I missed a thing or two in my last post about Distributism, in order to conclude on a hard hit. I’ll sum the whole issue up in a few words, even though in my experience that’s the least effective way to make yourself clear; I have no idea why, since most of the time I wish long explanations were so condensed. To each his own, I suppose. Here’s the few words: The efficiency advantages of the giant corporations, and thus, their “natural” place in the market, is a false generalization. The reason for this is that the actual production methods that benefit from scale are relatively few, compared to those which only benefit from scale through regulatory and tax advantages. As a consequence, many, many huge organizations are really wasteful superstructure attached to a relatively small core of productive activity.
We are familiar to the comparisons between Distributist production and Capitalist production; the dozens of workshops versus the singular factory, the kitchen of every home versus the commercial kitchen, the five hundred farms of three acres each versus the single farm of fifteen hundred. But what if these aren’t the things we should be comparing? When we compare workshops and factories, we are not, almost by definition, comparing complete enterprises. We are comparing the productive cores of two enterprises, which is a very different thing when you consider the resources which are consumed in the other activities of the firm that owns that factory. Narrowing one’s focus to look exclusively at one of GM’s factories is to look exclusively at the most efficient part of the operation, and to disregard major forms of inefficiency, even those inherent even to the factory itself. The first thing that is obviously lost is the whole huge management problem of an organization of thousands of people; one is tempted to regard a modern production plant as a miracle of organization until one realizes that it necessitates the miracle of disorganization that is the modern office, on many times the scale and cost of the plant itself. And if we consider that the huge factory cannot be truly cut out and isolated from the organization, that it cannot run without the support of that vast and barely-manageable machinery of human beings, a very different picture emerges. We have to compare firms with firms, not complete Distributist shops with the best-organized and most efficient portions of Capitalist corporations.
Speaking of automobile production, let’s consider the meaning of efficiency itself. We’re all familiar with efficiency numbers in the form of “miles per gallon” or pure percentages, in terms of say, watts output divided by watts input. These mathematical forms give an empirical aura to a concept that is inescapably subjective. This is point whose rhetorical challenge I have never successfully overcome, and I’m a little annoyed, because it is an obvious point, needing no proofs. The whole idea of measuring vehicle efficiency in “miles per gallon” depends on the notion that what we want from a car is to take us for miles. It is useless to talk of a heater’s efficiency in terms of miles per gallon, and it would be useless to argue that the efficiency of a vehicle was great if it could only take us miles into some hell nobody wanted to go to. A train to nowhere is a waste through and through, it wastes all its fuel, not some percentage. A machine’s efficiency is the ratio of its desired outputs to its inputs; if the miles a car could transport us on a gallon of gas were in an arbitrary or useless direction, it would not matter how many they were.
Similarly, John Seddon said of services, “Any waste in a system represents, by definition, a failure to provide value for customers.” Anything that does not contribute to the satisfaction of demand is waste. This is actually an expansion on the simpler formula which says “Any waste in a system is the failure to generate revenue out of inputs.” Now, Seddon, (who was paraphrasing Toyota’s Taiichi Ohno) is not putting forth some altruistic proposition that the firm is under an obligation to provide for the customers whether it pays off or no, he’s expressing the most fundamental element of the Free Market: Voluntary payment as compensation for providing value. At the most basic level, the free market firm is a money-generating enterprise because and only because it is a value-generating enterprise. In a mixed economy, full of altruism and good will, you can legally become rich at the expense of others; in a ruthless Laissez-faire economy of rigid private property and scandalously free prices, you can only profit to the benefit of others, because absolutely the only means open to you to receive money is their voluntary payment. So, in Seddon’s claim, if your exclusive means for profit is to offer value to customers, then even those things which appear to generate money, if they do so without providing value to customers, represent hidden waste.
I wish this point were heard on a wider stage.
