Innovation in Transportation: Proceedings of a Workshop, September 24-26, 1979, National Academy of Sciences, Washington, D.C. (1980)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

SPEAKERS 11

THE TRANSPORTATION COMMUNITY AND .POSSTRTI.TTTFS FOR INNOVATION BY ROBERT A. CHARPIE In the previous paper, Henry Eschwege made the point that if you have a problem, you ought to get a good solution for it and not be fascinated either by technology or by innovation in and of itself. He also commented that in his position in the General Accounting Office he has had the experience many times of being involved in giving helpful criticism that was not accepted. As surely as innovation, if it works, can help solve problems, I would remind the GAO that the giver should not be the one to decide whether the criticism is helpful. That decision should come from the recipient, and as you prescribe innovation and as you prescribe programs that you think are helpful, do not forget that somebody else has to decide whether they really are helpful. My background is as a scientist and a corporate executive, one by training and the other by experience. I know nothing about trans- portation. I buy a lot of transportation, but that is about all I know about it. However, I grasp instantly the idea that we could stand some im- provements in transportation. It took me two hours to come to Washing- ton from Boston this morning. It was a perfectly clear day, yet our flight was held on the runway, both at Boston and at Washington. Mo taxi- cabs were quickly available in Washington. The planes, both terminals, and taxicabs I used at both ends of the trip were dirty. We can stand improvements in this system that requires the passenger to do so much arranging. The only way we are going to get improvements in transportation is by pulling ourselves together in an organized way and looking at the problems. Transportation is a very big business, a big activity. It is 20 percent of the gross national product (GNP), and there are very few parts, big pieces, of the GNP that disaggregate into our individual lives as transportation does. Studies show that over a wide range of incomes, a full factor of l0, the average individual spends about one-fifth of his disposable in- come on transportation. So not only is it big in the GNP, it is big in the personal disposable product, too. It is one of our nation's larg- est expenditures. Over a rather wide range of possibilities, as the unit cost of transportation comes down, people consume more and more of it, roughly in proportion to their income. There is a huge latent demand for trans- portation. l3

The automobile is the most pervasive and visible part of the trans- portation system. When I think about the automobile, I do not think about it in terms of what it is or what it costs but rather in terms of what it does. There are two important aspects: (l) it gives us tre- mendous personal mobility, and (2) whether we admit it or not, it has a huge psychological impact on the design of our lives. There has been much talk about the love affair between the American and his car. That phrase dangerously belittles a very important human characteristic as reflected in our relationship with the automobile. One simply can not discuss transportation without talking about the automobile. The car does a lot of things for us. It expands our activity radius and gives us speed and power; for some people it provides appear- ance, prestige, image, and more. It is not only the American to whom those factors are important. Every nation, every society, exhibits the same reaction to the automobile. It is part of the human condition, not an American idiosyncrasy. And so we must be very careful to describe the automobile for what it is and for how it contributes to our personal satisfaction and what problems it creates in the way we use it. Only then can we evaluate proposed innovations in automobile transportation in a reasonable con- text. The automobile is a perfect example of a case where the experts have been befuddled for a long time. They have been confused by how rapidly it has been accepted all over the world. They have been dis- mayed by the inelasticity of auto demand with respect to price. They failed early on, particularly immediately after World War II, to under- stand the way in which it would interact with deeply cherished desires and generate new problems—suburban sprawl, urban congestion, environ- mental insults, and so on. What is worse is the fact that even though we missed this under- standing the first time around, we persist in misestimating the effect of the automobile. We tend to prescribe for the problem the automobile creates by saying that what we really need is good urban mass transit or that we ought to rejuvenate the railroad system of the United States and get the automobiles off the road. The simple fact is that people do not want to ride on trains. They also do not want to ride on subways—not if they can ride in automobiles at not too high a penalty. That is the key point: at not too high a penalty in cost. The mistake that the designers and the experts have made has been to underestimate the price people have been willing to pay, and will be willing to pay in the future, for mobility, for the convenience of going from point to point at a time of their own choosing. Underestimated also has been people's willingness to vote for people who propose projects that make very little economic sense to the trans- portation experts, but which are brought into being by the mass of pub- lic majority opinion. People are willing to pay a high price, a terribly high price—20 percent of GNP and personal product — for trans- portation, of which a large portion is for automobiles. l4

If we look at the rest of the transportation system, beyond the automobile, we will find the same effect. It is surprising how high a price people are prepared to pay for what they regard as acceptably good transportation services. Maybe it is the saving of time, maybe it is the reliability of delivery, maybe it is convenience or comfort or other perceived values, but somehow those are the things that cause people to pay the high price. Unfortunately, when we talk about transportation and economics, we often hear about the parts of the system that are not faring too well, the ones that are in trouble—those that are appealing for or require subsidies, regulatory protection, tax breaks, or outright public owner- ship to be successful. Such cases are usually not a majority of the transportation systems, but those are the ones on which we tend to focus. We can best learn how to deal with those parts of the system if we pay particular attention to the other parts of the transportation system that do not require special treatment, special pleading, or de- signation as special problems, in order to understand what it is people want and what they are willing to pay for. It is clear that people will pay the high price requested for good transportation services. It seems to me, as a businessman, that it ought to be possible to have a transportation service system that, aside from some special case that I have not figured out yet, pays for itself and earns an adequate return for the owners. That is the only sound basis for supplying transportation services. That kind of thinking necessarily leads me to comment that there already is an excess of government activity in the transportation sec- tor. Some fraction of our present poor performance is attributable to the way we are organized and the interaction between the industry re- lated to transportation and the segments of government related to trans- portation. Earlier I mentioned my problems in getting here from Boston this morning. I think that serves as an interesting illustration of an opportunity for new service, which I hope those in transportation will provide. Transportation is now organized by modes. We have railroads, airplanes, highways, and other modes. Typically, each mode has its own constituency, its own lobby, and its own godfather in the form of a regulatory agency, or two or three or four. The components are not always in step with each other. In traveling from my home to a meeting, I do not merely want to buy an airplane ride from Logan Airport to National Airport; I want to leave Weston, Massachusetts, and get to the National Academy of Sciences in Washington. This is a fairly simple idea since the two requirements on the end of a long airplane ride of 59 minutes are fairly simple, straightforward, and short. I can not buy a ticket from Weston to the National Academy. It is easy to construct much more elegant and difficult case studies involving several modes of transportation, which take into account as you cross the nodes where all the trouble is, that there is baggage involved, there are other people involved, and there is con- sternation and conflict and confrontation and plenty of cussing involv- ed. Sooner or later, somebody is going to find out how to offer a 15

service that cuts across at least some of the more troublesome nodes, that simplifies the travel process, and that makes it easier to get from source to destination without handling all the arrangements and hassles at the hard spots by yourself or with the help of a travel coordinator. Other similar opportunities have been exploited: Federal Express, container services, trailer on flatcars, auto-trains. They have not all been successful, but they are examples of imaginative, if not inno- vative, attempts to cope with the node problems, with the multimodal problems of going from point to point by using several different kinds of transportation to deliver the goods, whether that is an individual or a case of wine, from source to destination in a coordinated way. We must increasingly pay attention to that problem, and if we are to do so successfully, the federal and state governments must pay attention to how they should organize themselves so that they do not stand in the way, that is, deal only with a piece of the trip and re- gulate it in such a way as to make integration and coordination harder or perhaps even impossible. When we talk about innovation, we must remember that innovation means change, no matter if we mean using old ideas or new ideas. Change in and of itself is harder to accept in the transportation sector than in many other sectors, for the incentives to change are often too small or in fact may not exist at all. Given that much of the transportation sector is regulated in one way or another, there is an inevitable relationship between the modally oriented industry and the regulatory agency with which it interfaces. Now, if one were to ask that industry to supply new services, to create new products, or to deliver services and products packaged in new ways, then there must be as a minimum concurrence and ideally outright en- couragement and support for such changes within the government agencies related to that industry. But why should such a government agency be innovative? Or, more particularly, why should the individuals within an agency of the govern- ment be innovative? The answer is that they should not. To be innova- tive is not in their best self-interest. Innovation and change are risky; it hardly ever works right on the first try. The failure rate is very high. The process by which we find out which proposals are good ones is to give our ideas a try—to abort the failures and persist with the successes. So, viewed from a distance looking back, history often seems to suggest we have had a string of innovative successes. There are grave- yards full of innovative failures. We can no longer get the facts about these once they have been abandoned. The motivation for success in the industrial sector is very clear. Everybody associated with the company that has such a success is probably better off personally. The individuals who were the promoters of the success and who took leadership risk positions probably have prospered personally—they may have been promoted, earned more money, gained recognition. l6

