In looking over the landscape for blog fodder I came across an article written by a guy named Paul Krugman in the New York Times that had nothing to do with lean manufacturing, but it piqued my curiosity and led me to something that has everything to do with lean. Krugman is an economist – a Nobel Prize winning one, in fact. Now I know that the Nobel Prize is next to meaningless. Just the like the Baldrige Award was something to shoot for – until they gave one to GM's Cadillac Division and the manufacturing world knew that any quality award given to any part of GM was not worth having; and the Shingo Prize was meaningful – until they handed out 20 or so of them to Delphi right before they went bankrupt; and so it is with the Nobel prize. Giving a Nobel Peace Prize to Obama who had done nothing, but because he is foursquare in favor of peace took just about all the glitter off the award – made it clear that the bar for winning one isn't particularly high. Nonetheless, it is about as good as it gets for an economist, and they gave one to Krugman.
The article that caught my eye was one in which he trashes the world's leaders for not spending money they don't have to keep stimulating global economies. He accuses them of pandering to the common people with "a stunning resurgence of hard-money and balanced-budget orthodoxy". Only the Obama administration, it seems, understands the true relationship between spending money it doesn't have and creating jobs (never mind that it spent better than a trillion bucks it didn't have last year with virtually no effect on job creation).
This guy sounds like someone who goes into the bank and asks for a loan – even though he is already in debt up to his ears and has no job and no realistic plan to pay it back. The security he offers is that "something will turn up – it always has in the past", and when he is flatly turned down, he proceeds to lecture the banker on the arcane details of lending theory and its history and berates him for being ignorant of just how lending works. In short, he sounds like an idiot.
I used to think my lack of formal education in economics was a hindrance, but when you read guys like Krugman you realize that it is actually a great benefit to not be burdened with having to unlearn so much nonsense. Borrowing money with no realistic idea of how it will be repaid, and spending it so you can enjoy life in the short term is stupid. It is stupid whether it is an individual, a company or a country. That basic premise is quite obvious to just about everyone – except to guys like Paul Krugman who has his head so far buried in pointless economic theory and the arcane details of Keynsian monetary policies versus the Chicago school and how it all relates to Adam Smith and what Milton Friedman wrote … that he is completely out of touch with the obvious. And he looks like a colossal jackass when he reacts to anyone pointing out the obvious gaping holes in his logic with a stream of insults and rants – the hallmark of his writing.
So what does this have to do with lean? It seems he won the Nobel Prize for figuring out that factories produce best when they achieve economies of scale, but consumers like variety; therefore you can't have a factory in every country to make what people want because the factory needs to make far more of everything than the local market can absorb; therefore factories will be centralized in places that are good for factories; and only the niche producers will be located in other places. This brilliant insight won him the big prize and is what he calls the 'love of his life in academic work'.
In reading this it becomes clear that economists are racing down the road with their eyes riveted to the rear view mirror, not only missing what lies ahead but unable to even see what is around them. The worst of them, guys like Krugman, compound their wretched driving by shouting insults out the window at everyone they run over.
Several years ago Norman Bodek, one of the truly great lean pioneers, took a run at trying to nominate Shigeo Shingo for a Nobel Prize but was roundly rebuffed because the Prize is not for people like Shingo who make trivial improvements to factory floors. It would no doubt shock the Nobel committee and deflate Mr Krugman's substantial ego to learn that Shingo, in fact, recognized that factories work best with economies of scale, but consumers want variety, and unlike Krugman he did not stare at his navel for eleven years – then write a paper about it. He and others at Toyota cooked up SMED. It is the heart of the Toyota Production System precisely because it resolves the issue that Krugman and the Nobel folks see as so monumental.
Henry Ford took economy of scale to an art form with the assembly line, but could not figure out the solution to customer's desire for variety – the Model T was an extraordinarily economical, high quality product, but 'any color you want so long as it is black' ultimately did him in. Sloan went after a 'car for every purse and purpose' - that customer need for variation – but undermined Ford's economy of scale by institutionalizing batch manufacturing. Economies of scale are only realized when the output across a fixed base is optimized – and batch manufacturing slowed down output, and piled up inventory and it's resulting costs to a far greater extent than anyone knew (and they didn't know it because Sloan and his minions created a new accounting scheme to make those costs look like they didn't exist).
What Shingo and Toyota did through SMED was to achieve the economies resulting from scale – producing a high volume across a fixed cost base - but to do so with great variety. Heijunka – one piece flow – mixed model production – are the solution to Krugman's Prize winning dilemma. As manufacturing becomes more flexible – able to produce a great deal of volume without having to make everything the same - the grand conflict between economies of scale and customer desires melts away. It is how factories like Wahl crank out millions of products every year from its fixed cost base – viewing even labor as a fixed cost – but doing so in the form of hundreds of different SKUs to satisfy a very wide range of customer needs.
