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We’ve all been there, that is, all of us baseball fans …
The home team is down by a run or tied, it’s getting late in the game and our boys haven’t been doing such a great job lately of pushing runs across. Suddenly we have men on second and third, no outs, and the meat of the order coming up. What happens? A dribbler to the pitcher. One out. Strikeout. Two outs. Strikeout. Three outs. Rally dead. Everyone was swinging for the fences.
Where’s the analogy? Each of our boys when they went up to bat had greed on their minds. They wanted a hit. They wanted that 2-run scoring single, double, triple or 3-run home run. Everyone else is looking for contact: “just push the ball to the right side of the infield and the go-ahead run scores”. Do what’s best for the team, get the run home.
Bad greed promotes the individual to the detriment of his team, his peers, his community.
It is a truism that Capitalism relies heavily on growth and greed (both good and bad, though, bad greed is only determined in hindsight). [still in progress]
A company is formed and begins to make money. Modest annual gains. The company could continue in this fashion for years, except there’s a problem. Without much-better-than-inflation growth, the company won’t be able to pay its people more each year in terms of salary increases or bonuses or both. It needs to do this to retain its employees. In simpler times, it was easier to live on a few dollars a day for many years at a time for basically several reasons:
- Many folks subsidized their incomes by making many of their basic needs (be it growing food or making clothes or owning a horse for years) [kinda tells you how far back I’m reaching!]
- Technology was not so mature that new “have to have” items were coming out at a break-neck pace requiring more money.
- Consumerism was not as prevalent as it is today. People didn’t spend so much of their leisure time buying discretionary items. What they did buy, they kept for life. What broke got fixed, not replaced.
In addition, the company founder needs to account for inflation: the costs of the parts that go into building his widget will creep up over time. He can buy in bulk but that means risking more money. If his widgets suddenly go out of style, he’d be stuck holding a lot of widget parts. And lastly another component that eats into profits is taxes. Taxes never go down.
So our founder has to worry about making more money each year to cover his expenses and to retain and hire good people. This fuels growth. He needs to sell more widgets to his current clientele or figure out a way to reach out to more new clients. He can also just charge more each year for a widget. At some point you’d think he would price himself out of business or he can keep the number of widgets produced each year artificially low to keep demand up. Or he has two other options: he can grow by buying another company or he can start to work out an exit strategy and sell the company and walk away.
There are other options or methods to growing: the founder can borrow money to build out production lines or purchase another company; he can go public and raise money for similar purposes. In either case he is growing and he has a need to grow.
Greed comes into play when the founder wants to grow even more quickly. I’m not going to try to distinguish between good and bad greed. That’s for another post. But greed can fuel growth. It can be creative in its approach and as long as its not about lying, cheating or stealing it can probably be considered a good thing.
Okay, so growth is a basic ingredient to capitalism: companies want to make more money so they make more widgets or they just charge more each year. But selling is a two way transaction: you need a buyer. If our company is making a consumable product (think: food), it’s easy, if it tastes good, people will be back for more. Growing food, not taking extreme weather conditions into account, is a sustainable business.
Non-consumables are a different story. How many washer dryers can a person own? If our company is building a widget, they need to consider several items:
- Product Life Cycle #1. If the product is expensive and is built to last, do I try to manipulate its life cycle [think: planned obsolescence]. Or do I sell the product on its ability to last?
- Market share. If the product is built to last [even if it’s not], then I need to consider how many people can I reach in a given time period to sell the product to. If I have competition, how do I stand out and make sure I grab a significant -growable- share of the market place.
- Replace/Repair. If I build quality items cheaply, I can still make the parts so expensive that when my widgets break down, people may consider it cheaper to replace than repair.
- Product Life Cycle #2. At some point I will need to build a new and improved widget and convince people to throw away or turn in their old widgets for a new one. Here we need a roadmap for new product releases.
- Expansion/Global markets. Even though my widget may be seen as old hat in my market, I can always try to go global and sell it to other markets where there might be the incremental need.
