#39 How Manufacturing Can Create Societal Wealth

05 Saturday Apr 2014

Posted by Jordan Abel in Definitions, Economics, Innovative Thinking: Ideas and Products, Societal Issues

Note: Entry #41 begins a series of blogs about General Motors. How did an apparent culture change over time likely lead to bankruptcy and an apparent disregard for addressing safety issues. Such actions by corporations affect societal attitudes.

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books? Click links for download. America’s 5th Revolution Volume I (Entries 1-10), America’s 5th Revolution Volume II (Entries 11-20), America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan Visiting College Campus. Meets Former Economics Professor.

Jordan: “Professor, nice to see you again. Been a while since I was in one of your classes.”

Professor: “Yes, a long time. I understand you’re spending a lot of time in Washington.

Jordan: “Too much time. I need these kinds of breaks to keep my thinking straight.”

Prof (laughing): “You’re not saying people inside the Beltway have distorted thinking?”

Jordan: “I’ll skip my thoughts on that one. But if you have a few minutes I would like to get your thoughts on some serious issues facing the country.”

Prof: “I’ve got about an hour before my next lecture. What’s on your mind?”

Jordan: “There are some disturbing trends in the economy.

Prof: “Such as?”

Jordan: “The United States needs to generate more wealth as a country. Taxing the rich does not create wealth, merely redistributes income. Like moving money from one pocket to another. What policies should we consider implementing to create more wealth for society? Not just wealth for some individual or some company but wealth for society.”

Prof: “Great question. Creating wealth is a simple concept but far more difficult to execute.”

Jordan: “Let’s pretend we are back in Econ 101. Explain the concept and then we can talk about execution.”

Prof: “OK students, quiet down. Just kidding. For me the easiest way to understand how to create wealth for society is to think manufacturing.”

Jordan: “Exactly what do you mean by manufacturing?

Prof: “Most people think manufacturing as making cars or airplanes or furniture. But in the broadest sense manufacturing is the process by which value is added to a product.”

Jordan: “If I understand, then farming can be considered manufacturing. You start out with seeds and you end up with a bunch of corn. Mining would also be the same. Start out with dirt and end up with say iron ore.”

Prof: “Let’s use your examples. How is wealth created? Let’s take raw material – iron ore, corn, lumber. Step 1 is consider the value of that raw material on its own – a hunk of iron ore, stalk of corn or a tree. Step 2 is think about a product that uses the raw material. Step 3 is compare value between the raw material and the finished product?”

Jordan: “Let’s take this coffee mug. The raw material is some type of clay and some paint for decorations.”

Prof: “Good example. What would you pay for the clay and paint as raw materials?”

Jordan: “Nothing because they are of no value to me.”

Prof: “What did you pay for the coffee mug — $10?

Jordan: “Try $20. It’s a nice mug.”

Prof: “So value went from $0 for the raw material to $20 as a coffee mug?”

Jordan: “Yes. Whoever made the mug must have created the value.”

Prof: “He does remember Econ 101. Actually there are some other people in the chain but you have the idea.”

Jordan: “The other people – the trucking company, the place where I bought the mug, the company that mined the clay and the company that made the paint – all contributed to the wealth creation.”

Prof: “On a very simplest level, none of those people would be working if you didn’t buy the coffee mug.”

Jordan: “So each one of the companies involved in making and then getting the coffee mug to me contributed to value creation?”

Prof: “One can argue that the people between the potter and the buyer are merely middlemen. You could have purchased the coffee mug directly from the maker.”

Jordan: “So the middleman might not really add value, bur rather…call it ‘facilitate’?”

Prof: “The word ‘facilitate’ will work. ‘Catalyst’ will work also. A catalyst allows a reaction to occur without becoming part of the reaction.”

Jordan: “Hasn’t the internet started to replace the middleman? Many more companies seem to be selling directly to the customer.”

Prof: “The internet has been a disruptive force to the middleman, or distribution system. For centuries people in developed countries bought in physical stores. Virtually all these stores were operated by merchants who sold the goods but did not make the goods.”

Jordan: “Now, with the internet, in many cases I can buy directly from the manufacturer and have the product delivered to my location – no more brick-and-mortar store.”

Prof: “A lot of jobs associated with…call it merchandising business…have been eliminated.”

Jordan: “Did those people really add value and create wealth?”

Prof: “Technically, no. But what they did do was enable a lot more people to buy the product. Without the middleman, the potter who made the coffee mug would have a very limited population to sell to. With the middleman, the potential for sales expanded exponentially.”

