"The New Prophets of Capital" by Nicole Aschoff: Red Rosa for the New Age

This is a book in the Jacobin / Verso partnership, which puts together one of my favorite magazines with my favorite radical publisher. The books in the series have all been short looks at capitalism in the modern society, from teaching to writing to prostitution.

This book comes after several people who have tried to make changes in the relations of capitalism without changing the intrinsic nature of those relations. So it covers Oprah, Bill Gates, John Mackey, and Sheryl Sandberg. Each of these people has ideals that some might see as admirable, but are instead just capitulations to capitalism and not a direct challenge to it. She digs medium depth on all four of these people, and show that the greater goal is not met. I am more familiar with Gates and Oprah, as most people will be. Gates changed from uber-nerd to someone who wanted to save the world through elimination of disease and improved education. Oprah likes to hold herself up as an exemplar of pull yourself up by your bootstrap ideology. Both approaches are limited in their reality by the nature of economic and social relations that we call capitalism. Their very uniqueness shows the limits to capital, in that the mythos they perpetuate is limited by a confluence of happenstance that was beyond their control. Even if, like Gates, you ultimately want to put back the extraction of the resources you were able to affect through being a good programmer at the right time, there are still frictions in the system, and you will never be able to full give back. Your limits are also in part based on your focus -- Gates uses the market system to try to “Reform” schools; bypasses the state to eliminate diseases.  Mackey want to make a smarter market system, but even with his firm’s growth, even if it were a wonderful alternative to the WalMarts of the world, it doesn’t scale and just reinforces the privilege of the Whole Foods Shopper over any other consumer.

 The first essay in the book is the most troubling to me, since I have written positively of Sandberg’s “Lean In” crusade as trying to do the best within the capitalist system, even acknowledging Sandberg’s privilege of trying to make changes from the top. Aschoff and I have read a lot of the same writers, and she shows me the errors of my ways in being optimistic about the potential for change. Sandberg is focused on professional women and ultimately will only make incremental changes. Real change has to come from the bottom. Sandberg wants women to lean in, but the real goal is to lean against – and that is not just putting the onus for change on women, but it is the necessity of all people who want change to make a more equitable system.

 The book is short, but it is in the vein of Rosa Luxemburg, showing that yet again, reform is accepting the contradictions of the capitalist system, where real change is system change.

Goldratt's "The Goal": Strong Foundation, Weak Structure

I haven’t read that many business books. The ones I have are usually more poorly written than the economics books I read. I know that there is often a dedicated course in business writing in the academy, but in my experience, it isn’t a focus of the program.

So when I was assigned a long business book as additional reading for my operations management class, I wasn’t too jazzed. I was pleasantly surprised though, the Goal isn’t that bad.

To talk about the Goal, I have to talk about the structure. It is a 330-page business novel.  I had no sense on going in what a business novel would be like, and it is basically that, a novel with plot and characters.

The problem is that it is a didactic novel. That means it is teaching you something. And in that role, it is often very heavy handed. The plot is that Alex, the main character who we get to enjoy present tense first person narration though, has been promoted to be the plant manager of his hometown plant. It is not producing the profits that corporate would like to see. On top of that, the orders are late and they’re always in a rush. So corporate comes down and gives Alex an ultimatum – you have three months to turn around the plant or we will look into closing it.          

So what does Alex do? Thankfully, Alex meets an old physics teacher friend of his named Jonah, who happens to be an internationally famous business consultant. The problem here is that Jonah is always busy, so he can’t handhold Alex to improve the plant. This device is here so that you as the reader and the character of Alex isn’t told straight up what changes to make. You/Alex need to find from the stated principles to improve the plant. The whole thing is based on the idea of the Socratic dialogue –where the teacher doesn’t tell you anything but the educate is a coming to knowledge of the student. It’s really heavy-handed, since the author mentions it in the introduction and also has a subplot where Alex’s wife starts reading philosophy and they have a couple dialogue exposition-dump conversations.