On the government side of the same activity, there is no possi- bility for personal gain. Given the high percentage of failures in the innovative situation, in fact, the probabilities favor personal loss. And so in a regulated industry, one of the things that the govern- ment has to do if it is serious about promoting innovation is to find a way to reward its own people for promoting and participating in success- ful innovation, instead of penalizing them for failures. Government people do not now receive any of the direct rewards that those in the industrial sector do. The government should not penalize its employees for failure if the innovations they have been proposing and promoting were soundly conceived but turned out to be unacceptable in the market- place. > Another point I would make in the interface between industry and government on innovation is that an individual in a government agency must not allow himself to fall in love forever with what seems to him to be a good idea. Even though that idea promotes a concept or a value in which he believes, he can have no assurance that it is the basis of a successful innovation. In the innovation business, timing is everything. It is as bad to be five years early as it is to be five years late with an idea. There is hardly an innovation made that has not been tried in some form earlier, when it was truly too early. So far as timing goes, there is hardly an industry that does not have examples of companies that failed to see the light of day in time, and so "went down the tube" because they were too late in moving on a seminal idea that they understood but misappraised. Instead of worrying about being early or late, the innovator and the agency alike should worry about whether they can succeed by sheer force at a certain time and whether the market might pull them through even if they bobble the idea somewhat. Look at the automobile again. We have three automobile companies. What is their condition? It is very clear that Chrysler is in trouble. Despite the fact that everybody could see that small cars were coming, Chrysler could not. At least they could not see it well enough to make a positive decision to capitalize on the very good early small cars they had and bet their company on them. Chrysler inadvertently bet the company by not having little cars in quantity now, and I think they are going to lose out. Then there is Ford. In the sixties, Ford decided that safety was a good thing. The U.S. government told all of us and Ford that safety was a good thing. The government encouraged Ford and patted them on the head, and Ford was so pleased with being patted on the head that for five years they tried to sell the idea of safety options and lost lots of money at it. That loss of money represented the loss of financial capacity. The loss of capacity represented the inability to do other things as well, and so on the one hand they diverted, and on the other hand they failed to accumulate resources as they might have. Ford has surely not been mortally wounded, but they have been badly scratched. Ford is not as strong today as it would have been had it not persisted in that safety campaign in which they were selling safety as a good thing and as an extra at the time that the public did not want it. l7

That the public was wrong, we might agree. We would all be better off today if a lot of people had not been killed because they had been driving without those safety extras, but the fact of the matter is that decisions on innovative proposals are made by the public voting with its pocketbook, and with its feet, and even if they are wrong, the way they vote determines how the election comes out. By contrast, General Motor's sense of timing on the small car was exquisite, and that is being reflected in GM's market share. Now, the government can not insulate anybody against risks. Some- times we act as though the government can do so, but it really can not. The government can mandate riskless innovation, but in so doing it must necessarily push the costs off on the consumer or the taxpayer. Amtrak is an example of a riskless innovation. The decision to have seat belts in all cars is a riskless innovation; every manufacturer has got them. The government can also transfer risks to the producer as in the Corporate Average Fuel Economy (CAFE) standards. The fact of the matter is, however, that the ultimate decision on whether an innovation is truly a sound idea is made by the public in a complicated, unpredictable way. The costs do not always track either the decision to act or the decision to buy. Another problem we all know about that is particularly important in the transportation sector is that the scale of transportation acti- vity is so large and the infrastructure so complex that it is terribly hard to do small-scale tests to determine if a proposed change is good or even acceptable. This problem is compounded by the fact that people do not always act in accordance with what they claim to believe. Every transporta- tion survey I have seen on the subject in the last two years shows that an overwhelming majority of the public believes that the 55-mile-per- hour national speed limit is a good thing. I can testify that although more people are staying closer to the 55-mile-per-hour limit now than last year, the average speed is till above 55 on the interstate high- ways. The public strongly supports in every opinion poll the proposals for improved mass transit. We have quite a few examples of good mass transit, but practically nobody is riding on them. The members of the public are in favor of urban mass transit for all the public except themselves, and they do not patronize it even though they claim to believe in it and want more of it. One of our difficulties is that we do not know how to translate apparent opinion into reliable predictions of public response. I am not going to go through the long recitation of problems we have had with apparently good ideas that turned out not to be accepta- ble for one reason or another, or the glitches we have had in the exe- cution of some of the good ideas that have caused them to arrive on the scene late and therefore not have maximum effectiveness. What I would like to do in closing is simply to focus on my pri- mary assignment, which is to make a couple of suggestions about the government's role in innovation and to focus on what is possible and what I think is impossible. 18

It is clear to me that the easiest rallying point for transporta- tion today is the demand for energy efficiency. The fact that we final- ly are in a position where the president of General Motors can and did recently remark that the American public wants small cars is, I think, a watershed in America. If the public wants them and creates demand for them at the dealerships, the public is going to have small cars because the manufacturers are going to supply them. It is unfortunately perfectly clear despite that fact that we are not likely to realize in the design of the U.S. automobile all of the possible energy reductions that can be technologically accomplished, even though some of these will be publicly acceptable. I doubt that the Congress can successfully legislate them either, except in the broadest possible sense. I think, however, that government might pro- vide incentives to make some of them happen sooner. The fleet average mileage standards are an example of such as accomplishment. Ideally, we ought to put a lot of people to work thinking about the automobile efficiency problem. One simple idea might be to have a big contest in which there could be l,000 prizes of $50,000 to $l mil- lion each for the best ideas over a period of time, say a couple of years. That sounds like a lot of money, but it is peanuts in this game, and I have a lot of confidence that the Department of Transporta- tion can manage a contest that rewards innovation somewhat better than it manage innovation directly. So I would be willing to advocate such a contest. The second thing that I would advocate would be to go back and re- view the programs of the last l0 years in transportation that might be deemed innovative but have either failed or been killed and systemati- cally inquire for each one whether we would take the same course of ac- tion in the light of today's problems. We have had a lot of big programs come and go, ranging from the glamorous projects like the SST and automated highways to simpler ideas. I am.convinced that there are some very good ideas that have been set aside, and I am convinced that we can learn more about how to manage these ideas better if we review decisions away from the battlefield of circumstance in which they were made. I also think it would be a useful thing for DOT to think about the question of how well the government--not DOT—has responded in the past in the innovation area in transportation, why it has done what it has done, and how well it did. I have a theory that the government's per- formance in safety innovation, for example, and innovations related to safety, has not been good and has not been timely, although in the end it has almost always been right. By way of example, I felt that the government waited too long to react to the data on the DC-l0 cargo door. I felt that it took too much time to decide that the highway sign foundation problem was real and that people would continue to be killed until we did something about it. I may be wrong. I may be impatient. But I would like to have a thoughtful review of what the process was that caused so much time to be taken for those important decisions. I think that there is a basic weakness in government that is reflected in its inability to react to l9

innovation quickly and positively. There is therefore an incommensura- bility between the government's promoting innovation and the needs of the system for change. I would hope that government might learn to create policies that would encourage innovation. The first thing, of course, that must be done is for government to say it is in favor of it. Those at this conference say that. Secondly, government has to decide how to be in- volved. I hope that government decides it is not going to be in the innovation business itself, and I hope it decides that it is possible to create useful incentives and opportunities that will cause innova- tion to progress through conventional channels—tax incentives, nation- al competitions, and others. Finally, I would hope that government would continue, and much more vigorously than DOT has in the past, to encourage imaginative research in our universities that might lead to the definition of new innovation opportunities or to the prescription of useful innovations themselves. I think that one of DOT'S weaknesses has been a lack of breadth and depth in coverage of basic university technology support in transporta- tion alternatives. If we were limited to a single recommendation for action, I would urge that it be for DOT to take a more active role in the support of transportation technology and planning activities on our university campuses, rooted in the assurance that out of such a program would come a general description of several important innovative, eco- nomically sensible transportation opportunities for the United States. 20

