MIT Commission on Industrial Productivity - Steel Industry Study

Started ~1985 in School of Engineering conference room; published 1989 as *Made in America*. Led by Dertouzos (computer science), Lester, and Solow (Nobel economist). Tom served on the steel-industry subcommittee.

I want to switch into a topic that's not necessarily material selection, but I lecture as I feel like — productivity. I'll tell you a little bit about Made in America: Regaining the Productive Edge. Michael Dertouzos was a professor running the computer science lab at MIT. Richard Lester has been an administrator around here for 20 years. And Bob Solow is an economics Nobel Prize winner. This is the MIT Commission on Industrial Productivity. As a younger faculty member I got involved in this. It started about 1985 at a meeting in the School of Engineering conference room. It was published in 1989.

Likely referent for "a study once with a guy from Harvard Business School" at Chaparral. The "Kim" mentioned at §8.p6 (HBS friend who became Dean and wrote on the steel industry) likely Kim B. Clark. Tom uses this to make a point about economists writing on industries they don't understand.

At Chaparral Steel — I did a study once with a guy from Harvard Business School, and we spent a few days down at Chaparral and visiting Gordon Forward. Gordon used to always talk about the corporate dining room at Chaparral. The corporate dining room at Chaparral was a couple of folding tables, plastic chairs — not as nice as these, nowhere near as nice as these. Plastic forks and the little things, because they would go out and get some barbecue from the local takeout. That was the corporate dining room at Chaparral. So difference in philosophy between the people who were at one time printing money.

Tom contributed to the steel chapter alongside Lester Thurow. Source of the "to live well, a nation must produce well" opening line and the Krugman productivity quote. ## Figures referenced (numeric anchors, not cases)

Here are my quotes on productivity from Made in America, the book that MIT put together, that I actually worked on some of. "To live well, a nation must produce well" — the opening line of that book, which looked at — one of the five examples was the steel industry, and I worked on that part of it along with Lester Thurow and a few other people. "Productivity isn't everything, but in the long run it's nearly everything," which is Paul Krugman, a Nobel laureate who did his early work at MIT.

Tom was a commission member, did the steel industry section. Dertouzos chaired (CSAIL head), Lester, Solow (Nobel laureate). Book *Made in America* — opening line: "to live well a nation must produce well." Frames the productivity-vs-competitiveness teaching unit.

The Japanese were eating our lunch, and so Jerry Wilson commissioned a book written by Michael Dertouzos, who was head of CSAIL, the computer science lab — almost became president of MIT. Michael's passed away now. He was a Greek, a consultant to the premier of Greece. I remember at Engineering Council they were complaining once that the assistant professors didn't make enough money to live on in the Boston area, and Michael said, well let them go out and consult, I can make twenty thousand dollars a day. I said, what? That's the kind of money Michael was making consulting for the government of Greece. Richard Lester is still around; Bob Solow won the Nobel Prize in economics. These guys were asked to be part of the MIT Commission on Industrial Productivity in the mid-'80s, and they wrote this book. I was a commission member and did something on productivity in the steel industry.

Source of the productivity figures Tom recites — manufacturing at 4% per year, mining at 6%, service sector at 0%. The decomposition of steel cost (45/45/10 in the mid-'70s shifting to 90% energy today) traces to this work.

Energy costs have become the dominant factor. When I went to work for a steel company in the mid '70s, it was about 45% ore and raw materials, 45% energy, and 10% profit. Today it's about 90% energy cost. Raw materials really aren't that significant anymore. That's partly because the only industry over the last 30 years that has exceeded the productivity of the manufacturing sector is the mining sector. If you look at productivity growth over the last twenty or thirty years in the service sector — doctors, insurance companies, Wall Street — what's office productivity been? It's been around 0%. No productivity growth whatsoever. In the medical business it's going down. In the financial sector maybe some people are getting rich, but the productivity growth is not there. They always say, well, we've got computers now, we're more efficient at screwing people in the financial industry.

1986–87 commissioning of the *Made in America* book by Dertouzos, Lester, Solow. Quote: "To live well, a nation must produce well."

Wikipedia says the revolution started in Japan, and if you were living in the 1980s, you would say it started in Japan because the Japanese were beating our socks off in manufacturing. So much so that I remember sitting in a little engineering council meeting in the 1980s, and Jerry Wilson was the Dean of Engineering at MIT. Kent Bowen had been assigned in 1984 to start a manufacturing program at MIT, which he finally got four years later. He had raised about twenty-five million dollars, and they started the Leaders for Manufacturing program, which at Sloan is now the Leaders for Global Operations. They decided in that meeting in 1986 or '87 that they should commission a book, and a bunch of MIT faculty — the MIT Commission on Industrial Productivity — should write a book, which they ended up calling Made in America. The three authors were Michael Dertouzos, Richard Lester (who's now provost), and Bob Solow, who was Nobel laureate at the time. I like to quote the first page of the introduction: "To live well, a nation must produce well." That's why China built Baosteel, that's why Korea built Pohang steel, that's why people in Qatar built their own steel mill — because they had all this natural gas, and one way to ship the natural gas is to turn it into steel. It's easier to ship steel than it is to ship gas.

The 1980s MIT-authored book whose opening sentence is "to live well a nation must produce well." Frames the productivity-is-everything thesis Tom uses through §6–§8.

The whole story of steel over the last fifty years — there's a book that MIT put together in the '80s, where the beginning sentence is "to live well a nation must produce well." Paul Krugman, who was a faculty member at Sloan School then — he went to Princeton where he won the Nobel Prize in Economics — he says productivity isn't everything, but in the long run it's nearly everything. If you want to talk about quality of life, maybe not over a one-year period, but if you want to talk over a ten- or twenty-year period, productivity is everything. In the old days it might be productivity growth over a hundred years, but today it's over a much shorter time constant.

---