The developed world’s business model unravels. Is that a good thing?

Free trade and globalisation; just-in-time supply chains; the supply of cheap labour (such as lorry drivers or fruit pickers); each of these has been a critical aspect of economic development in the last twenty or more years in developed countries. And almost every day I read an article about each of these is unravelling. This feels like a profound reversal – but what will it mean?

I can’t help thinking back to my management training in the late 1990s. There was one segment called “The Power of One”. The idea was that if you improved each aspect of your business by a small amount (“one”, which could be 1%), the overall effect on profitability could be profound. Profit is the difference between two large numbers – so improving each of those numbers by a small proportion has a disproportionate effect. If your revenue is 100 units, and cost is 98, your profit is 2. If you increase revenue by one to 101, and cut costs by one, to 97, your profit is 4 – double. This was part of an era of tight micromanagement and of continuous, incremental improvement. Alongside this came a trend to break up business processes amongst specialists by outsourcing – and often this was to businesses based in places where labour was cheap. Or sometimes to agencies that could procure cheap labour, often by using immigrant labour. This gave managers more ways to exert the Power of One, often using the oldest management technique of all: bullying. The changes might be incremental each year, but over time the effect was profound. Complex supply chains and cheap labour became embedded in rich world economies. Some big businesses, such as supermarkets, became very powerful; others, such as farmers and haulage businesses were squeezed dry.

By and large economists applauded this process. Prominent liberal economist and Nobel laureate Paul Krugman once said “Productivity isn’t everything, but in the long run it is almost everything”. Human wellbeing is measured by the amount people consume (well it isn’t, economists admit – and then fail entirely to to act on this insight); in the long run to consume more per person people must produce more per person; that is the definition of improving productivity. Add to the mix gains from trade, a favourite concept of economists, and the gains made in the 1990s and 2000s through tighter management would be bound to lead to gains for everybody in the long run. Economists deal in aggregate numbers and sweeping generalities – their’s is not ask what is really happening beneath the numbers; that’s mere logistics that the little people like accountants are there to manage. But non-economists were not so sure that all was well. They pointed to a number of problems: inequality, exploitation, sustainability and resilience.

To many the rewards of all this productivity improvement were skewed. True, many things became cheaper and inflation was reduced to a small number – but the lives of many workers and small business owners were squeezed by the culture of continuous management bullying, and their livelihoods became less secure as work became here today and gone tomorrow. The big, powerful businesses controlling it all were not necessarily all that profitable, as they often competed intensely with each other, but they were controlled by small elites who were able to corner good incomes for themselves – a reward as they saw it, of making their business more efficient. And there was a strange shadow world of highly-paid professionals designing these complex systems and keeping them in being, in finance and consultancy.

But the inequality problem went deeper than that. Many of these techniques are about the use of cheaper labour (not all – just-in-time management is about inventories) , either by outsourcing to places where labour costs are low, or by importing workers from such countries. Economists are relaxed about this. Wages are low in less developed countries because productivity is low there. Trading with them helps the raise productivity and wages, so both sides gain. This is more of a stretch if the workers themselves are imported – but there is evidence of benefits to the exporting country in that case too. There are a couple of problems though. Labour standards are often lower and this is often exploitative and unethical. More fundamentally, it can only be a temporary fix. Living standards and wages rise in cheap labour countries (look at the succession of countries where this has happened – Japan, South Korea and now China) , and immigrant workers integrate into their new home.

There was also a hidden cost: to sustainability and resilience. Farmers were forced into methods that sucked the land dry (figuratively – depriving the soil of nutrients rather than water), and culled biodiversity. Few people want to be lorry drivers, and their average age is rising. And when there is disruption, such as an earthquake in Japan or a container ship grounding in the Suez Canal, chaos ensues right around the world. Never mind a global pandemic. Suddenly, the world is full of production and transport bottlenecks.

And so it has all started to unravel; the gains are being unpicked and reversed. The changes have been happening for a decade or more, but the first conspicuous reversal came with a political backlash that economists are prone to dismiss as “populism”. In 2016 Donald Trump railed against outsourcing, immigration and foreign trade deals. And in power he did his best to put the clock back, most successfully in trade. In the same year Brexit campaigners also exploited discomfort with free trade and immigration. The outcome has been a profound disruption to many businesses, as buying things from the European Union has become harder (and selling things there), while the pool of flexible European labour has diminished.

Brexit means that the shift has been particularly acute here in Britain – but Brexit has merely accelerated trends that can be seen right across the developed world, and which the Covid-19 pandemic has also accelerated. This has created a very challenging environment for many businesses, and it will surely mean that the prices of many goods will increase, and living standards, as measured by economists, will fall. But before we get too gloomy about this we need see it all in a broader perspective.

Firstly, most of this is about “stuff”: things that need to be moved around by ship, train or lorry. Productivity levels for stuff are already very high, to the extent that it plays a much smaller role in the economy as a whole than it used to. Manufacturing and agriculture account for less than 20% of British national income, compared to over 70% for services. Furthermore there is a lot of over consumption. Most clothes that are bought are only worn rarely. Who really needs an SUV with a max speed over 100mph to do the weekly shopping? Vast amounts of refuse is generated. Consumption of yet more stuff is not going to be the route to improved wellbeing. We can adapt to consuming less across our society without an adverse impact – even recognising that a significant minority of people would benefit from an increase in consumption.