Jordan: “Now the potter can use the internet and reach many more people than before. In some cases maybe even more people than with the middleman.”

Prof: “And keep more of the profits since no payment to the middleman.”

Jordan: “At the same time, employment declines because fewer people are working to distribute the product. So did we really create any additional wealth by selling on the internet?”

Prof: “Answering a related question will help you set policies for wealth creation.”

Jordan: “Where are we headed?”

Prof: “What if the coffee mug is no longer made in the US but now made in say China…bad pun, I know.”

Jordan: “I’ll forgive you. If the mug is made in China, the wealth created between the raw material and the finished product – coffee mug – stays in China and not the US.”

Prof: “You’ve got it.

Jordan: “Rather than $20 being spread among US companies, the only value in the US is for transportation and distribution — maybe $5-6. The potter is cut out completely.”

Prof: “One can make a good argument that no wealth is created for US society when products are manufactured outside this country. What we as a society confuse is wealth creation for an individual or company compared to wealth creation for society.”

Jordan: “Macro and micro economics. Or as a friend of mine calls it macro schmacro and micro schmicro economics.”

Prof: “I’ll remember those terms. But the distinction is important. What is of benefit to an individual or a company…schmicro economics…is not always a benefit to society…schmacro economics.”

Jordan: “Moving production of coffee mugs to China might generate more profits for a specific company…schmicro…but overall the US loses wealth as a result…schmacro. Correct?”

Prof: “Yes…but…and the ‘but’ is the value of trade between countries.”

Jordan: “So trading between countries is not just a one-way street but can create wealth in both countries?”

Prof: “Trading is important because more demand can be created. Just like the internet opened up new markets for the potter who made the coffee mug, trade opens up new markets for countries.”

Jordan: “But isn’t trade usually one sided. I mean the country that exports seems to benefit the most.”

Prof: “The country doing the exporting is usually more efficient at making those products than the country buying the products. But for trade to work the country buying has to offer something in return – another product at a lower cost or some raw material that has value.”

Jordan: “Let’s take coffee. Brazil is more efficient at growing coffee beans than the US mainland. Therefore, the US should buy coffee beans from Brazil.”

Prof: “The US is also very efficient at growing certain crops – corn, soybeans, wheat. And it exports lots of those crops.”

Jordan: “But Brazil and the US are not as efficient at producing electronics as say China. So Brazil might trade coffee beans for US wheat and the US might trade corn for electronics made in China.”

Prof: “You’ve got it the basics. In theory…and I emphasize theory…each country trades products that it produces more efficiently. As a result products made in another country are less costly to consumers and wealth is created in each of the countries.”

Jordan: “I realize understanding wealth creation has many more variables. But the gist of it seems taking a raw material and refining it so it is worth more. Clay becomes a coffee mug. Wheat becomes flour which becomes a cake. Silica becomes silicon which becomes an electronic circuit which becomes a computer.”

Prof: “Very good Jordan.”

Jordan: “Prof, I have a somewhat related question that has bothered me for some time.”

Prof: “Which is…?”

Jordan: “The manufacturing of electronics is mostly automated. Labor cost as a percent of the cost of the product must be very low. So what is the advantage of making so many electronic products in Asia? Lead times are long and it is hard to protect intellectual property.”

Prof: “Let’s take a break and come back to that question. But I want to put the answer in the context of your first question – what policies will help the US create more wealth for society and not just individuals or certain companies?”

Jordan: “Good. Now I want to refill by coffee mug. Let’s see where this was made?”

#33 Rekindling the Emotional Bond with Detroit

15 Saturday Mar 2014

Posted by Jordan Abel in Economics, Innovative Thinking: Ideas and Products, Societal Issues

≈ Leave a comment

(Readers: Please note the blog about the 5^th revolution in the US is constructed as a story. While not all chapters are linked, I think the story will be more meaningful by starting at the beginning.)

Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books? Click links for download. America’s 5th Revolution Volume I (Entries 1-10) America’s 5th Revolution Volume II (Entries 11-20) America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan’s Office with the housing Guru. Continuing conversation.

Guru: “OK, Jordan, we have our coffee refill. Tell me what I need to know about making the rehab in Detroit more appealing.”

Jordan: “You consider yourself a car guy?”

Guru: “Huh? What do you mean?”

Jordan: “You answered the question. You’re not a car guy. Detroit still is the car capital of the world, even if many assembly plants have left.”

Guru: “Where is this conversation headed?”