THE EXTERNAL CLIMATE FOR INNOVATION BY WARD J. HAAS My mission is to discuss Innovation from the viewpoint of the Industrial Research Institute (IRI). The IRI is an association of approximately 250 industrial companies with major R§D operations. Originally organized in l938, the IRI has as its main purpose the pro- motion of cooperative endeavors to improve all aspects of industrial research operations. Company representatives in the institute are in- variably senior R§D managers, who are all too aware that R§D that does not culminate at some point in successful innovation is of no value to their firm. Hence our major interest in the general topic of your workshop. About a year and a half ago, the IRI formed several subcommittees to discuss and study various aspects of the innovation process in pre- paration for a three-day progra^ of papers and extensive discussions at our spring meeting last May.l I shall attempt this morning to boil down the three days of this meeting into thirty minutes. Because the IRI, as a voluntary association, is only partway through the process of reviewing and digesting many of the points I will present, please view them as personal opinions of this R§D manager and not as official posi- tions of the institute. Starting off with a definition of technological innovation as a process that starts with the discovery or compilation of knowledge in one or more technical fields and culminates in the successful introduc- tion of a changed or new product, service or manufacturing process in the economy, we can picture or model it in simplified form as shown in Figure l. In the middle box are the iterative processes of discovery or invention, or whatever goej on in creative idea sessions, in analy- sis, hypothesis, evaluation, and testing in the laboratory and in the technological stages outlined years ago in the reports by the Charpie,^ the Denver Research Institute, and many others. On the left-hand side of the figure are the so-called Push factors. To make innovation possible, we have to have the technological compe- tence or understanding to do something new; we have to be able to pro- duce it (or deliver it if it is a service); and we have to have the raw materials to make it. These latter requirements further mean that there must be economic resources, capital for investment, available for the innovation process, or nothing will happen. On the other side of the model are the Pull factors. There has to be a real use, or need, for whatever the new innovation or change is 2l

CO o Q_UL « CO Q) D co r o o c n co,~ Q-»- C co o °iio csi II c 8. preparatory product and cess engineer 9 production and ant lnsial!a!!o c Ig (7) Wl Cits 0 0 CD •6 >• a o -o •D o a 9. "*•' If € i 2* •o « « ^*{ Z o a 0) 0 a "c5 t O) o o research perimentation 3. product and process conception 4. technical easibilily and BSiei»meiit 0 -Si !| - A. - ^ • TT Q. 4* o c •— 1 CO co o 3 cd Q.U. •^ D> o"0 .bf OJ II T) ^ •- C ~ O co £ d£ T- CM (0 o 0 CO CD ODC CO § (H > O O «*-! Z V O > 01 U 4-1 c o w c ^ o 0) U T3 o> c U, O i-t rt M C 4= •H U O 0) Oi I/) 2 «> O V (H Q tw 0) P. X nJ 43 •a < UH to M 0) </> X O 4-> U o o C h o o •H P- 4-> 0) A (H > O -H C rt c c cu H "« o r-l -H 3 O to O C t^ M C Ol U. hH •—I 22

going to be. There has to be some way of identifying and locating this need and of getting the new product or service to where the need exists, i.e., to the actual market or market segment. Finally, there has to be a return, or profit to pay back the Push factor requirements in order to motivate and move the whole process forward. Although it was not obvious initially, and certainly not during the early stages of the post-World War II science and technology boom in the United States, we also now know that the Push and Pull parts of the model are not equal in their effort on the whole process. Numerous examples and historical studies have shown that the Pull factors are much more important than the Push factors in actually making innovation and change take place. In addition, there is one other extremely important feature of technological innovation. It is especially sensitive to uncertainty or risk. As illustrated in Figure 2, we all know that costs escalate exponentially as an innovation moves out of the laboratory stages to- ward the marketplace or actual full-scale utilization. And at each point along the cost curve, the probability of final success and reward must be judged by the responsible manager or management group. The greater the risk or uncertainty of return, the more courage it takes to proceed with the process, or, conversely, the less likely it is that the extra costs or resources to continue will be committed. In summary, your friendly private sector colleagues will tell you that technological innovation: l. Is more—a great deal more—than invention or discovery. 2. Requires Push factors: capital resources, qualified people, and technical knowledge. 3. Is especially responsive to Pull factors: need or mar- ket, and financial gain or reward. 4. Is especially sensitive to uncertainty or risk. Innovation also has a number of other characteristics that are not explicitly shown in the Figure l model, but that are nonetheless very important to its management. For instance, almost all innovation is incremental. So called "core" or basic inventions such as the tran- sitor, xerography, the internal combustion engine, and the discovery of radio are massive in their eventual far-reaching effects, but they are few and far between and take a long while to show up in the marketplace. So most technological, social, and economic change results from a sequence of small steps that are often hardly realized at the time by the participants. It is a little difficult for me to think of specifics in trans- portation that illustrate this point because I have been solely a con- sumer in your area, not a real participant. However, in my own busi- ness, the pharmaceutical industry, there are many excellent examples. For instance, a direct progression of modified chemical structures can be seen from the earliest sulfa drug. Prontosil, over about a decade and a half to the oral antidiabetic agents. Innovation is user directed, pulled toward what users or markets really want and will pay for. It is therefore very sensitive to rates of change in user needs or desires, serendipitous (subject to the 23

24

unexpected), and usually, perhaps almost always, bitterly resisted by the very people or constituencies that the experts might think would benefit most from it. The consumer goods industry is very aware of this latter point, but it is again difficult for me to think of illu- strative examples in transportation. One example might be the failure of the Ford Motor Company's attempt to introduce seat belts and other safety features as major benefits of a new model year back in the early l960s. Part of the inertial resistance to innovation is certainly due to the problems of capital replacement, as we have all heard from the U.S. steel industry. Probably much more important is the all too human "not-invented-here" (NIH) syndrome. One famous historical example of this problem is not in transportation, but is germane to the challenge presented by large systems involving many people in a bureaucratic organization. It concerns the U.S. Navy and has been most entertain- ingly told by the technology historian, Elting Morison, in his descrip- tion of the difficulties in introducing continuous aim firing in naval gunnery. By the turn of the century, rifle barrels and flat trajec- tories were available in artillery and naval guns, making possible longer-range gunnery. But the guns were still aimed at a fixed eleva- tion from the deck and fired whenever the roll of the vessel brought the muzzle elevation to a point where the gunner judged he was "on target." A U.S. naval officer in the China fleet—a long way from Washington—picked up the idea from a British colleague of putting con- tinuous gearing on his guns so they could be constantly cranked up and down independently of the angle of the deck, thus greatly increasing both the accuracy and the rate of fire. After making the modification and practicing a little, he was soon breaking all the target practice records in the fleet and enthusiastically writing back to the Bureau of Ordnance recommending adoption of the new system to the whole Navy. He got absolutely nowhere. At first his letters, diagrams, and results were discounted, dis- believed, and ridiculed. When he persisted, they were ignored—for months on end, nobody would even bother to answer "the crank." When that did not work anymore he was quietly threatened, and then he final- ly got wise (or desperate) and made himself into what (in the lingo of the innovation game) is called "a disposable agent of change" (also known as the human sacrifice). He wrote his story out of channels to the president, Teddy Roosevelt. Reluctantly, but obediently, the Navy finally changed over, but of course even Roosevelt could not save the officer's career. This anecdote also illustrates a final point about the innovation process that must be kept in mind. It almost never works without an energetic advocate, the new product, process, or service champion, the entrepreneur, within or without the sponsoring organization. And, if such an individual does not exist, somehow, one must create him. Based on all these characteristics, our IRI groups took a look at what needs to be done internally, within the private sector profit- making organization, to increase innovation. The resulting recommenda- tions fell into four groups: 25

