350
PARTISAN REVIEW
three to five year time horizon. With a fifteen year horizon, we can
build a plant, build a service network, improve the quality of our
products, and eventually run a five year horizon firm out of busi–
ness." The problem is the incentive structure we have built for
American management. We have investors who invest on a daily if
not an hourly basis, so that companies must always be looking over
their shoulders at the stock market; we have top management that
gets a bonus based on current profits (European and Japanese
managers do not get bonuses based on current profits); and we have
middle-level managers who are set up as profit centers-they are
promoted or demoted based on current profits. With that kind of
management incentive, why should anybody have a long run time
horizon?
At the
Fortune
meeting, the Japanese pointed out that Nissan 's
Datsun was on the American market for ten years before it ever
started making money. And they asked the American businessmen
what American firm would be willing to do the same thing. The
answer
IS
none.
The other day I was at the General Electric management
institute and I asked thirty division managers
to
tell me their
division time horizons. The mathematical average was 2.8 years.
How do you build new factories if your time horizon is 2.8 years?
You do not. That's one of the interesting things about investment in
the 1970s. Although we're investing more, we have almost com–
pletely stopped building new industrial facilities.
It
may partly be
due to the problem of time horizons. You cannot blame it all on
inflation, because foreigners have inflation problems too.
ROBERT NOZICK: Is there some reason for thinking American time
horizons are shorter than they used to be?
LESTER THUROW: Yes, there are a lot of reasons . This whole business of
turning middle management into profit centers happened during the
last ten years. We 've always had bonuses, but they have gotten bigger
relative to salaries .
EUGENE GOODHEART: Does American management acknowledge the
justice of these criticisms?
LESTER THUROW: To a certain extent, yes . But Americans argue that
they are more averse
to
risk partly because of their short time
horizons. Do you know the story about video recorders, all of which
are made in Japan? The famous Betamax. The patents on the
Betamax aren't owned by the Sony Corporation. Ampex, the Ameri–
can tape manufacturer owns the patents on the Betamax. When they