We’ve discussed some of the fundamentals for why and how companies and by extension economies grow. Technology has become a straw that stirs the drink in our capitalist economy. Since the late 40’s the push has been for consumerism. Conspicuous consumption is consumerism as an addiction. Advertising has pushed several themes upon us over the last 60-70 years. In the 40’s and 50’s and early 60’s it presented the general population with an enviable and seemingly achievable lifestyle: a car in every garage, the white picket fence, etc. In the late 60’s through the late 80’s the theme shifted into celebrity emulation or “live like the rich and famous”: dress like the stars, ride like the stars, go to the same vacation spots and restaurants as the stars. Finally over the last 20 years the message has subtly changed to: “just buy, there is pleasure to be had in just buying anything”.
This message was picked up and it drove us to buy, buy, buy and it helped fuel companies to grow, grow, grow and it made a number of people rich, rich rich.
But several things happened while we grew up, expanded and kept buying.
- The number of people benefiting from all this growth actually shrank. This is not good. It translates into people being convinced to buy things they cannot afford and going into debt. Without going into a laborious discussion here on this matter, it paints anew face on unwitting indentured servitude.
- Technology played its parts well upstaging a number of key players in that Product Life Cycle #2 [see point 4 above] became ridiculously short. Think of computers and iPhones: almost as soon as you walk out the door with your new purchase, it’s out of date.
- We developed a throw-away mentality. As soon as the widget doesn’t please us, we throw it away and get a better one. Things don’t last because we don’t want them to last. We’re continuously being convinced that yesterday’s product line is passe.
This is the part of capitalism that is unsustainable. Making widgets requires resources, whether it’s oil to run the machines or trees to build a product or coal or whatever. There is a finite amount of resources on this earth and we need to take this into account. Is there anything more resource-wasteful than indivdually wrapped slices of American cheese?
People vote for products with their wallets. If you stop buying a product, manufacturers stop making it. To be sustainable requires rethinking the product lines we consider vital or necessary. Yes, materials improve over time and technology can make many widgets small, both of which make widgets cheaper and better, but is it necessary, for instance, to buy a new car every 2-3 years? As cars have been priced out of most people’s budgets, leasing was created to fill the gap. This has led to shorter life ownership spans.
How do we create sustainable products or better sustainable companies. Cars, for example, have longer life spans. They last longer than they used to. It’s not unreasonable to think you can put a couple of hundred thousand miles on a car these days. Large car manaufacturers still need people to buy cars at a heady rate in order to survive. In America the answer has been to move to leasing cars. This almost guarantees that ownership lifecycle remains short. Customer turns in vehicle after a 2 or 3 year lease, company resells car as “pre-owned” [just a money-engaging way of saying “used”] or pushes the product to developing countries.
Manufacturers more than likely either need to consolidate (which would mean less choices) or to get smaller and more responsive to market trends. Getting smaller regrettably means less jobs.
Products need to figure out a way in which they remain viable for longer. [still in progress]
Sad. Very sad.
Sad story in today Times about the unemployed. Story uses a worst-case scenario to make its point about the disenfranchised unemployed. Cynthia, 52, was an administrative assistant/secretary for 30 years, living in Jacksonville, Florida, one of the harder hit areas. She only knows one thing: administrative assistant. She can file, she can type 120 words a minute, she’s smart, but that job description has gone the way of the woolly mammoth.
She made too much money to qualify for food stamps. She got a job as a cashier at Walmart which pays a third of her former salary. She got “duped” into going back to school. I say “duped” because she took out a student loan and went to medical school to become a medical assistant, but they forgot to tell her that she needs a year of experience to get hired anywhere, meaning she needs to do volunteer work (for free) for a year. This is out of the question since her loan is now coming due. She doesn’t have the money to relocate. Tough story but the kicker is the ending quote:
“Sometimes I think I’d be better off in jail,” she says, only half joking. “I’d have three meals a day and structure in my life. I’d be able to go to school. I’d have more opportunities if I were an inmate than I do here trying to be a contributing member of society.”
Some thoughts:
Have we made the cost of citizenry too expensive? Between taxes (local, state, federal, sales, fees, registrations), health care, education (that is, -pardon my snobbery- a good education), have the costs of being a United States citizen become too expensive for the average Joe to sustain? Forget the basics: food, housing, clothing, commuting, utilities, etc.