First, find and nurture innovators. Specifically, search actively in your organization for creativity and creative people. Create an atmosphere for their autonomy and independence by the use of such devices as discretionary funds, project free time, etc. And improve their motivation for invention, discovery, and innovation by adequate recognition and rewards for those responsible. Second, organize to minimize the internal resistance to innovation. Make sure that needed technology units are at a critical mass (general- ly more than one, but less than ten professionals); that the R§D manage- ment is sufficiently decentralized that it can focus on market or ser- vice needs and be adequately user directed; that all possible tools for speedy transfer of technology and knowledge are used (e.g., matrix or team organization and movement of knowledgeable people forward with the innovation project), and finally that the organization allows for the existence of the all-important innovation advocate. If at all possible, make him "indispensable" rather than "disposable." Third, take great care to insure the adequacy of the coupling, understanding, between the functional areas involved in the innovation process, and, most particularly, of the coupling between your organiza- tion and the marketplace it is seeking to serve. Failure to accomplish this all-important linkage can often be fatal even to the most techno- logically competent firms, as was illustrated by the collapse of Repu- blic Aviation on Long Island some years ago. Although Republic had available all of the NASA technology tapes and everything one can think of in the way of aids to technology transfer, they were simply unable to couple into non-space-related general consumer or civilian market needs in time to avoid financial collapse. And, finally, emphasize top management's responsibility for the "in- novation imperative." If the chief executive officer (CEO) of the cor- poration really cares about innovating and changing or improving the corporate product or service line, remarkable results will often ensue. In this connection, I can think of an illustration from my own experience. When I worked for Pfizer a number of years ago, the then CEO was never satisfied with the broad spectrum antibiotic innovations that initially made the company into a highly successful multinational enterprise. He was constantly using all of the motivational tools (both positive and negative) at his command to call for new and different products. By contrast, another much older and better established pharmaceutical com- pany was led by a manager who radiated vibrations to the organization that essentially said, "What's the matter, isn't Chloromycetin good enough for you?" This latter firm had a bigger and better basic research organization than Pfizer at the time, but only l0 years later it was quietly acquired by another company while Pfizer continued to grow and expand. In fact, the IRI study group taking a look at this aspect of innova- tion management felt that both the business schools, at one end of the management development process, and the corporate boards of directors, at the other, could productively devote more time and attention to train- ing and directing senior management to be innovation conscious. To move now to the recommendations concerning the external, and especially the governmental, climate for innovation, our study came to 26

one overriding general conclusion. Federal government actions to stimu- late innovation at this point are really not required. What is requir- ed are actions to dismantle the barriers and reduce the disincentives to successful innovation that have grown up over the past years as the government, the public, all or us, looked the other way. These actions fall into several groups. The first of these are economic recommendations, the most impor- tant of which is to control inflation. As inflation heats up, not only do high interest rates add appreciably to the investment costs of in- novation, but the uncertainty of the true value, in "real" or deflated dollars, of the expected return is greatly increased. Consequently, the time and risk horizons of responsible management at all stages of the innovation process are shortened, and the rate of innovation slows or even stops. In this connection, it is my opinion that congressional action to reduce federal deficits and monetization of the resulting debt is, in turn, the essential first step in the inflation control process. Attempts, as at present, to manage inflation by countercyclically mani- pulating the interest rate cost of money not only are obviously in- efficient, but add appreciably to the overall uncertainties that depress the innovation process. Next, as we all know, innovation has an insatiable need for capital, both for new investment and to replace plants and equipment made obso- lete by innovation. In transportation, as in the steel and other capi- tal intensive industries, we must all be particularly aware of this latter point. For this reason, we discussed a number of ways to increase the formation of capital. These include: l. The study, for possible phased introduction, of alternatives to our present progressive income tax with its numerous inherent biases against the accumulation of savings and wealth. One of these alterna- tives could be a progressive individual consumption tax with a flat or regressive income tax that is as small as possible. A consumption tax obviously sounds like a far out idea, but it might just be one whose time, after a long hiatus, has come. It was originally developed con- ceptually by the United Kingdom economist, Nicholas Kaldor, in the l940s, and it was also part of a serious study of taxation undertaken by the Treasury Department in the last administration. I personally think it makes sense; it may or may not be politically possible. 2. Further reductions in the income tax on so-called capital gain income. "So-called" because capital growth is not income, and an in- dividual or nation that spends or treats it as if it were is headed for the miseries so well described by Charles Dickens' Mr. Micawber and recently dramatized by the city of New York. The sensitivity of the innovation process to this kind of change is well illustrated by the rejuvenation of the venture capital markets in the United States since the "capital gains" tax rate was changed back to have some preference over other forms of again "so-called" nonearned income. 3. Further increases in depreciation allowances and investment tax credits, at least for technologically venturesome organizations. 27

Our study also considered the question of direct federal subsidies of socially important innovation, and we came to the conclusion that they were justifiable for sufficiently important programs, but only as a last resort. Specifically, we believe that subsidies and other gov- ernment interventions into the marketplace should not be used as an ex- cuse for failing to deal more directly with the economic incentive and and capital formation issues discussed above. Originally, in drafting this position for IRI discussion, I had put in the thought that subsidies might be justified if extremely large amounts of capital were required—a point that is probably of interest to all of us in the field, considering our history of land grants for railroads, federal highway programs, and the development of the air travel industry. Significantly, our present recommendation does not contain any reference to justification for subsidies other than relative appropria- bility (I belive that this is the correct economic jargon term) of the benefits of the proposed innovation to society as a whole. As Gilpin? and others have emphasized, capital availability for any project, no matter how large, would not be a problem if financial markets were in adequate shape and if the rate of formation of capital was sufficient to keep its price within reason for the risks involved in the project. Our final economic recommendation was that the federal government, instead of providing subsidies, should take an active and proper role in the stimulation of socially important innovation by, as Henry Eschwege said in an earlier paper, aggregating markets and setting performance standards through the procurement process. Veterans of the last innova- tion battle in the early l970s may recall a discussion I am going to use to illustrate this point simply because it did not happen and will therefore not tread on any toes. Back when solid waste was the problem of the day, the idea was that the government should stop passing laws, rules, and regulations and should simply buy solid waste at whatever price was required to insure that it was delivered to the appropriate handling depots rather than strewn along the highways. If the price was high enough at any set of performance standards (e.g., for presorted trash) to stimulate supply, some innovator would soon come along offering the housewife a new service between her home and the buyer's depot. Another entrepreneur would then enter with a sorting device, and so on, and the whole socially important innovation would take place remarkably rapidly. Analogies to this hypothetical series of events certainly exist in the transportation area. Our study then moved on to consider regulation and regulatory un- certainty. Obviously, regulation is a necessary evil. In all modern socioeconomic systems, no other mechanism for meeting and controlling social costs, such as the exploitation of limited natural resources, the pollution of the biosphere, and the exposure of consumers to un- determined safety risks exists since they can not be readily evaluated in the marketplace. And reasonably regulatory administrative require- ments have been shown to be important incentives to technological inno- vation in their own right. 28