Economists like Krugman are not only out of touch with the obvious, but they tend to be a pretty disingenuous lot, as well. They seize the data that supports their theories, and ignore the data that refutes it. Had the Nobel Prize folks been knowledgeable and ethical they would have demanded that Krugman reconcile Toyota's long track record of success with a regional manufacturing strategy with his 'New Economic Geography'. Such a reconciliation would not have been possible, because Toyota – and lean principles – stand those theories on their ears. The entire theory, in fact, is based on an understanding of manufacturing that is at least fifty years old. It applies to the Chinese factory that cranks out those irritating vuvuzela horns by the hundreds of thousands to make soccer games even more painful to listen to than to watch, but it less and less applies to serious manufacturing.
Similarly, Krugman and his brethren ignore the proven error in productivity statistics – or trivialize it – because it undermines their erroneous and outdated thinking. Or they simply flat out lie - that Comparative Advantage is "a tried and true idea that has lifted millions out of poverty", for instance. It is a typical Krugman article – start out with a lie then insult the intelligence of anyone who disagrees. Who are those millions, Mr Krugman? The Mexicans who were on the receiving end of globalized manufacturing with the Maquila craze of the 1990's? The one million jobs that cropped up are long gone when the cheap labor gang dumped them and moved on to China with no lasting benefit to Mexican wages. The Chinese? Apparently not since they are starting to riot in the streets to get the better-than-poverty-wages they deserve but have not received. The Vietnamese? Malaysians? Hondurans? Where can we find these millions who have been lifted from poverty? It is only because they are in poverty that they have jobs. When they want to be "lifted out of poverty" your theory of Comparative Advantage dictates that factories move to another country where the folks have no such lofty aspirations.
With their backs to the future and their eyes closed to the present, economists are proving themselves to be increasingly unworthy of respect. More and more what the economists have to offer the world is absolutely nothing.
Within ten years regional manufacturing based on lean principles will be the norm, and the days of mass production without variation will be largely over. What will actually lift millions out of poverty will be to perform high value, high productivity in lean factories serving their own regional demands. Thirty years after that, the economists of the world will 'discover' this economic shift, and will race each other to Oslo to win the prize for their insight. By then I doubt anyone will care.
Paul Todd says
What perplexes me about economic theorists is that they all take as a given that industrialization creates wealth by “lifting millions out of poverty”, yet none seem to be bothered when the source of all that wealth is shipped off. For those displaced workers who don’t become radiologists, accountants, or professors, how will they maintain their living standards? That is the question I would like Mr. Krugman and company to ponder, with help from Evolving Excellence as needed.
Lost in the Northeast says
Bill, I don’t think anyone cares now, except for those of us struggling to overcomee the hideous theories of boneheads like Krugman. Because most people have not been taught cause-and-effect they don’t have any idea of the true causes of the economic and manufacturing difficulties occurring in the US today. So, they follow the idealogues blindly down the paths laid out for them. I keep my faith and remind myself periodically that Shakespeare wrote that the true man fights only for the lost CAUSE, realizing all others are mere EFFECTS, (paraphrased); and that Harry Truman said that if you “took all the economists in the world and laid them end-to-end they would still point in all directions.”
Lean Advisor says
Only people who have worked in a factory, managed a factory or worked at improving factory performance truly understand the issues involved. Go to the gemba Mr Krugman, work at improving one process, and then another, and another for at least 5 years, study all the great Toyota / Lean books and make a positive contribution to economics of small volume – high variety and maybe you will gain some respect within the Lean community.
Barry Sharp says
Bill, what a great article on Krugman, and it could not have been more right on. I believe that the reason this nonsense of Toyota’s safety record about this make believe theory by the Obama destroy all capitalism club, that their (Toyota’s) vehicles just accelerated on their own accord (floor mats) was to try and destroy the credibility of the company’s economic & manufacturing impact on the world. Another Obama ism.. When shall the world awaken to that which surrounds them inevitably to destroy us all? Thanks Bill for you insight..
William Pietri says
I’m disappointed with this. Krugman actually has a very clear idea how the money will be paid back and has said so repeatedly.
The theme he’s been hitting lately is something that I’d think would be pretty clear to somebody who understands Lean. You already know that making money is not the same thing as creating value, and focusing too much on standard accounting measures can lead to value destruction, especially by destroying productive capacity through firing capable workers just to meet short term numbers.
Whether you agree with him or not, the basic point he’s making is clear and coherent: fiscal policy should be countercyclical. By borrowing during downturns and repaying during booms, government smooth out economic cycles and prevent the destruction of social and commercial infrastructure. Done right, there is no net cost, because the countercyclical spending is cheaper than the value that people fail to create during the busts, let alone the waste from overproduction during the peak of the booms.
Disagree with him, sure, but your willful ignorance of macroeconomic theory makes you look like a creationist who says, “I don’t know much about science, but what kind of fool thinks we come from monkeys?” The choir may enjoy that sort of preaching, but it doesn’t help your credibility with anybody else.
Bill Waddell says
William,
And I am disappointed in you falling into his arrogant defense of his theory – that disagreeing with him is proof of ignorance.
