If 737 failures were systemic, Boeing’s in serious trouble

Bad habits like focusing on short-term profits over long-term growth are very difficult to change.

Boeing’s problem with the 737 Max is going to be expensive. American Airlines reports that the grounding of the aircraft caused flight cancellations that cost it $185 million. Delta Airlines, by contrast, which doesn’t operate any 737 Max planes, reports that its profits are up and look good for the rest of the year. The recent cancellation of their 737 Max order by Saudi Arabia indicates that the cost of lost sales will be substantial, too.

We still do not know with certainty the root cause of Boeing’s problem but it appears to be systemic. Stan Sorscher, a former physicist for Boeing now on staff for the union representing engineering workers, wrote recently that he believed the airplane manufacturer’s focus on cost-cutting overwhelmed their dedication to high quality.

He may be right, but it is equally possible that the desire to win the competition with Airbus, which is also a near-existential goal, caused the company to offer unrealistic delivery times and the consequent hurry-up production schedules eroded quality standards. That also would erode worker morale, a potential problem that could endure long after the hardware and software issues have been fixed.

Systemic errors are worrisome for economists, too, especially those who are responsible for the mathematical models used to forecast the economy and guide our economic policy decisions. These errors are particularly vexing in the manufacturing sector because they can have an effect on investment that is both significant and hard to predict.

The cost-cutters as the enemy of quality is not a totally new concept, although it may be so at Boeing. Almost a century ago, an economist, Thorstein Veblen, wrote a series of essays on the subject for “The Dial,” an influential magazine of the time. Eventually collected and published as a book entitled, “The Engineer and The Price System,” Veblen analyzed the conflict between engineering values such as quality and durability and what he called “pecuniary values” in the corporations of his day.

The American economy and especially the industrial sector, had grown very rapidly in the decades after the Civil War and generated great wealth for its entrepreneurial owners. Veblen had mocked these modern-day buccaneers, calling them “Captains of Industry,” and more thoroughly mocked them in his book, “The Theory of the Leisure Class” published in 1899 at the height of the so-called Golden Age of capitalism. Echoes of that book and his descriptive phrases such as “conspicuous consumption” turn up in today’s news reports of the excesses the wealthy enjoy.

Beyond the mockery, though, as an economist, Veblen was genuinely worried about the effect of wealth and pecuniary values on our economy and society. But he was not a socialist and certainly not a fan of Marxism. He called socialism a “dead horse” and wrote a critique of Marx’s theories that remains the most thorough analysis — a dissection, really — to this day.

Veblen’s concerns about the pernicious effects of monetary values in the workplace are being revisited as regulators and company officials seek the definitive causes of the dramatic 737 Max crashes. It is not clear that pecuniary values played a role in the quality failures revealed by these tragedies, but they are certainly on the list of suspects.

If the balance of corporate values is changing, it could have a significant effect on economic policy making. The economic theory of corporate decision-making that underpins the mathematical models will be changed and that will alter the forecasts of the economy’s growth and shape.

This is no small thing. Corporate values may seem like one of those airy-fairy ideas that consultants dream up. But when it comes down to boosting short-term profits for long-term growth it is time to take it seriously.

Veblen’s work describes the clash of values between workers and management and it isn’t all about money. Money can be a powerful incentive, especially for a person who doesn’t have any. But workers want to take pride in their work and in knowing that it is the best that they and the company can do. But if they see corporate management constantly substituting haste or cost reduction for quality, a fault line will develop between workers and management.

Fault lines of this type can be amazingly durable, even outlasting corporate ownership, management changes and union leadership changes. They resemble a loss of trust issue between individuals in that they are very difficult to overcome or set right.

Boeing will be very fortunate if investigations — theirs and the government regulators’ — into the 737 Max failures reveal that the cause of the failure was not a systemic but a localized problem such as a component’s quality assurance standard not met or simply a bad decision. Otherwise the company is in for a long, hard climb.

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