale of dot-com glory or the stuff of global economic folly? Like a skier whispering lest she sets off an avalanche, the whole capitalist world is now waiting for the answer. As the pressure mounts, a few "New Economy" fund managers and market analysts have broken ranks to predict that this speculative market is about to end in tears.

Such defections suggest that some of the very people who have been feeding our pension funds to this voracious global beast now accept that the frenzied rise of dot-com share prices cannot be sustained. As market volatility mounts, we may soon know whether these reluctant prophets are right.

Their reluctance is understandable. Proponents of "Old-Economy" bricks and mortar have singularly failed to capitalize on the extraordinary growth in share prices in three crucial sectors: technology, media and telecommunications or the "TMTs." (Biotechnology is keen to join their ranks.) The recent flight of capital from the Old Economy into dot-com speculation has meant that these paper paupers have started losing real money.

In the most speculative sectors, U.S. and British fund managers who have invested in profitability, proven management ability and tangible corporate assets have been badly squeezed by the New Economy. It worships corporate growth potential as reflected in structural trends (e.g., if 100 people own mobile phones today, 10,000 will own them tomorrow).

If, however, the New Economy has not repealed the laws of economics, then what goes up will eventually come down. Curiously, rather than fear the consequences of the bursting of the dot-com bubble, a thoughtful minority of policymakers, business leaders and ordinary investors in Adam-Smith land (the United States and Britain) have started to pray for a crash.

Given the dismal consequences of 20th-century financial crashes, how could anyone now be praying not just for a major "price correction," but for a full-blooded collapse of share prices? Why might an entire economic worldview need to be destroyed? The reasons will be apparent to anyone who sits down for an evening or two with this contra essay, "In Praise of Hard Industries."

The author has worked as an editor at The Financial Times and has been a Japan-based journalist since 1985. He has achieved a rare feat: written a book that has become more valuable since publication last year.

Fingleton writes fact-rich but jargon-free prose. His very readable analysis concludes that manufacturing, and Japanese manufacturing in particular, offers humanity its best chance to nurture jobs and prosperity for workers of all ages and abilities, and not just for what he sees as the self-serving elite, as greedy as it is intelligent, which is orchestrating the globalization of the international economy.

In three core chapters, Fingleton sets out his case for "manufacturing's advantages," which exploit the neglected merits of contemporary shipbuilding, textiles and steel. Rejecting the globalizing orthodoxy preached by The Wall Street Journal, The Economist and Fortune, Fingleton insists that, product for product, job for job, bottom line for bottom line, manufacturing is more creative, more productive and more socially cohesive that any of its postindustrial rivals.

In setting forth his heterodox views, Fingleton seeks to resurrect the supposedly buried corpse of the Japanese miracle. This country's economic troubles during the 1990s have left him unfazed. He even dares to repeat his bold claim, set out in his 1995 book "Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000," that when the dollar finally falls to the value that its desperate trade figures demand, Japanese GDP will surpass that of the U.S.

Fingleton has little time for the free marketers at the International Monetary Fund, the Harvard Business School and Stockholm University (which he thinks has wrongly showered Anglo-American economists with Nobel Prizes). But informed defenders of the New Economy, such as David Holzgang, a Web strategist for a premier Silicon Valley's company, condemn the neomanufacturing school for its nationalism, its economic illiteracy and its blindness to the irresistible rise of the service-led economy.

As for proponents of the U.S. model, Fingleton accuses them of moving the goalposts of economic success in order to inflate the U.S.'s reputation at the expense of Japan's. The real facts of the case, he declares, demonstrate that Japan repeatedly outstripped the U.S., both macro- and micro-economically, during the 1990s.

Japan as No. 1

No specter unnerved the Anglo-American economist and business guru during the 1970s and 1980s more than the troubling suggestion that Asians might have devised a successful way of doing business.

The intellectual godfather of this counterrevolution in economic thought was Friedrich List, and although unmentioned by Fingleton, the ideas of this formidable 19th-century German thinker illuminate the pages of "In Praise of Hard Industries" as those of no other economist, living or dead.