Let’s take an example that would be near to Ohno’s heart. Say a car maker engineers its new product line, produces it, and brings it to market, expecting a return of so many million dollars, a return estimated based on the expected selling price and sales volume vs. costs. All well and good. Now the reason a person would buy the car would be its ability to provide value to him; why then is part of the budget for the introduction of the new model dedicated to “advertising”? Why is an unforseeable portion of the cost wrapped up in the level of discounting the dealer must engage in to shift the inventory? Part of this is the mere minimum involved in bringing the product to practical availability in the market at all, but obviously these costs are not uniform for all products in a given category. Some cars consume vast advertising budgets, some consume none. And in point of fact, from the perspective of someone in Ohno’s position, the better the product is in itself, the less its faults will have to be patched up with discounts and advertising. The ideal car sells itself, it is self-evidently the greatest thing ever. The less-than-ideal car needs somebody on TV to tell you that it’s the greatest thing ever, since you wouldn’t see that on your own. Ohno would see a massive advertising campaign, or a massive wave of discounts and special financing as nothing but administration trying to cover the failures of engineering and production. In that sense then, though the advertising campaign does “generate revenue” in the broadest sense, it is truly a costly attempt to recover revenue that was lost in the failure to produce a product of maximum value to the consumer. Any failure to provide value to the customer is waste. The cost of any activity which does not provide value to the customer (such as advertising) is truly, originally, the cost of such a failure. We pay our advertising people the bill incurred by our engineers’ failures.
Even the minimal advertising required to make the customer aware of the existence of the greatest car ever is a reflection of the limitations of the car itself, in some sense, since the car does not make itself known. A car which, as soon as it rolled off the factory floor, telegraphed its existence and greatness to customers across the nation like a barbeque joint making itself known across the street, or a good song echoing across the radio waves…well nobody expects this of cars, but in lacking obviousness, cars have something of the quality of buried treasure which must be dug up. The minimal advertising etc. required to bring cars to market is a patch for the fact that cars roll out of a mere handful of factories in the whole world. Money must be spent to make the car into a local, available product, or else it is simply impossible to consume and enjoy. And a car that cannot be consumed because it is far away or kept secret by distance and silence is a failure to provide value to the customer. The minimal “legitimate” advertising budget serves this function, yet it is still, even in the minimal case, an effort to make up for value that the production system failed to provide. It is simply because we take it for granted that it is impossible for the production system itself to provide this value, that we consider minimal advertising worthwhile. If a way were discovered by which the production system could overcome the distance and ignorance that separates the consumers from the product, then no advertising would be legitimate, or rather, advertising would be exclusively a cover for true waste, since all the functions of advertising could be more directly performed by a properly squared-away production system. At best, advertising covers production’s failures to provide value to the customer where production could not possibly provide that particular value. At worst, it is simply a patch over laziness and incompetence.
Thus it becomes visible that the factory production system has shortcomings which are not regarded as its shortcomings, but part of some inevitable nature of things. The corporate giants think that they were in an arms race of advertising spending, forced upon them by competition, when in reality price cuts equivalent to the massive advertising budgets could likely claim a greater market share were it not for the shortcomings of the products themselves. They would have no need to win, or even fight, the advertising wars, were it not for the fact that their products are by their nature dependent on successful advertising to sell. The fact is that GM’s products simply need advertising to move off the lot, as surely as they need fuel. When we say that the factories of a manufacturing firm are a thousand times more efficient than garage-based production, it is like saying that a disembodied hand consumes less calories in working than does an entire man: The separation can only be theoretical, for in practice, the disembodied hand or the unadvertised factory simply does nothing. The plants of Detroit would be even less useful than they are today were their products only consumed by those consumers who happened to spot the buildings, walk in, and try to seek out a way to consume some of their products. And this natural isolation from the consumer is a fundamental and inevitable quality of the factory production system itself. Centralization has costs as well as benefits, only these costs are not of the same kind as those of the workshop, and so the illusion is maintained.
If GM’s profits go negative, the meaning of that fact is simply that its consumption of scarce inputs exceeds the value it has produced for consumers, this is not merely a fact, it is a tautology. If the profits of a small, Distributist operation are positive, the opposite holds as well. In those not-infrequent cases where both of these are true, the efficiency of the small operation exceeds the efficiency of the large one, economies of scale be damned. The reason this can occur in spite of Adam Smith and the division of labor is simply that while (some) machines grow more efficient with scale, the organizations of people grow less. While a $100,000,000.00 robot is incomparably more efficient at making crankshafts than is a foundry and a machine shop, when the two are placed side by side and set to a production race, a single $100,000,000.00 robot serving the entire North American continent produces its product at a single point on the globe, in a single stream. The mere physical distance between the consumer and the point of production is negative in value, and must be patched up with an interstate highway system or railroads. The isolation of the consumer from information about the crankshaft production must be similarly overcome with millions in advertising. The fact that any consumer needing a crankshaft must fit his needs into coordination with the needs of millions of other consumers (since all consume from the same source) is negative in value; the centralized production cannot absorb variety of demand, and instead the consumer must accept a less suitable product.