But our IRI group believes that the negative effects of regulation on innovation over the past decade have been overwhelmingly negative because regulations are: l. Rapidly increasing. 2. Often unpredictable. 3. Sometimes mutually incompatible. To expand on this point for a moment, I am not aware—although I am sure they exist—of mutually incompatible regulations in transporta- tion. However, William E. Simon mentions some other examples in his book that would be funny if they were not so symptomatic. For example, the Armour Company was ordered by the Federal Meat Inspection Service to create an aperture in a sausage conveyor line so that samples could be taken out for tests. After the company created the aperture, OSHA came along and demanded that it be closed because it was a safety haz- ard. In another case, OSHA required employers to provide special lounge facilities for women's restrooms. Then EEO said that if you supply lounges for women, you must supply them for men. Overdone regulations also sap capital and other resources. Both Murray Weidenbaum'syCenter for the Study of Business and, more recent- ly, Chase Manhattan Bank economists have put a price tag of $l00 bil- lion as the overall annual cost of regulations in the United States. I do not know how sound the figure is, but it is illustrative of the growing understanding in all sectors of the economy that the costs of regulation are very, very large—quite probably too big a price to pay for the societal benefits obtained. Charpie and Eschwege referred in earlier papers to some of the costs that might be contained in this figure. Some others that are a little more difficult to put in dollars smack of just plain harassment. For example, Simon points out that the typical small business in l976 grossing $30,000 a year or less had to fill out 53 federal government forms, and the situation certainly has gotten worse since then. George LockwoodH once gave a talk about an innovative agribusiness venture on the West Coast. Trying to get the operation underway had required re- porting to 40 different agencies. Not all of these were federal, of course, but in many cases state, city, and county bureaucrats can be a lot more troublesome than federal inspectors. Now all of these "costs" are particularly pernicious because they delay innovation by, and therefore effectively deny market entry to, the smaller entrepreneurial new venture which has historically been responsible for much, if not most, of the true technological innovation in the United States. Against this rather bleak picture, we then come to hopefully ap- propriate recommendations. Perhaps surprisingly, IRI is not in favor of deregulation. Why? Because we think deregulation very often fits Herbert Stein's definition, which I would like to read out of a recent New York Times Magazine: "Deregulation: A process of restoring free markets by eli- minating the old, small regulations we are used to, as in the case of airline fares, and imposing big, new regulations, as in the case of who can use how much energy for what purpose, with the result that the total number of regulations becomes larger and stranger." 29

What we favor is adequate administrative review of regulations prior to implementation carried out by a truly nonpartisan group, in other words, by competent individuals other than representatives of the regulatory agencies involved. As an aside, most R§D managers such as myself who have quality assurance and quality control responsibilities make sure that the quality control managers in our production plants do not report direct- ly to the plant manager. We do not believe in having the cops working for the robbers, as the old phrase puts it. Similarly, we do not be- lieve that a regulation review should be managed by the regulators. In such a review, the effect of the proposed regulation on innova- tion should obviously be of prime importance. I would like to see the review carried out (although I do not know whether this is practical), in somewhat the same way that the Office of Management and Budget con- ducts reviews on the financial aspects of all government programs. In other words, the review ought to have some teeth in it! In addition to such preimplementation reviews of proposed regula- tions, the regulatory process needs improvement by such means as: 1. Changing wherever possible from legalistic advisory procedures to minimum cost balance of risk approaches to regulatory rule-making. As Eschwege indicated, our dedication to advisory procedures is the mirror image of the mistrust problem that exists widely in U.S. society. It is also complicted by the fact, as many others have pointed out, that regulations are written by lawyers and often issued without ade- quate technical review by competent professionals in the field. 2. Utilizing market-adjusting economic incentives as opposed to legal restrictions and penalties, wherever possible to meet regulatory goals. The IRI has noted that at least the EPA has recently started to explore such economic incentives as marketable emission permits, and they strongly believe that all regulatory agencies should be legisla- tively or otherwise directed to do likewise. Actually, it is as much a different mode of thinking as it is a set of specific mechanisms that is needed here. In spite of the politics of envy, which we see so well illustrated in the current debates about energy policy, we need to trust market mechanisms more and the bureaucracy--no matter how enlightened — less in attempting to meet social and political objectives. To further illustrate, let me use again a personal experience example that at least is somewhat related to transportation. For a number of years, I have tried to make a suggestion to help the traffic problem in New York City—admittedly without much success. The sugges- tion is that, rather than worry about all kinds of rules and regula- tions to control congestion, vehicle-induced air pollutions, etc., the city simply sell the traffic space on Manhattan Island to those users or private automobiles who want the psychological and other satisfac- tions of taking their territories onto the "common" by a variation of the present medallion license for taxis. There is obviously some price for a private car medallion that would adjust the demand for automobile traffic space on Manhattan Island to the available supply, which is equally obviously a very limited economic good. This price is probably 30

on the order of $l000 or $2000 per year, or $25 or $30 for just a single day's permit, and it really ought to be politically possible, since most of the voting residents of at least the island borough do not own their own automobiles. 3. Finding ways to improve the performance of the personnel work- ing in the regulatory agencies. For example we now have internships from the private sector into the government. How about internships from the government into the private sector? To go a little further out, how about requiring prior private sector experience (obviously in a nonassociated industry as far as a specific regulatory agency is con- cerned) or perhaps even requiring entrepreneurial or innovation manage- ment experience, before an individual can be qualified for a senior position in the federal regulatory apparatus. Significantly, no mechanisms now seem to exist in this regulatory apparatus for adequately recognizing the time and dollar cost of delay and uncertainty in handling any type of permit or for example a new drug application. And there is certainly no discernible reward system in the agencies for personnel who advance innovative or economically advantageous projects. So the question is, "How can regulatory agency personnel be motivated to make appropriately balanced decisions with respect to risk, cost, and benefits, and to become aids rather than barriers to useful innovation?" At a minimum, how about creating an "ombudsman for innovation" within each regulatory agency? In other words, as I commented earlier about private sector firms, we should create within the agencies the advocates or innovation champions whom we know are necessary for the innovation process. Finally, our IRI study reviewed actions we felt would be important to increasing the new knowledge or R§D part (the initial Push factor) of the innovation process, with recommendations as follows: l. Increase federal support for basic and exploratory research at universities and other knowledge centers. 2. Index this support in some way, possibly by relating it in the budgetary process to the nominal GNP, so that it would be reasonably consistent over a span of years. 3. Modify antitrust regulations where and if required to permit private sector R§D consortia for major projects. 4. Modify or eliminate the Treasury Department Regulation l.86l-8. Although it is almost impossible for anybody but a certified public accountant to understand, this little regulation has the net effect of stimulating managers in large companies with any kind of overseas R§D operations to build up the R§D staff and activities in the invention and discovery of new knowledge overseas instead of in this country. Since R§D jobs are jobs like any others, this point is one of the very few on which both private sector management and big labor agree. 5. Develop coherent patent policies across all the government agencies to encourage exclusive licensing of federally owned patents. As many of the points that Charpie and Eschwege made earlier illustrate, this may perhaps be the most important recommendation of all with re- spect to a quick return on the new knowledge base produced with support of public funds. If exclusive licensing of federal patents is not made 3l

possible,-harnessing the Pull factor of financial gain or reward to make them exploitable for innovation is very, very difficult to do. These last points complete my summary of IRI's discussions of the innovation process. In closing, I am also pleased to report on more official actions that the institute has under way. IRI has already issued a number of official papers, one on patent policy and another on regulation not connected to its economic aspects and is now well in- to the process of distilling out of the points and recommendations out- lined above an additional position paper on the economic aspects of in- novation, which should appear sometime this fall. This paper will start off with the same statement I made earlier that what the country does not need is government actions to stimulate innovation. On the contrary, what is needed is to replace to the maxi- mum extent possible, the dead hand of government with the invisible hand of the free market economy. The paper will then go on to recommend that: l. We control the basic causes of inflation. 2. We increase capital formation. 3. We utilize market incentives to meet regulatory goals. 4. The government properly exercise its role by aggregating mar- kets and setting performance standards in its procurement operations. 32