Ultimately, Alex does come up with a process of improvement where he takes some of the old rules off the board and looks at defining the ultimate goal of the plant vis a vis the company and what he can do to help the plant meet those goals. He and his team identify bottlenecks in the plant, reimagine them, and the plant is a success. He is promoted to district manager at the end, and he and his team start to see how they could apply the more general principles they had determined to processes that are harder to define than movement of material in a plant. For me, the end was the weakest part because I work in service and I kept trying to figure out how this could apply to me in my job. I still haven’t and I hope there was a sequel or something that applies the goal to a larger organization.

The general processes that Alex worked out by way of Jonah (who is a total stand-in for the author) are:      

1) Identify the system’s constraints

2) Decide how to exploit the system’s constraints.

3) Subordinate everything else to the above decisions

4) Elevate the system’s constraints

5) If in the previous steps, a constraint has been broken, go back to step 1, but do not allow inertia to cause a system constraint.

 

They sound like good general principles, and they work in the book. I do have some issues with the book and the idea though. First of all, the structure of the book feels entirely unnecessary. We as the reader have very little context for what the company Alex works for even makes. It is just some generalized manufacturing plant in a nameless town. That means the process described in the book cannot be fully trusted to have worked. I would like to see evidence-based material to prove that the process works. As it, it might as well be like the mystery writer who cannot really solve mysteries but just knows what he wants at the end so he can work backwards.

Second, the novel approach is just weird. It makes the book longer by three times than it could be to convey the same information. For example, there is a part in the book where the main character takes his son on a walk in the woods with the rest of the Boy Scout troop. The whole thing is just in there to illustrate that any process is only as strong as its weakest link or as fast as its slowest part. And it takes a long time to do so. The characters never really develop a secondary consideration. There’s a whole subplot where Alex and his wife are fighting and she ends up moving out for a while and it is just ridiculous. As a reader of fiction, it is horrible. You don’t know why these characters are in love in the first place and their reconciliation is unbelievable. It is also completely unnecessary for what Goldratt is trying to teach in his book. It just adds pages and I still never really cared about the characters.

Smaller things nagged as well.  For example, what is it about the impetus to restructure the company? Do you need to be close to failure to rethink your processes? Alex only went ahead with it because he had nothing to lose. That gave him reason to change. If things are working well enough at work, why change, even if efficiencies can be found? Another is that this book has been around a while now. Are efficiencies still possible? Or does every generation of managers have to relearn the same general principle here? Further – with the decline of manufacturing in the states to more labor-intensive countries, did the companies that embraced the goal succeed? There’s no indication in the book of the real world, so that bugged me.       
                

One last thing. Alex always refers to the cars he and his wife owns by their make. He has a Mazda, and she has an Accord. If he works in domestic manufacturing, why the heck does his family have two foreign cars?

Some Key Insights of Microeconomics

Lean Back

There was a story tossed around at some point about Henry Ford’s crowning jewel, the River Rouge manufacturing plant. It was said that Ford, who owned the mines for the coal and iron ore and the plantations of rubber trees for the rubber, would have the ships unload their cargo on one end and the other end would spit out fully formed Ford automobiles. This is an example of perfect vertical integration from tree to tearing up the country roads. It is also, what may look to be the best way to realize profit in a market system is vertical integration. A firm will not have to be at the mercy of suppliers, and they can capture whatever profit the supplier firm might have, thus creating more profit within the firm.