Secondly, it is good thing if many people in lower-paid jobs (which I will not call “low-skilled” as the Home Office does) have more bargaining power. We are long overdue for a reversal of the balance of power between workers and capital, which has tilted towards the latter from the 1980s. This is why incomes have been skewing towards the better off. Whether what we are witnessing is enough to be such a reversal is another matter – but it is surely a step in the right direction.

And thirdly there are other ways to improve productivity. Automation may destroy jobs, but, as economists don’t tire to point out, it leads to the creation of others. Good process management, another 1990s idea, but one that failed to catch on as much as it should, could improve many industries, especially in services such as health care. It failed to catch on because it involves delegating more power and responsibility to lower levels of the organisation – something that senior managers and regulators like are uncomfortable with. Many observers suggest that the shock of lockdowns has spurred innovation and productivity improvement.

So it may not be a bad thing that the world is changing, but all change is disruptive, and the main victims of disruption, in the short run, are usually the less well off. But in the short term most of will find it harder to get many of the things that we want. there will be more self-service. But it may a step towards making the world a better place.

6 thoughts on “The developed world’s business model unravels. Is that a good thing?”

  1. In your previous posting about Afghanistan you ventured the opinion:

    “How the West won the Cold War had little to do with military confrontation ………. It was the self-evident superiority of Western values that did it.”

    I’d put it that they were only self evidently superior when the western ruling classes wanted them to be. Once the Soviets had safely been confined to the the pages of the history books, superior values were no longer a priority. Those increased profit margins that you mention were.

    I don’t believe it was entirely coincidental that the kind of economics you would have been taught, in the post cold war period, was of the essentially neoliberal variety, whereas when it was at its height in the 60s, economics was still of the Keynesian variety and such concepts as full employment weren’t solely the preserve of the ultra left.

    My expectation is that the increased government deficits of recent times, which are also accumulated savings of everyone else will produce a spurt in inflation. It’s a similar process to coming out of a war time economy. Inflation can be an issue. So good on the working class for making the most of the situation with some higher wages. But there will be reprisals in the form of more austerity based neoliberal economics. There could be a rocky ride ahead.

    1. Demand certainly is outstripping supply in a lot of places. But a lot of the excess savings is in the hands of the better off, and much of that is being channelled into financial speculation rather than demand for goods and services. That won’t end well, but with a bit of luck the bust will look more like the end of the tech boom in 2000 than the crash in 2008…

      My economics teaching was very much in line with the Neo-Keynesian consensus – how neoliberal that is depends on how you define neoliberalism (a lot in my view, but my definition is more benign than most on the left). However the university teaching did encourage a spectrum of views, and the concepts of market failure were explored. The central idea on unemployment was the “natural rate” as promoted by Friedman – which is looking a bit battered these days.

  2. I would have thought New Keynesianism, rather than neo, with its emphasis on monetary policy was more the dominant approach in the profession.

    How would you explain the differences between the various Keynesianisms? And what would Keynes have been if he’d been around today?

    1. I have to confess I use the terms interchangeably. What I am referring to is the integration of monetary policy into the classical post-war formulation developed by Samuelson – the ISLM model I think it is called.This was pretty much consensus in the early 2000s in mainstream universities. The first textbook I had was by Olivier Blanchard. What Keynes would have thought is another matter. He never took it down the highly mathematical rate favoured by modern universities. He was certainly pretty flexible though. He may have been troubled by the practice of floating exchange rates – but I suspect he would have come round to the idea. I suspect the running up of big surpluses by Germany, Japan, etc would have bothered him though.

      1. Prof Bill Mitchell is particularly scathing about IS-LM models as you’ll see if you Google {Bill Mitchell ISLM }.

        I’ll leave that type of mathematical discussion to the professional economists, but I’ve never understood why it was the accepted consensus that regulation of the economy was possible by mainly monetary means. ie Reducing interest rates to speed it up and reducing them to slow it down.

        The first part appears to work in the short term because increased borrowing leads to more spending. But the borrowing isn’t giving anyone more spending power in the same way as a tax cut might do. It simply brings forward some future private sector spending power which then leads to reduced spending power in the longer term or a debt deflation.

        So interest rates have to be lowered again to encourage more borrowing and private spending to cure, in the short term, the debt deflation caused by the previous round of borrowing and spending. Any attempt to raise interest rates becomes problematic because of the danger of creating a situation where debtors can’t repay loans and we have another 2008 style GFC .

        So we were always going to end up where we are now with ultra low interest rates and very high levels of private debt.

        1. Hmm.From my past readings of Bill Mitchell I suspect hime of playing up the model’s weaknesses in order to burnish his own reputation. All simplified models are full of holes – it depends what you use them for. The teaching at UCL used the models very effectively to show how different aspects of the economy might be connected, and the thinking behind many of the policy decisions that had been taken in the last decade and were being taken then. They were also clear that it only reflected short-term to medium term developments – and that it could all collapse in the longer term. The standard answer to your criticism from economic liberals would be to agree, but to say how important supply side policies were to work alongside short term adjustments to build up internal strength within the economy.
          That was in 2008, just as the crisis was emerging. At the time this was used to illustrate issues of asymmetric information, but not much on macroeconomics. The course did help me understand what was happening – and many of the issues with the Euro, for example, were borne out. Still their teaching has moved on. My tutor, and the lead on macro, Wendy Carlin, is one of the leading drivers of the reform of economics teaching – though very much within the orthodox mould.

Comments are closed.