REFERENCES l. "Stimulation of Technological Innovation." Research Management, XXII, (6), l2-38, November l979. 2. Charpie, R. "Technological Innovation and Economic Growth—Applied Science and Technological Progress," a report on science and astro- nautics to the U.S. House of Representatives, June l967. 3. Robbins, M., C. Burke, and J. Milliken. Industrial Economics Divi- sion, Denver Research Institute, University of Denver, Denver, Colo., final report to the National Science Foundation on Contract C-790, November l973. 4. Morison, E. "A Case Study in Innovation." Engineering and Science, lJ5, C7), 5-ll, April l950. 5. Kaldor, N. An Expenditure Tax. Westport, Conn.: Greenwood Press, l977. 6. Ehbar, A. "Manifesto for a Tax Revolution." Fortune, April,l977. 7. Gilpin, R. "Technology, Economic Growth, and International Compe- titiveness," a report for the use of the Subcommittee on Economic Growth of the Joint Economic Committee of Congress. Washington, D.C.: Government Printing Office, July 9, l975. 8. Simon, W. A Time for Truth. New York: McGraw-Hill, l978. 9. Weidenbaum, M. The Future of Business Regulation. New York: American Management Association, l979. l0. "If You Like Challenges...Try This!," Chase Manhatten Bank Adver- tisement, New York Times, Friday, October 26, l979, p. D-3. ll. Lockwood, G. (Monterey Abalone Farms). "Some Causes and Conse- quences of Declining Innovation," address at Third Annual Collo- quium on Research and Development Policy, American Association for the Advancement of Science, Washington, D.C., June l978. 33

LABOR AND PUBLIC INTEREST CONSIDERATIONS BY WILLIAM B. SAUNDERS I do not completely agree with the previous paper by Ward J. Haas. One of the figures suggested that we do not need government stimulation in order to innovate. That may be true in many industries, but in transportation there is an evident need for government participation. I address the public interest aspects and the labor aspects of innovation in transportation because there is a public dimension as well as a government dimension to the problem of innovation. There are obvious differences between the normal process in un- regulated industries and the process in transportation. In other industries, decisions about innovation and about research and develop- ment are made by the producing and consuming industries, jointly or separately. There is at least an interaction between them wherein decisions reflect what Haas talked about: the market criteria. In short, the risk factors are borne by those who make the decisions to spend the money. When the government is involved, there is a shift in the nature of the decision-making process. Bringing government in permits a re- examination of the time horizon: management decisions must have a shorter time horizon than is needed for R§D decisions by government. With government, we can have a reexamination of the planning criteria and of the risk criteria that individual enterprises are willing to absorb. That risk and rate of return feature is fundamental to the role of government in providing a different innovation environment. It is the risk feature on which government should concentrate: how to share the risk. When we talk about sharing the risk, we immediately run into criteria that are not very evident in private decisions: public interest criteria and labor criteria. While they are recognized in every decision, they may not be major or significant factors in decid- ing whether to go ahead or not in the case of strictly private sector decisions. Let's talk about the public interest first. Legislation and public understandings about policy in the country lead to a whole series of national goals that any senator or congressman will tell you about. They may include things like the Humphrey-Hawkins full employment criteria, equal employment opportunity, environmental considerations, national defense, and so on. 35

The question then is when you establish a public interest set of criteria, what do you do with it? When government is involved, it has to face this question. There are two ways of looking at it. One is to say that it is good to have that in the preamble to some legislation so as to set the broad guidelines and to give some assurance that the agencies administering that national policy take into account these various criteria. On the other hand, I would be very concerned if the approach were to take those criteria and apply them in evaluating each individual project. If we go that route, we will be hindering the rate of innovation rather than helping it. Almost any project can be justified in terms of having some bene- ficial impact, some national goal. In the same way, almost any project will have some aspect that might be found to have a negative impact. Hence it comes down to a question of weighing the broad public interest of, for example, more employment versus lower cost. Somebody has to decide that. If we let each project be decided by a special interest in a particular aspect of the public interest, I think we will stifle innovation directed toward overall benefits. How do we decide? If we look at the proposed legislation, S-l250, we get a point of view that I find very alarming. That legislation talks about a technology review panel in which there would be, clearly, experts familiar with research, development, innovation, marketing, and the various other aspects that have to be considered in evaluating a project from a business point of view. But then it goes on to say that it should also have members of the panel who are "affected by technical innovation." When we talk about including anybody that is "affected by techno- logical innovation," the door is being opened to a vast variety of people who could very readily throw monkey wrenches into the machinery. The question is then, what do we do about public interest? What is the public interest itself? If we look at the public interest criteria list I mentioned at the beginning, it is clear that a wide range of political judgments is involved in evaluating and deciding what the public interest is. It is a political judgment; it is not a technical judgment. The engineers and the scientists, then, have to back away and ad- mit that they have no special claim to deciding the public interest. On the other hand, one does not want to have a large number of indivi- dual special interests sitting on committees to say, "well, that is a great idea except it has environmental impact" or "that is a great idea except it has labor impact." Therefore I suggest to you that the stress of those who want to see innovation in transportation should be on the political process. Instead of talking entirely about the technical side of it, we should address the political process. The political process in America is one we should be proud of. It is a very good process. What I am sug- gesting is that all these negotiations and trade-offs be handled through the Congress rather than in technical committees that are going to re- view individual projects. If the Congress appropriates money for a program, that will be the best way to see that the various interests 36

are considered, and then, in the overall, given some relative weight that is consistent with the political judgment of the country. The alternative, I believe, is simply to defeat innovation. On the other hand, it is fair to say that the political process sometimes gives us funny results. We now have a National Highway Traffic Safety Administration. I am sure it does a lot of good work. But the policy question to be asked is, would we like to have a safety administration for every mode in which we are interested? I think that would make it a nightmare for decision-making, and again, we would have one group with a special interest in safety alone directing the efforts of a group that might be interested in safety as merely one factor to be considered. One has to ask whether in the political process, proposals can be made to Congress that will be acceptable and workable but that will not result in a proliferation of agencies to tackle the various segments of research. I am a believer in the systems approach, but we will never have a systems approach to decision-making in transportation if we divide up all the areas of interest with separate administrative groups looking narrowly at each one. We already have problems between departments: for example, Energy and Transportation may have completely different views about what is right or appropriate for the automobile as one element of transporta- tion. Let us talk now about the political process for determining the transportation share of the total research or innovation dollar. From an overall industry point of view, there is a movement to have the De- partment of Commerce to be a kind of clearinghouse or central agency for research. Should that be the vehicle for doing transportation research or fostering transportation research? I think not. I think we have enough expertise in the transportation industry (including its suppliers) to have that industry be responsible for evaluating what it needs. That industry can work with the Department of Transportation and its related agencies to evaluate the needs of the transportation in- dustry. However, there is a political problem. The problem is that trans- portation has to compete for its share of the total dollars the govern- ment spends and for its share of the administrative or political interest that the government will expend on transportation as against all the other industries that need attention. Now here we get one step closer to technology. Getting a bill passed is largely political and strategic. The departments perform a partly political function in competing with each other, but they also inject some technical input into the competition. I am talking about the stage where the Department of Transporta- tion has some technical input. It has panels, it has committees re- presenting people who understand the technical problems, and that de- partment provides input vis a vis the Department of Commerce, the De- partment of Energy, NASA, the Department of Defense, and so on, in get- ting a share of the limited research and innovation budget. 37

