Monday, June 21, 2010

Wal-Mart, Local Businesses, Manufacturing, Unions, What Happened?

At the Indiana GOP State Convention there was a group, Alliance for American Manufacturing, who had a booth promoting their agenda of trying to protect manufacturing in America. They were promoting ideas such as tariffs, and punitive fees for foreign manufacturing and monetary positions. While this might feel good emotionally to embrace the idea of going back in time when American unions were producing the most prosperous middle class in the world with high wages and benefits for often unskilled labor. That is a thing of the past, it doesn't matter who the political party in charge might be.

America will always have a percentage of its economy in the manufacturing sector, however, it is never again going to be the driving force of our economy. It will never again afford higher wages and benefits for those unskilled workers simply because their unions were able to pressure the company into paying them. The chickens have come home to roost on that process with companies trying to survive with the bloated expenses of all those benefits for not only their current workers, but those who have retired. They now find that trying to compete in a global market isn't possible with this heavy overhead.

The manufacturing jobs moved overseas due to the cost of doing business here. The manufactures sought less expensive labor markets. This isn't simply an American issue, but a global one. Japan was the first to really show us where we had a weak link. They started out building cheap junk, "Made in Japan" meant it was cheap and inferior. However, they learned to improve their quality but kept their prices low, they learned their lessons taught to them by W. Edward Deming well. It wasn't long that "Made in Japan" meant highest quality, yet still more affordable. They were dominating us at that point. However, Japan's dominance was short run. Korea learned what Japan was doing and copied them, and beat them due to their lower cost of living allowed them to cut labor costs further. Now Korea is losing out to China for the same reasons.

There is another burr under many Americans saddle, and that anger is often directed toward Wal-Mart, who they blame for destroying small towns and closing local stores. However, those same towns are benefited with more goods for less money, and more convenience because Wall-Mart is there. However, it is an easy target to strike out at a vanishing memory of how things used to be.

These two issues really are two sides of the same coin. Both are actually due to technology, not ideology. It is market driven, not some sort of conspiracy. We have been taught economics through a flawed prism. Today's government, who so embrace Keynesian economics, will not be able to come up with a working theory because their very basic premise is incorrect. Most economics are taught with a fixed pie concept. That if I get a bigger piece of pie, then you must get a smaller one. Wars have been fought for centuries over this fixed sum game thinking. If you look to the very definition of economics in most of our text books it will say that "Economics is the study of the distribution of scarce resources." One of my favorite economists says that is totally false, that there are no scarce resources, and really no resources at all until first there is a technology to make it a resource. There was a time that if you had oil on your property is was a curse, until someone learned how to burn it.

It is all about a change of paradigms. If you look back in history there was a time when the world couldn't produce a working calendar. About every hundred years it would snow in July in Rome, the Pope would declare it January and it would work pretty well for a while. The science of astronomy couldn't find the answer because they defined their science from a flawed understanding. Just like today's economists, those old astronomers defined their science that they studied the planets, stars, and sun's rotation around the earth.

Eventually a Polish mathematician, Nicolas Copernicus, using mathematical equations found that if you put the Sun at the center and had the earth orbit around it, he could make a working calendar. He published in Polish, and died before his work became widely read in that day's academia.

Galileo read Copernicus's work, and had a tool no man had ever had, his invention the telescope. With the mathematical theory and using his telescope he proved Copernicus's theory and published it in Italian, not the accepted in academic circles of Latin. The Catholic Church was outraged, he was charged as a heretic for placing the Sun instead of the Earth at the center of the Universe. The Pope was going to have him burned at the stake unless he recanted his theory. With being a barbecue as an option, Galileo recanted. He was ex-communicated from the Catholic Church, only to be reinstated on October 31, 1992 by Pope John Paul II.

The major reason we have seen such a sea shift in our manufacturing sector, and our retail distribution are both due to technology. No political party will be able to turn back the clock, however, there are things that can be done with a more business friendly environment in America. If America would reduce the Corporate Tax Rate and end the outdated concept of Unions, it would help keep manufacturing active and alive in America. However the days of high income low skill jobs are over.

For centuries the technology of the age defined the age. Eras like the Stone Age, Iron Age, then Agrarian Age, Manufacturing Age, and now Information Age. For most of history people were born, lived and died within the same technological age, there were few changes during their lifetimes. However those of us today are living at a time when change is the only thing we can count upon. Industries come and go seemingly in the blink of an eye.

When you look at 1930 there were 30 million Americans living and working on the farm. They were barely producing enough food for the 100 million Americans. By 1980 there were only 3 million Americans living and working on the farm who were able to have so much surplus beyond feeding the 200 million Americans that the government was paying them not to produce so much. That was a major shift in the dynamics of American life, however, it happened over a fifty year time period. Many farmers retired, most of their kids either chose to or were economically forced to leave the farm for opportunities in the cities.

What happened to some of those kids? In 1980 there were about 250,000 Americans in Michigan and Indiana building carburetors, however by 1985 there were none doing so. Not because the economy had turned bad, but a new technology of fuel injectors took over. They were being made by different people with different skill sets in different locations.

In 1985 there were about 250,000 American in Indiana and Ohio working in factories making vinyl records, that was the biggest year in history in the record business. However, by 1990 there were none making vinyl records due to the take over of Compact Discs. Once again new locations, new people with new skill sets.

It was during the 90s that I was interviewing a gentleman for a position. I went to his home to visit, it was a beautiful home on the water, there were two Mercedes in the driveway, all three had for sale signs. When we were talking he told me that he was the national sales manager for a high tech company but the company was falling on hard times. He had to lay off about one hundred of his sales people and was down to himself and about a half dozen others. The companies sales had fallen accordingly. He was complaining about the economic downturn. I asked him if people were not using his product anymore. He told me no, but his company's business was testing microchips, but where a few years before there would be ten microchips on a circuit board, at this time there might only be one due to how advanced technology had become. He went further and said many times the one on that board often self-tested. He was so close to the forest he couldn't see the trees. His industry had become buggy whip manufacturers, even though they were "high tech."

When you look at the Wal-Mart vs small local businesses. It is about technology and improvements in distribution that makes this battle so one sided. Wal-Mart, and others to a lesser degree have vastly improved their distribution methods to cut cost and streamline the process. There is no way that the local can compete head to head, so those who succeed do so by setting themselves apart. They are different, they make their stores destinations, and worth paying more. They are not going to be able to compete on price, of convenience, they are not likely going to be open 24/7. However, people are succeeding.

We as consumers, and as Free Market Capitalists have to embrace the better mouse trap and the consequences of some good businesses failing in the wake of a better business model. The argument against Wal-Mart could be made against Blockbuster coming in and running all the small Video Stores out of business. Of course now Netflix, Red Box, and Internet Downloads have killed off all the Blockbusters as well. Technology is marching on, with each advancement, companies and industries will come and go.

If you want to blame someone, blame Ronald Reagan. When he cut taxes in the early 80's and gave tax credits to businesses to retool themselves it caused an explosion of new computers being moved into businesses, where people got used to using them and bought them for home as well. If you want to go back to the theory of there is no scarce resource, and no resource until it has a technology to make it one. Who would have thought that sand would change the world? Once we learned to turn sand into silicone it allowed the computer age to change everything we knew.

This isn't going to change back, it is only going to change further and faster. The key is to relearn how we learn. Instead of learning to be the best at something, learn to learn faster so you can change and adapt as does the world. That is the new magic of success.

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