Jordan: “Are you a fan of Motown music?”

Guru: “Who isn’t? Motown music is alive. It’s lasted several generations and cuts across all ethnic groups.”

Jordan: “And for good reason. The Motown sound is great music.”

Guru: “OK. So are you saying the rehab needs to incorporate cars and Motown?”

Jordan: “In spirit anyway. The rehab program has got to have a soul. It somehow needs to build the same kind of emotional bond that people have with their cars and people have with Motown music.”

Guru: “How am I supposed to do that?”

Jordan: “Guru, that’s your job. You’re the architect…you’re the designer. I’m just the client.”

Guru: “Give me some more guidance about what you want. Start with cars.”

Jordan: “Cars and trucks are very high tech. Today even the least expensive cars have extensive integration of electrical and mechanical components. Somehow the rehab needs to highlight the combination of electrical and mechanical functions. Show how automated functions can make an older building modern.”

Guru: “Like automated parking, for example?”

Jordan: “There you go. Perfect example.”

Guru: “Many of these old factories are wide – in fact, too wide for two modular units and still meet the code for natural lighting. We could have parking between the units…and automate the parking.

Jordan: “Automated parking inside the building that used to assemble cars. I like that.”

Guru: “Now, let’s try to build on that idea. What else can we do?”

Jordan: “How much electronics can you include in the building and in the modular units?

Guru: “As much as you want. All electric circuits and outlets could be integrated – just like a smart house. You can also link the circuits to a smart phone or car.”

Jordan: “What about upgrades to the circuits over time?”

Guru: “How many times are you going to ask me that same question?”

Jordan: “I don’t know. But the modular unit should be designed to allow the resident to upgrade easily wiring and other electrical features for at least 50 years, and preferably 100 years.”

Guru: “All the wiring is on the outside of the module and easily accessible for upgrades and any repairs.”

Jordan: “I know. But just want to make sure it can be upgraded easily. By the way, we need to stop calling these modular units. It’s confusing.”

Guru: “What’s so confusing?”

Jordan: “People think of modular in the same vein as double-wides.”

Guru: “They’re completely different.”

Jordan: “Maybe to you and people in the industry but not to most folks, me included.”

Guru: “You have a better name?”

Jordan: “What about ‘component construction’? Sometimes the component can be large — like an entire unit — or sometimes small — like apportion of a wall. Using the term ‘component construction’ is easier to understand and allows more flexibility.”

Guru: “Alright, we’ll call it ‘component construction.’ But I might slip every now and then. Moving right along. What about incorporating the themes of different car companies – Ford, GM, and Chrysler? What about other companies?”

Jordan: “There were lots of companies. In 1910 there were about 400 companies nationwide making cars and some making few trucks. By 1920, I think the number was closer to 20 companies. Many became part of larger companies – GM included Buick, Cadillac, Oldsmobile, Chevrolet and later Pontiac. Cadillac also had the LaSalle brand.”

Guru: “What about other companies that were not acquired. Wasn’t Packard in Detroit?”

Jordan: “Yes. A number of other companies were in Indiana – Auburn, Cord, Duesenberg, and Studebaker. But let’s focus on companies in southeast Michigan.”

Guru: “Alright. What else you thinking about?”

Jordan: “Well, we could name a floor after a company and use the theme from the brand for certain features or design themes on the floor. We don’t want to get too cutesy but capture some of the history.”

Guru: “You worked at both Cadillac and Buick, didn’t you?”

Jordan: “Yes, even though Buick was based in Flint, there is a lot of connection to Detroit. For one, Buick was the cornerstone for GM.”

Guru: “You know what I remember most about Buick? Portholes.”

Jordan: “You’re not alone. Portholes have been a Buick signature for 70 years.”

Guru: “Portholes are a great branding idea.”

Jordan: “The original portholes were to cool the engine but the look quickly became associated with Buick. Years ago when I was at Buick my nephew, about 9 or 10 at the time, and my brother were doing their weekend ‘Let’s go to the junk yard routine.'”

Guru: “Obviously true car guys.”

Jordan: “My nephew sees a stack of crushed cars and yells, ‘Look there’s a Buick. I see the portholes.'”

Guru: “What great brand identity. Recognizing a brand in a stack of crushed cars. That gives me an idea. We could use portholes or circular lamps on one of the floors or in the lobby. Tell me some other themes.”

Jordan: “Ford uses the ‘oval’ in the middle of the grill. Chevrolet uses the ‘bow tie.’ The original Chrysler logo looks like an award ribbon. Cadillac has the crest. Fisher Body used what looks like a carriage for a queen. There are all kinds of logos.”