Make no mistake – I clearly understand the theory – hence the “something will come up, it always has in the past” remark. Krugman (and you apparently) assume that we are just in another ‘natural’ cyclical downturn and the economy will by same law of economics or nature inevitably come roaring back to its previous levels. The deficit spending now will then be repaid with the surpluses from such a boom.
If there is any willful ignorance going on here I think it is on the part of you and Krugman who fail to see this as a substantial and somewhat permanent correction in the economy, rather than just a deeper than usual but normal swing.
Consider, for example, the automobile market. Prior to the collapse some 16 million cars a year were sold and bought in the US annually. For those levels to return, someone is going to have to start making ‘C’ and ‘D’ loans again to people with poor credit. For someone to start making those loans, someone on Wall Street is going to have to be willing to buy bundles of such loans. Who do you and Mr Krugman think is going to invest in such a bundle after the experiences of the last few years? It turns out that the size of the market for automobiles among people who can legitimately afford them is something closer to 12 million a year.
The same fundamental issue exists with credit card debt. The people from VISA and Mastercard are not going to go back on the college campuses pushing credit cards into the hands of kids with no money, no credit and no job until someone on Wall Street is foolish enough to buy that high risk debt. And, of course, housing is the biggie. Same thing – who will invest in bundles of home loans to high risk borrowers?
The economy was rolling along on a shameful explosion of credit that could not possibly sustain. Obama and others look like fools when they criticize the banks for not making more loans to help the economy. The banks only made those high risk loans in the form of credit cards, auto loans and mortgages because they had a ready market to sell the paper. Those markets are long gone and no one is foolish enough to invest in them again soon.
Krugman’s theory would have the government step in and replace the trillions of dollars of consumer spending that was done by poor credit risk people until the markets to invest in such credit return. That is no ‘cyclical thing’ that is just going to naturally occur any time soon by same law of economics. When I facetiously said that Krugman has like the guy going into the bank with no realistic plan to repay the loan he was seeking I meant exactly this. Krugman has no realistic idea of just how the economy is going to get back to 16 million cars a year without the C and D credit people buying them.
Krugman’s theory that this is just a cyclical downturn that will soon enough be replaced by an off-setting cyclical upturn is based on an assumption that the economy is fundamentally sound and on the right track, and that this is just a normal variation on a trend line that will generally keep on the same slope it has been on all along. The alternative would be for him to admit that he and the rest of the economic community have been enormously and painfully wrong for the decades it took to build up to this fiasco, and that admission is not going to happen. When he and you can tell me who is going to underwrite $80 billion worth of high risk automobile loans every year in this country any time soon I will stand corrected. Until then, I stand by my post – that he is urging massive government spending with no plan for when and how it will be repayed.
Bryan says
Unfortunately, economic theory has little to do with money and more to do with human action.
A great, easy read is Economics in One Lesson, by Henry Hazlitt. I’m sure Krugman would roll his eyes at this “laymans” unsophisticated explanation of economics.
Bill Waddell says
P.S. William
Since we exchanged comments the Congressional Budget Office released its latest projections. You can read about it here:
http://money.cnn.com/2010/06/30/news/economy/fiscal_commission_cbo/
Among other things it says, “Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That’s the equivalent of a third of all federal revenue”
If the plan is “borrowing during downturns and repaying during booms” the borrowing now you and Krugman think is such a good idea cannot be repaid before 2035 at the earliest, according to the Democrat in charge of the CBO.
We won’t be able to pay the interest on the Federal Mastercard we have maxed out, let alone pay down the principle, and Krugman’s solution is to go out and apply for a federal VISA card so we can keep spending more than we take in – or have any hope of taking in – over the next 25 years.
Billy says
Just to throw another “William” into the fray…
It seems that William’s reading of Mr. Krugman makes a lot of sense. Unfortunately, it only works if government actually works to repay its debt during booms. When has THAT ever happened?
Bill Waddell says
Excellent point, Billy
By the way – great email address … and welcome to the fray.
Bob Emiliani says
Coincidentally, Toyota’s debt is over 60% of FY2009 sales (their GDP, so to speak). What’s their plan for reducing debt? They’re increasing spending on advertising and spending more than a billion dollars in dealer money, low/zero-interest loans, and rebates to customers. So it would seem to be growth through higher sales. Debt repayment? They didn’t do it during the boom…
Steven Bonacorsi says
Well written assessment, bravo on setting the record straight.
Happy Independence Day
Andy Etnyre says
Between cash, short term, and long term investments – I think Toyota has the money repay it’s short term and long term debts. Not fair to compare the way Toyota runs it’s business and how the Federal Govt. operates.
Jayadeep Purushothaman says
I thought I was ignorant about economics and that was the reason I felt Economics didn’t make any sense. But one thing for sure, they are the middlemen on the sidelines who never played the game most of the time.
Found this blog some months back and it has been pretty useful for me in learning about lean – thank you!