Fingleton believes that during the 1990s the fog of e-commerce hype dangerously obscured the intellectual foundations of the German, Japanese, French and South Korean economic miracles. This fog has made all these economies seem hopelessly passe from the standpoint of a dot-com revolutionary.

And nothing could be more remote from the logic of the surging Nasdaq than Fingleton's advocacy of job creation, long-term profits, export surpluses and dynamic manufacturing. In other words, the old 1980s struggle between short-term and long-term investment has been replaced by indifference to the bottom line in favor of potential growth alone (mobile phones and all the rest).

Nevertheless, Asians may shortly go on the offensive again. If the dot-coms stumble, the global economy will learn to reapply proven investment principles to our altered technological landscape. However, even if the New Economy does carry the day, Nozomu Nakaoka, senior editor at Toyo Keizai, believes that "Asians will play a major role in making all the hardware and writing all of the software indispensable to sustaining this revolution after the IPO honeymoon is over."

Fingleton agrees: "The core team that created Microsoft's Windows 98 operating program was largely composed of Indian-born engineers." Whatever doubts one may have about the splendors of Windows, Asian engineers are players in this game. According to The Economist, whites are already a minority in Silicon Valley.

As for the uncreative Japanese, Fingleton reports that Bill Gates has chosen six Japanese universities for inclusion in his preferred list of 25 universities for global talent-spotting. At the same time, many of Japan's high-tech component manufacturers are moving from strength to strength. How else is one to explain Japan's mountainous trade surpluses during the 1990s?

Fingleton's attacks on U.S. mass media for sloppy business reporting and on fund managers for gambling with our pensions in suspect speculation suggest that he, and much of Japan with him, have escaped the formidable lash of New Economy thinking. In contrast, this argument was fought and won in the U.S. some time ago (if current trends hold, the capitalization of Nasdaq will overtake the Dow Jones by summer).

But if the dot-com bubble bursts, Fingleton will be news even in the U.S. Indeed, one senior analyst working in Tokyo for a major European investment house observes, "It may be that the Japanese and the British are warming to dot-com capitalism just as Americans are beginning to sour on it."

From this month, nine TMT companies will replace nine mainly old-economy companies in The Financial Times listing of Britain's 100 largest companies (the FTSE or "Footsie" 100). At least four of the new entrants are operating in the red. By contrast, the largest of the expelled companies employ hundreds of thousands of workers in the beverage, restaurant and hotel trades, and tend to be hugely profitable.

The British invented modern capitalism, and the idea of capitalism without profits strikes them as absurd. Refusing to surrender to dot-com enthusiasm, British skeptics have rushed into print to mock managers who punish "not-com" companies for making a profit.

Such journalistic vigor underwrites Fingleton's criticism of the way U.S. journalism, particularly newspapers, fell for Wall Street spin and Silicon Valley hype. Indeed, there are ample grounds for arguing that the surrender of the U.S. media to the corporate propaganda of the dot-coms has, perhaps more than any other climatic factor, contributed to the TMT bubble.

The outcome of this new "Battle of Britain" has important implications for Japan. Fingleton's hopes for Japanese-style, capital-intensive super-industrialism will crumble if there is any irreversible flood of capital from conventional Japanese businesses into the profitless wonderland of dot-com commerce.

True, even Fingleton cannot deny that "the shock of the new" drives the prowess of DoCoMo and the reach of Softbank, while inspiring the rebranding of unprofitable railway companies and fanning the frenzy surrounding the new venture-capital Mothers index. But George Lee, an analyst at Jardine Fleming (Tokyo), warns, "The new chase for hidden assets (property then, cable television companies now) may mark a return to the excesses of the Japanese Bubble."

In the next six months, we may learn if the dot-coms are to be condemned to a place among the great speculative follies of the past: tulips, 19th-century railway stock and Ginza real estate. The recent job losses at Amazon.com, which, so its critics claim, loses $5 on every book it sells, have sounded a warning.

Doubt lurks even at the heart of the New Economy. A major player at Yahoo! now complains that there are a lot of aggressive young people who are convinced that a set of cool presentation slides and a summer job is all it takes to become an instant Internet millionaire. If that man with the ponytail and a half-million-dollar check is not the wave of the future, Fingleton will tell you why.

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