Guru: “So if we wanted, we could incorporate some of the logos as escutcheons for door locks – the Ford oval or the Cadillac crest. Or, we could also use door handles from certain models. Didn’t older cars have pull down handles?”

Jordan: “Yes. Another feature from early model cars – at least I know it was true for Cadillac – is the opera lamp. Opera lamps were used originally on horse-drawn carriages. Cadillac brought back opera lamps many years later.”

Guru: “You know we could use automotive lighting – past and present – throughout the building and the parking area. We could actually use headlamp bezels from cars as light fixtures.”

Jordan: “Now you’re thinking like a car guy.’

Guru: “We could also make a mosaic in the front lobby…or maybe outside the elevators on every floor. The mosaic pattern would be a company logo. Hey, I’m liking this.”

Jordan: “One more thing. How would you mix different periods of design? In the early years cars were much like horse carriages. During the 1930’s there was a lot of art deco – Buick had an metallic instrument panel. Can you mix and match decades in the building?

Guru: “Not sure about combining features of early design with the art deco or the modern design on the same floor, for example. But let me think about it.”

Jordan: “We’ve not talked about how to incorporate Motown but I’m sure you will think of something.”

Guru: “Let me work on incorporating automotive stuff first. Then we can talk Motown.”

Jordan: “OK, when will you have ideas to review?”

Guru: “Give me a week or so. I need to get focused.”

Jordan: “Thanks, Guru. See you soon.”

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Thank you for your response. ✨

#30 Government Has No Assets?

05 Wednesday Mar 2014

Posted by Jordan Abel in Definitions, Economics, Societal Issues

≈ 1 Comment

Want a PDF version for Entries #1-10 and 11-20 formatted for tablets and e-books? Click links for download. America’s 5th Revolution Volume I (Entries 1-10) America’s 5th Revolution Volume II (Entries 11-20)

Scene: Same coffee shop. Jordan sees Greenie third day in a row.

Greenie: “Jordan, over here.”

Jordan: “Greenie – three days in a row. What will people think?”

Greenie: “People in this town actually think? Here’s your coffee. And no more meetings after today. At least for awhile.”

Jordan: “This is good service – coffee every day. What’s up?”

Greenie: “One more question about issues in economics that are counterintuitive – not really common sense.”

Jordan: “And that is…?”

Greenie: “A lot of people keep saying the government has too much debt. And they might be right. But I never hear these people talk about what the government owns.”

Jordan: “Greenie, you are very perceptive. Yes, the government has debt. The government also has assets – land, buildings, equipment. Lots of assets.”

Greenie: “Why doesn’t anyone talk about the value of what the government owns?”

Jordan: “Couple of reasons. One is talking about government assets would weaken the case against too much government debt. Another issue is the government does not really put a value on all that it owns.”

Greenie: “Really? You mean there is no what do you call it…balance sheet…for government property?”

Jordan: “No balance sheet. There is a list of what the government owns but no value is assigned to it.”

Greenie: “So an asset is only assigned a number, not a value. There is no value put on all the roads, bridges, building, parks, oil leases, military equipment, scientific equipment and all that other stuff?

Jordan: “No value assigned.”

Greenie: “That seems really stupid. When private companies buy something they assign a value. When you try to get a mortgage they assign a value to the house.”

Jordan: “It is a political problem. Not having a value assigned allows people opposed to any kind of government debt to emphasize the debt and not the value of what funds are used to buy.”

Greenie: “Companies take on debt all the time in order to buy more assets. Why shouldn’t the government recognize assets?”

Jordan: “Your point is well taken. Tax payers do not know the value of government holdings. All taxpayers hear about is a certain building cost say $50 million. That building might be worth $75 million.

Greenie: “If a company owned the building, everyone would cheer and say it was a smart investment. Many of those same people chastise the government for spending $50 million, even though the building is worth $75 million. By the way, why doesn’t the government value assets?”

Jordan: “Part history. Government never had a need to put a value on assets. Part tax law. Private investors can depreciate buildings and equipment over time, which reduces taxes. Government pays no taxes so no need to assign a value.”

Greenie: “What about lenders? Aren’t most loans backed by some type of collateral? Someone still holds the mortgage to my condo. The finance company’s name was on the title of my car until I paid it off.”

Jordan: “One big difference between lending to individuals or companies and lending to the government. The government can always print more money to pay off the loan. Individuals and companies cannot. So the lender needs some type collateral as a guarantee.”