I have to admit, however, that the democratic process very often takes a long time to make a decision. Too often the decisions are made only when the problem reaches a crisis stage. I view this situation with alarm because crisis decisions are not the best way to reach optimum solutions. I remember in l972 and l973 going to a briefing on energy by a staff group of one of the joint committees; their studies had shown that within perhaps l0 years, if nothing untoward happened, there would be a serious energy crunch. They were concerned about our dependence on foreign supplies of petro- leum. It was a very impressive demonstration. Afterward they told us they had made presentations to about one hundred congressmen and sena- tors, one or two at a time, and everyone they showed it to had been impressed, but each admitted he was not ready to urge conservation in automobile use or substitution of new energy sources. They feared poli- tical reactions even when they knew what was good from a national policy point of view. So while the process was there, there was not adequate courage on the part of our representatives to stand up and tackle a very tough question. We are now in a real crisis on energy, which we might have avoided had we started earlier to tackle it. The same point can be made with respect to railways, which are basically in a crisis situation. We have seen it coming for a long time, yet we are paralyzed in our political approach. For example, Congress has not been willing, until very recently, to say that there is a lot of obsolete or unneeded plant that we should let railways abandon. So while I say that the political process is important and necessary, I am painfully aware of the fact that it takes a long time and we tend, too often, to operate on the crisis theory. We need better ways of reaching out to the public, which in turn reaches Congress. My own preference would be to see the public interest issue describ- ed in terms of productivity. I would like to see everybody who is interested talk about productivity as the main public interest issue. Productivity is something we can all understand and something we can measure, whereas standards involving national defense and social values are very difficult to use in evaluating a government research program. I was delighted to see the August report of the Joint Economic Committee, which places very heavy stress on productivity. They say it is the linchpin for our economic progress. Our national administration is beginning to get around to addressing productivity. It is a politi- cal problem for the administration, but if we are going to try to con- trol inflation, we can get the support of the average person by talking about the power of increased productivity as a way of restricting the inflation rate. Let us take a look at Canada, because they have faced this problem of the public interest in their research program. First of all, when they set up their R§D effort, they set up an interdepartmental committee, which makes sense. In their case, they put it under the Treasury Board because that is where the money comes from. We have a little different process here, and we do not have to put it under Treasury, but 38

one admirable effect of their process is that it filters the decisions through the various departments. So there is competition in evaluating where the money goes and what kinds of projects are supported. The effect of that is that once a department has a chunk of money to spend, it tends to have the most to say about the nature of the pro- ject, and that is not unlike the situation in private enterprise. By looking at Canada, we can see one of the pitfalls that I would be concerned about here. In their case, for a lot of historical and sociological reasons, they place great stress on regional development. We have an Economic Development Administration in the Department of Commerce that also looks at regional matters, but in Canada, regional development is a very important, sensitive issue, and so they have a separate department concerned with regional economic development. That agency has a big chunk of the research budget, and so that agency gets into the decision-making process in transportation. It can decide to encourage research in certain subjects because it wants to expand in- dustry in a given region where a nucleus exists. That decision may not be the best from the standpoint of increasing transport productivity, but it does fit a broad political objective. Looking at that from an American point of view, I would be concerned about letting the Depart- ment of Commerce, Economic Development Administration, decide that we ought to be doing research on some kind of a project in transportation that would benefit, say, Appalachia, because that should not be the criterion for optimizing the use of the limited budget that we have to put into transportation. It is also interesting to note that the Canadian process does not contemplate a role for a Ralph Nader. They have a Consumer Association of Canada that is similar to what we have here. They do have a voice politically through their general impact on Parliament, but they do not evaluate individual innovation projects. There is one other point to make about the Canadian method. They have a very powerful solution to the issue of risk sharing. In their process, a specific decision is made about what share of the project will be borne by the various interested parties. It is almost a bidding process. If the government has a pet idea that industry does not think is a very good one, then industry says it will not put up money for that project. On the other hand, if the government still feels strongly about it, it will go ahead and spend only government funds for its own idea. But taking l00 percent of the risk is a sobering idea for the government, and it may be cautious about such projects. Yet again, industry may feel there is some merit in an idea, but not be willing to risk more than X dollars on it. This leaves room for the government to decide whether it wants to spend any extra sums needed—in comparison with the benefits it may derive from investing in other projects. Hence the share of funding is a way of measuring the relative risk. My own view is that government should look at it in the same way a private entrepreneur looks at it. Say that a normal business decision might have a planning horizon of 3 or 4 years. As a manager, if I can do it in 3 or 4 years, then I am willing to spend the money because I 39

am able to predict within that range—not with certainty, but with some comfort. On this basis, I would conclude that government funding should be only a small portion of the effort on projects that are, say, of 3- year duration, while a much larger portion would be appropriate on pro- jects that have a potential payoff l0 years out. I submit that that criterion would enable the dollars to go further and would help the decision makers to look at the real choices in terms of possible impact on the economy and on the income statement of the entrepreneur. Concerning the labor aspect, it is obvious that labor is directly affected by innovation. Labor can be hurt and hurt badly. It does not help an unemployed or underemployed or downgraded person to know that in another city and in another industry there will be new jobs at a higher salary. So there is a real difference between the short-run impact and the long-run benefits to society, and we have to be sensitive to that short- run impact. Organized labor has a justified concern about how innova- tion is handled. What is the labor response to innovation? It varies tremendously. The United Mine Workers under John L. Lewis made a decision many years ago that no matter how many jobs were lost, everybody left would be a member of the union with a good income and good working conditions. Lewis was content with innovation as long as the people that were left on the job did very well. The International Ladies Garment Workers Union (ILGWU) faced a declining industry, and it decided to protect its jobs; instead of just waiting, they spent money to find ways of increasing productivity of the factories in which their members worked. The Airline Pilots Association has shared directly and proportion- ately in the economies that came from larger, more efficient aircraft, but because their share of the total cost was relatively small, their compensation has not crippled the industry. If the pilots accounted for a large proportion of total cost, that process could not have worked as effectively as it has in aviation. The longshoremen fought the container movement bitterly. In effect they have set up employment protection systems, but there still remain economies in the container movement that permit that innovation to con- tinue to grow and flourish. Let us take a look at the difference between the teamsters and the railroad unions. It points up an interesting economic reality. My opinion is that the Teamsters Union over the years did not resist inno- vation because it said: "Anything we do to stimulate the trucking in- dustry is going to take traffic away from the railways; that is going to mean more jobs for our members, so it is a good thing." In other words, the nature of the market and the employment opportunities in trucking encouraged or at least permitted the leadership of the Teamsters to move in a positive or at least nonnegative direction with respect to innovation. The contrast with the railways, where it has been a con- tinuous battle to get innovation, is clear. 40

I will mention one other interesting recent development—Eastern Air Lines and its attempt to provide incentives for workers to be con- cerned about innovation and productivity. Under the plan, 3.5 percent of the pay of the employees and 5 percent of executive pay are put into a reserve fund. If earnings equal 2 percent of revenue, the money is paid back to the employees. If earnings are more than 2 percent, the extra money is shared with the employees. But if the earnings are less than 2 percent, then that fund is available to assure lenders or equity investors that the company will remain solvent. It has worked so far. How long it will continue to work I do not know. But it is an innovative approach to sharing the cost of survival and progress. The overall research approach to innovation is important, but we should recognize that efficiency and economy at the work place are also important. Changes in methods do not always require new technology. Simple changes in work methods and rules can be significant for improve- ment in transportation. Obviously, that kind of issue permits only a very limited role for government. Education and support for change would help, but retrain- ing would be the major specific role for government. However, innova- tion at the work place is hard to achieve without aggressive management, without hard work with unions, and without incentives for the workers. Part of the slow progress in change at the work place can be attributed to what I call regulatory malaise. Too many managements can just blame the government for all their problems and therefore simply coast along with things as they are. The fear of head-on conflict and possible strike acts as a cloud over many management decisions. A weak railroad has great difficulty in facing a strike. The Rock Island, which is certainly among the weaker railroads, is now going through that. But for stronger railroads, that need not be the same kind of limiting factor. Again, I will use a Canadian exaple that deals with an institution- al or environmental factor from which we could learn. The Canadians were way ahead of us in getting rid of the firemen on the locomotive back in l957. It was precipitated by a strike, and as a result of the strike, the government set up what they call a Royal Commission. I am a great believer in the Royal Commission process, and I wish we could do it here. This is how a Royal Commission, of course here we must call it some- thing else, works. When the government has a tough political problem to tackle, it sets up an independent tribunal, very prestigious and com- posed of well-respected public figures, to evaluate and make findings and recommendations. The findings are not binding, but when the independent group does its job it is much easier for the government to take the hard political decision and rely on the Commission's findings. We could make more use of such powerful, independent tribunals or commissions. We are all tangled up in administrative agencies that do not necessarily have the political stature of the independent special commission. The findings of an administrative law judge represent a technical decision rather than one of broad public policy. 4l

