Wednesday, July 9, 2014

Evolution in Business Practices

"The steel industry was in a depression and its problems eventually affected the rest of the economy. The problems began through the continued use of obsolete production techniques, equipment and ill-suited locations. Persisting in the 'business as usual' methods of management, the industry leaders failed to see the upcoming crisis. They failed to invest in the most efficient technology, thereby reducing their production costs; instead, they fought their workers for the 'nickels and dimes' in the wages that comprised a small portion of the total product cost and acted in accordance with an economic philosophy that expedient maintainability of profits could be achieved through limited supply and the resulting profitable prices. Competition was domestic, or so they thought, and therefore as long as all the corporate leaders behaved similarly, no great advantage would be gained by any one; if one refused to reinvest in capital equipment and therefore gain a short-term cost advantage, the others would follow suit. All of this led to a crisis and everyone knows of the recent financial woes of the steel industry."

This was written in 1987 by this author for a graduate school analysis. However, as the author noted, the situation was really diagnosed back in 1919 by Thorstein Veblen in a series of articles, later compiled into a book The Engineers and the Price System. Veblen is best known for his Theory of the Leisure Class and its mantra of 'conspicuous consumption'. Veblen blamed the repeated economic crises on 'vested interests'--the corporate financiers, entrepreneurs and investment bankers--because they were more concerned with their own gain than the community's. Veblen also included the government, labor unions and trade associations because they would gain by continuation of the status quo.

Where Veblen predicted collapse of the capitalist system (aka his "Price System"), history has shown an evolution. Business has cycled through scientific management methods (just coming into prominence in Veblen's day), participative management methods and employee ownership programs. Most investors realize that we cannot just ignore or kill the goose that lays the golden eggs (or the cash cow); Covey admonished all of us a few decades ago to pay attention to the productive capacity of our organizations. Thus, business managers are re-investing into technology and education. However, we still have the tension between those who 'make money the old-fashioned way' by earning it and those who make money by 'shuffling paper' or indulging high-frequency trading (HFT). What value does the latter group provide to the community's gain except through conspicuous consumption?

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