At very least, in the world of production, there is a tug-of-war ever in play between abundance and suitability. Custom-produced goods command higher prices because of their capacity to overcome the shortfall in suitability of mass-produced goods. When millions of identical objects are made for use by millions of people, it is to be expected that even the most generalized of them will not approach the perfect satisfaction of demand that each person would enjoy were he able to design his own product. However, where economies of scale prevail, it is a choice between having a slightly unsuitable (or perhaps very unsuitable) product and having nothing. Great masses of consumers end up consuming quite a lot of not quite what they want. This is a property of mass production, that it leans strongly toward abundance and away from suitability, and it does so more and more severely the greater the variety of customers who consume the product. And this shortfall in the value provided to the customer (again) must be fixed either with discounting, financing, or advertising which manages to bridge the gap between the consumer’s subjective valuation of the product, and his subjective valuation of the price.
What we’re getting to here is that the fact that GM stock’s price-to-earnings ratio is over 18 (it takes more than eighteen years of profits to add up to the price of the stock) is a more realistic indicator of the efficiency or inefficiency of its production methods than is an analysis of the factory floor. The hidden costs, of administration, transportation, advertising, and sacrificed suitability are effectively aggregated through the profit-and-loss calculation. No matter how efficient are the means by which we make a product, any additional costs which necessarily attend the process in order to get that product into the hands of consumers are real. If we could wave an industrial wand and transform a handful of sand into a Cadillac, but could only perform the feat on the moon, we would be deluding ourselves in saying we had cracked the problem of car production. Every step necessary for the consumer to consume is a cost of production. Every expenditure on GM’s books wholly legitimately detracts from its profit, and wholly legitimately undermines the belief that factory production is an enormous leap forward in efficiency compared to localized, variegated production. If we take GM’s financial numbers seriously, it returns profit to investment at a rate of 5% per year. Not awful, but certainly not some prodigious advance on the profitability of small businesses. And GM has going for it what no small business does: The Superstition of Scale, set in policy. GM has bailouts (a fixture of such monoliths of efficiency and stability) unthinkable to the small operation, whose failures are brought home entirely in bankruptcy and poverty. GM has the interstate highway system to support not only consumption of its products, but their distribution across the vast distances separating its plants from its customers. This publicly-created and tax-maintained infrastructure removes from GM’s calculations the costs of a major part of their business model (as it does for innumerable other corporate giants, i’m not trying to pick on GM, they just have a nice short name) and socializes that cost burden. Business decisions regarding whether to produce locally or at a central plant are all skewed in favor of centralization by this off-the-books handling of cost. But since the cost is still paid, just by tax revenues rather than those of the decision maker, a less-than-optimum efficiency is pursued, just as if a major cost were simply forgotten in accounting.
And of course GM is surrounded by a hedge of regulation that unilaterally prevents the production of competing products by anyone without political clout. To be permitted to compete with GM, you must gain the approval of the same government that saw them mismanaging themselves into oblivion, wasting resources, destroying wealth, converting the labor and minerals of America into products of inferior value to that which they destroyed, and reacted by shouting, “HERE IS AN ENORMOUS CHECK TO JUST KEEP DOING WHAT YOU’RE DOING!” It is tempting to doubt that competition that provides greater value out of lesser scarce inputs would be met with anything but the closed ranks of bureaucratic defense that make up “consumer protection.” The consumer may feel entirely secure in his protections; the interventionist government will make absolutely sure that any challenger to Microsoft will be found to have its papers not in order. He may be entirely sure that there is no danger of any ozone-depleting R-12 will be produced, just as soon as DuPont’s patent expires (and he may be sure that by the time the R-134 patent expires, he will be entirely safe from greenhouse gas refrigerants as well). The protection of the consumer by the restraint of commerce is the tool with which the modern Edison easily defeats the modern Tesla, if you take my meaning. It is the weapon by which political power becomes economic power. It is the reason a lobbyist is a good investment. And it is the crime of economic policy i personally despise most intensely.