I’m not bleeding-heart. I understand and -at times- applaud when we cut back and become more efficient, but at what cost? We can’t afford to pay people here the wages that folks overseas take because the cost of living is too high. While we are shedding unproductive jobs, we aren’t also reducing our citizenry costs, which should be happening in concert. The government is not reducing workforce (the irresponsible argument being they don’t want to add to the unemployment problem), nor is it reducing spending significantly enough, taxes are going up not down.
Interesting statistic: the US has less than 5% of the world’s population, yet we have nearly a quarter of the world’s prison population! Are we really that bad? Are we sending the right message to our fellow citizens and the rest of the world when we throw in jail nearly 1% of our population and that 1% has better benefits than possibly 10-20% of our population?
(Note: subject matter for another discussion — many of the business process jobs that are going overseas are going there because our IT departments build lousy inefficient systems.)
So, months ago, I said that we need to change our focus from consumerism to becoming a net exporter, that we need to concentrate on bulding better product and focusing on selling that product worldwide rather than expect American consumers to return to the past and spend over and above their means.
And, guess what? Here’s an article from the Economist voicing the same message.
At the risk of repeating myself, the point here is that one measure of country’s economic health is GDP. GDP is measured by the following formula:
GDP = Consumer Spending + Business Spending + Government Spending + (Exports – Imports)
Up until recently Consumer spending has represented as much as two-thirds of GDP. That implies several things:
- We are relying too heavily on consumers spending all they have (and more).
- Business and Government spending is contributing a lot less than consumers towards GDP. In one sense there’s some good news here. The more Government spends, the more we get taxed. The bad news is that if government isn’t spending -or isn’t spending thoughtfully- infrastructure goes down the tubes. And we see this weekly with bridges and roads and water systems failing.
- Business is a strange piece to this puzzle as some economists argue that the costs of goods sold is not factored into the equation. That is, the purchases Kelloggs made towards cardboard and corn to make a box of corn flakes did not make it into the equation. This is partly due to the fact that it would mean some double counting (since it is factored into the purchase you made to buy the box of Corn flakes). The bad news here is that business is spending less towards its own infrastructure in terms of manufacturing plants and shipping that money overseas where it’s cheaper to build products.
- The biggest issue we have -I think- is that we are net importers. That is, we buy more goods from other countries than we sell. This has to be reversed. We need to build equipment and products that the rest of the world wants. We can make great headway by being more creative in our thinking about products and technology. We could become a mass exporter of certain sustainable technologies: wind power, water turbines, and the like rather than taking a backseat to other countries. A smaller example of this is Apple and its iPhone and iPad. These are desired the world over.
We can only become leaders again by thinking smarter leading ourselves thoughtfully out of this financial morass.
Here we go again!
Spending Gains Outpace Income – Wall Stree Journal
Spending Gains Outpace Income – OneNewsPage
Ahead of the Bell: Personal Spending and Income – ABC News
Consumer Spending Outpaces Income In March – Manufacturing News
One of the major reasons we got ourselves into our financial quagmire was our capacity for spending to outstrip income. We borrow too much and it has to stop.
Yes, I know we need consumers to spend to help move the economy forward, but not spend blindly and not spend just to spend. We waste too many resources just buying. In an essay I keep trying to write I note that advertising’s main purpose is to get you to buy those things you don’t need. If you needed it, you’re going to buy it anyway, so there’s no need to sell you on the product.
We can’t go back to the old ways of spending more than we have and business has to realize that for sustainable growth they will sell less product but better long-lived product.
Someone save us from ourselves!! Please? 🙂
So this is interesting. There was an article in yesterday’s Wall Street Journal called Reappraising Home Appraisers. It was written by James Hagerty (always give credit where credit is due). .
I’ll quote some parts to it to give you a flavor, but to give you the gist of it.
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Home appraisers are getting squeezed on a number of fronts. First, obviously, there’s no buying, no selling, no lending going on right now in the real estate market, that we all know. Secondly, there are new conflict of interest laws that went into effect (more on this in a moment) on May 1st of this year that change the way home appraisers do business and also saw a drastic reduction in their fees, but not in the costs to you and I the home seller. Continue reading Conflict of Interest: Home Appraisers and Lenders
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