It is simplistic and wrong. One of the key insights of microeconomics is that there is a whole constellation of factors to take into consideration when looking at integration, either vertical or horizontal. These are termed “make-or-buy” decisions (Besanko et al. p. 99) and they determine if a firm should obtain an input from a supplier on the market or bring it in-house. The ultimate takeaway is that the profit the supplier firms create is hard to capture because the supplier firms have their own learning curve and their own economies of scale. It may make no sense for an automobile manufacturer to make their own airbags when every manufacture needs airbags, and a supplier can specialize and sell airbags to several companies. This allows the supplier to have lower costs because they are operating at scale where a singular manufacture of automobiles would have higher costs because they are manufacturing for only themselves. The potential exist for the manufacture to be a supplier for other manufacturers, but that is rare because other manufactures do not want to be reliant on competitors for suppliers. This is why Delphi and Mopar were spun off the larger parent companies, and they have gone through further specialization themselves. A further incentive to buy in the market is that by having multiple suppliers a firm can buy an input at the market price and be shielded from any supply chain disruption. Competitive firms do realize a profit, but bringing production of an input in house is no guarantee of capturing that profit both because the supplier is working at scale and there is a potential for the supplier to get lost in the bureaucracy of the firm and the potential profits instead become costs to overhead. Ultimately, it can be the firm that does the least that is the most efficient because it can then utilize the learning curve and the economies of scale for that one thing that they do.

There are other important takeaways of strategic microeconomics. An important thing to take into consideration is that the market is not everywhere and anywhere. A lot of goods and services are available through the internet. Call up Amazon and hope you find a good price and can trust the reviews, and you can buy most anything near the market price depending on how you get it shipped to you. Other products are very tied to the location of the consumer and the supplier. If a particular sweater is only available in Mongolia, and the firm does not ship it, then the buyer has to both find the sweater and go to Mongolia to obtain it. The location of a firm has some very real drivers on how much the customer is willing to pay. The ultimate cost of a good is not just the price paid in market, but also the time it takes to find it and get to it. There is the gas paid and the depreciation of the car, and the opportunity cost involved with the travel. What does a potential customer give up in terms of going to Mongolia to get that sweater? It can be so much that the firm could give them away to American customers and they would not be able to. Instead, the market for that sweater is more realistically geographically defined. Mitigating these search costs (Besanko et al. p. 179) is why it is so common to see multiple locations of some stores. In Chicago, there are Dunkin’ Donuts and Walgreens stores almost every other block. The reason is that though they sell differentiated products, the next best option is similar enough they have to put their stores everywhere or else they will lose potential sales to competitors.

A third important take-away from studying the strategy of competitive markets is the importance of the demand curve. In macroeconomics, the demand curve is given and it is more conceptual, but the slope of the demand curve is important. It is also not wholly a straight line. Individual markets have their own demand curve, and they can be empirically measured to show the inverse relationship between quantity and price, so that the demand curve is a downward sloping line. This has two interesting consequences (Besanko et al. p. 20). First is that an individual firm’s price flexibility is based on the demand curve. The less of a slope the demand curve has, also meaning the more elastic that demand is the less power an individual firm has to set prices. This can be seen in a perfectly competitive market. All the firms in a perfectly completive market have to charge the one price that is also the market rate where the average total cost curve and the marginal cost curve intersect. The downward sloping demand curve has an important consequence at the other end of potential market structures, in a monopoly. In a monopoly, the seller has pricing power, but they still have to face the quantity consequences of that pricing. If they try to take the price higher, they will lose customers. There is a theoretical point of price elasticity called perfectly inelastic demand, where the demand curve is a horizontal line, but that does not reflect the real world. Even in a world where a company had a monopoly on breathable oxygen, there would be a slope to the demand curve because ultimately, the willingness to pay would still be infinite, but the actual ability to pay would be finite. Ergo, there would be a backwards slope to the demand curve, and the monopolist is price constrained.

These and other ideas in microeconomics are crucial takeaways from the science. Some things that may look to be common sense on the surface are actually more complex once the math is grafted on the too easy narrative statements. Integration is not always perfect, there is a cost to search, and the demand curve can be limiting. Any prospective manager, as well as current manager, should be cognizant of these results of microeconomics.

References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of Strategy (6th ed.). New York: Wiley.