The just in time economy
The usually smart James Fallow agrees with a dumb argument:
Yesterday I mentioned a summary of the latest John Boyd conference, which included the argument that today’s lean, hyper-efficient, “just in time” economy was magnifying the effects of today’s economic collapse. Problems in one sector instantly become problems in another, since so many businesses were fine-tuned to await the next order, the next payment, the next shipment from someone else.
How can Just In Time be bad in a collapsing economy? Is there a single retailer in America, right now, who doesn’t wish they were holding less inventory? And then, if retailers are having trouble selling, aren’t the suppliers even more desperate to lower their inventories? JIT means that when an economy begins to collapse, suppliers know it sooner and can adjust their production schedules that much faster. It means the ultimate solution is closer than otherwise: suppliers matching production to consumption so as to avoid over-production.
Imagine it the other way around: what if the suppliers had more padding in their supply chains, and the retailers too, so that economic signals took an extra 3 months to work their way up the chain. That would mean suppliers would have spent September, October and November of 2008 producing as if the economy was still moving at the speed it was in August of 2008. In a sense, this would have simply added to the bubble – imagine how long it would take for the economy to work off the over-production of those 3 extra months. As bad as 2009 will surely be, it would be even worse had 2008 seen an extra 3 months of over-production.
JIT does mean that suppliers feel the pain almost the same instant that their customers do. But that is a good thing. It means they can react sooner. More information, sooner, is a good thing for the economy.
There are a lot of recent business trends that have made this depression as bad as it is. Chief among them is the incautious use of debt. But JIT? It is innocent. It should not get lumped in with other recent (misguided) business trends.
Fallows also agrees with this summary from a recent Boyd conference:
The search for efficiency and the urge to consume has set us all up like a row of dominoes – there is no buffer, no resiliency. As one problem rises it causes another. As one solution is tried it drives another problem. We all pull back and the consumer economy stalls. The auto industry and credit firms feeds the media (40% of conventional advertising). Papers and TV and Radio networks, many subject to LBO’s will have to fail as per the Tribune. Every sector will be laying people off. Sales of all things fall off a cliff – driving more business failures and layoffs. Cities and states that depend on sales tax and property tax and the credit markets can rely on none of these. So they too will have to lay off millions – thus making all the problems worse.
Where are the owners, in this scenario? The nominal goal of the efficiency movement, among America’s corporations, is to squeeze resources out of business processess. The resulting savings are suppose to be passed to the people who own the corporation (in another era, the money would have gone to the company’s workers). What do they do with the surplus? The saved resources don’t simply vanish from the face of the Earth. “Becoming more efficient” is not a method of destroying wealth. Those saved resources are a buffer, and can be used to offset an economic setback.
One could argue that in real life the new surplus is not being spent well. One could argue that the efficiency movement works better in theory than in practice. But it seems to me, in the paragraph above, it is the theory that is being attacked, not the practice.