I would hope that we would find ways of tackling big, broad issues by addressing them with this sort of independent commission. Unfortun- ately, in America we are not as willing to accept the idea that a com- mission can be independent and authoritative. Nonetheless, we need to do more to break away from our normal mode of administrative agency decision making. The Canadians are ahead of us in another work place on the railways. Practically all the switching crews in Canada now have only two workers. We almost always use three. This cost-saving, productivity-improving change did not require the government. No research effort was involved. Rather, it was a matter of negotiating, dealing with supervisors, deal- ing with workers, seeing their ideas, trying to find ways of taking advantage of it, and not being smug and talking down to people. One more thing we might learn from the Canadian experience is that having a few strong companies will help to permit savings to be made. It is not just that there should be only a few companies. They have to be strong, because having a hodgepodge of weak properties put together is not going to have the dollars; they are not going to have the eco- nomic strength to tackle either their union problems or their public relations problems. I have come to the following conclusions: l. If we had intermodal corporations in transportation, we would have a better chance for optimizing the use of our scarce resources. There are intermodal corporations in Canada. Even so, they do not do as much in terms of a systems approach for purposes of resource alloca- tion as they could. They tend to operate on the basis of profit cen- ters, which is, a perfectly normal business practice. It makes sense in most industries. In the case of transportation, where there is a competitive thrust among the components and where there are options for deciding how given goods may be moved between point A and point B, I am not so sure that profit center criteria alone should be used. I can see where a systems approach could be brought in that says on balance it would be better to divert some of this commodity moving from A to B to the truck side or the rail side or the air side for a variety of reasons that, overall, will maximize the benefit to the corporation as a whole. That is a tough decision, and it is one that has a lot of public interest feedback. Many people will say that this will tend to reduce competition, and antitrust laws ought to be applied to prevent inter- modal companies. But on the whole, I believe it offers some potential for improving resource allocation and innovation. 2. Even if there were an intermodal corporation, we would not have any better results in negotiating changes at the work place as long as we have the present structure of unions. There are now a number of com- peting unions, not only mode to mode but within modes, and it is impos- sible to visualize a system under which an employee in union A can be laid off and readily given a job in another mode run by the same com- pany. The union in the other mode will not be likely to put that work- er into the seniority list at the same place he had in another union. That is simply not consistent with the political realities today. 42

Hence I do not see any advantage in having intermodal companies to tackle the problem of expanding and contracting segments of trans- portation, unless it was accompanied by a completely different union structure. That process involves so many political problems and per- sonality problems that I can not see it in the reasonably near future. 3. We need to have a better sharing in the savings oi? innovation. When I say sharing, I do not mean just that labor should get a bigger share of the savings. I think we have tended to concentrate so much on "labor productivity" that we have lost sight of the very difficult and very real problem of total factor productivity--labor, capital, and materials. Politically, it is important to begin to stress total fac- tor productivity—because only in that way will we be able to see the true advantages and disadvantages of management decisions on innovation. Only in that way will we be able to sell the notion that the labor in- centive to innovate should be there, but it can not always take the major share of the total savings. Total factor productivity is not discussed enough in the government literature or in the political environment. I would hope that one of the benefits of this workshop is that there will be a paper that will go to congressmen stressing the benefit of looking at total factor pro- ductivity. 4. We need new incentives, which will take tough bargaining, in order to maximize work place innovation and to reduce jurisdictional problems. The transportation industry is full of those problems. The solutions seem to take a long time to spread from point to point. Again, I will cite the Canadian experience on switching; it was done by negotiating with the appropriate authority to look at individual situa- tions on a local basis. When that was done, it was reviewed and examined location by location, and the result is that in a relatively small number of years, there has been a significant change in the way switching is performed by the railways up there. 5. The government share of any innovation effort should be based on risk. If the project or the idea has great risk, the government share should be greater. If the project has low risk, the government share should be low. There should be bidding on shares by the various par- ties to determine the relative interest that people have in the potential of each project. 6. If a research effort is to be effective, we need to have the minimum possible lag by government. Now, how are we going to do that? Government, once it sets the process in motion, will inevitably be worried about making mistakes and that concern can be deadly to innova- tion. We have to rely on the political process, but I think we can mini- mize it by not having the political process reflected r the technical boards that look at individual projects. 7. In setting priorities for effort, it would ^e a mistake to have government make the list. It would be much more effective to put the first responsibility on the industry involved to make the list of pri- orities and to put in a justification for why each project is on the list, with costs, benefits, and so forth. When that is done, the government can review it and suggest, per- haps, that not enough attention was paid to safety or environmental 43

considerations. Those considerations could be included in a project that the industry has offered or could be independent of other projects. If it is accepted that this is not an adversary process, the government still has control. It does not have to be a rubber stamp, but it will be much freer to comment and expand on or delete projects than if it has to create the projects de_ novo. 8. In evaluating projects, we ought to be asking what the cost consequences are. There are all sorts of projects, and some of them are the pet project of some particular scientist or engineer. If we go into a project, we should ask what the cost saving significance is for this project as opposed to some other project. Will we save l percent or 5 percent of operating expenses by successfully solving this problem? The one that saves 5 percent (subject to these other considerations that I call political or public interest considerations) ought to have the higher priority. 9. We need more public education. We have an adversary system that is encouraged by the political process. I think we can do some- thing to educate people about productivity that they can accept. The average citizen can accept the principle of productivity. We need to educate people for that is a way of breaking down the spirit of hostil- ity in the adversary process that results in unsound decisions. l0. The role of government in designing infrastructure differences into the system must be considered. One mode supplies most or practi- cally all of its infrastructure. Another mode has it almost entirely supplied by the government. In one case, say, in the case of trucking, there are fuel taxes that do not involve the same capital commitment that the railway has to have when it provides its own right of way. The airline is provided with a right of way, and it has an argument about what the taxes are. The waterways have another kind of an argument about their responsibility for the provision of the infrastructure. So when we look at the share to go to each mode in trying to de- cide what is a rational approach to transportation innovation from the standpoint of the government, we have to consider the fact that the dollars are spent on quite different kinds of projects, because of the different financial responsibilities that managements have. I would suggest, then, that we look at R§D expenditures, for exam- ple, expressed per dollar of total capital investment, not just those of the company but the total committed to the industry; likewise, we ought to be looking at R§D expenditures in relation to the current year's capital outlays. Why do I make the distinction? I make the distinction because in the case of railways, we have such an old investment that the dollars are obsolete dollars. Much of the plant may not even be relevant. While we ought to look at that to get a comparison of the different modes, it will not tell us enough without looking at the way current dollars are spent. Again, current dollars means the dollars currently spent in each mode including the government contribution. The practical suggestions that we may come up with should be direct- ed toward the political process that now prevails, rather than toward the theory of innovation or the organization of industry in doing research. 44