Greenie: “OK, I’ll buy that is a big difference. But if government recognized the value of assets, seems like the tone of the conversation about the amount of debt might change.”

Jordan: “If the Federal government were a company, the balance sheet of the government might show a surplus of assets over liabilities – you know debt. That would definitely change the story about debt.”

Greenie: “Reminds me of a line of a classic movie, ‘Cool Hand Luke.’ ‘What we have is a failure to communicate.'”

Jordan: “Great example and spot on. I think you need to include in your education program the implications of government not valuing assets. People need to understand parts of economics are not common sense.”

Greenie: “I will. Right now we have three parts of economics that seem counterintuitive. One is why in economic downturns…or upturns…the Federal government should behave differently than companies or individuals. Two is why backing the money supply with precious metal is no guarantee of value. Three is government has assets for which no value is assigned. Whew! That’s a mouthful.”

Jordan: “Might be a mouthful but should be a great educational program. When do you think you’ll be ready?”

Greenie: “Jordan, I need some time to make this easy to understand for everyone. A couple of weeks at least. I’ll let you know.”

Jordan: “Great. And I’ll buy coffee next time.”

Greenie: “Wow. Mr. Generosity himself. Don’t go overboard. But thanks. See you Jordan.”

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Thank you for your response. ✨

#29 Money Supply Backed by Gold – Logical…Illogical?

01 Saturday Mar 2014

Posted by Jordan Abel in Economics, Possible Solutions, Societal Issues

≈ 1 Comment

Scene: Coffee shop – Jordan sees Greenie

Jordan: “Greenie. Two days in a row. What a coincidence.”

Greenie: “No coincidence. Jordan. I was hoping to catch you here. Thought you might be a creature of habit like most men. So I took an early train and have been waiting for you.”

Jordan: “Let me get a coffee first.”

Greenie: “I have one for you and it’s still hot.”

Jordan: “Great service. Now, what am I in for?”

Greenie: “Yesterday you jokingly made me the chair of the President’s Council of Economic Advisors. We laughed about schmacro economics and schmicro economics.”

Jordan: “You caught on quickly.”

Greenie: “I got to thinking about that later and it bothered me. By all standards I am considered well educated and yet I did not know some fundamentals of economics.”

Jordan: “Give yourself a break. You know the fundamentals but not the correct terms.”

Greenie: “No. When you explained the role of government and how it differs from the role of families and even companies, I looked at economics from a much different perspective.”

Jordan: “Glad the discussion helped. But what is the issue?”

Greenie: “If I am considered so well educated and do not understand…didn’t understand…the basics of economics, then how many other people are in the same boat?”

Jordan: “Unfortunately, I think it is a very large boat and includes many people in Congress.”

Greenie: “How do we get people exposed to how economics works…at least the people in Congress?”

Jordan: “We started an educational program for new congressional members. That program should help keep the discussion more rationale and help put some logic back in proposed legislation…at least at the Federal level.”

Greenie: “But there is still a large block of people who oppose any kind of government intervention in the economy. This group espouses the free market as the only way to manage the economy.”

Jordan: “Some in that group will never change, no matter the evidence. But your concern is a good one. What do we do to help educate the public about the fundamentals of economics?”

Greenie: “I used to think of economics as the dismal science. At least that’s what a lot of people called it – a dismal science.”

Jordan: “You’re calling me dismal?”

Greenie: “Jordan, you can be dismal at times (laughing). But after your lecture yesterday I realized economics can be exciting.”

Jordan: “I am glad you think so. I have said this before but for me most of economics to be common sense. Notice I said most of economics. Part of economics is counterintuitive.”

Greenie: “I think therein lies a big part of the problem. People do not understand which parts of economics are common sense and which parts are counterintuitive. So now tell me, which parts are not common sense.”

Jordan: “Yesterday we talked about one. A lot of people think government should act like households in economic downturns – cut back on spending. But the role of government is just the opposite of households.”

Greenie: “After yesterday I understand the Federal government needs to spend money in recessions to stimulate the economy. Then it needs to slow spending a bit when the economy is expanding. Give me another example that’s counterintuitive.”

Jordan: “The money supply needs to be backed by precious metals – gold, silver, platinum…whatever.”

Greenie: “Now that seems logical. Otherwise the money is backed by someone’s guarantee, which might or might not be good.”

Jordan: “Think about what metals we call precious. Let’s take gold. Other than looking pretty in jewelry and making electronic circuits operate faster, what value does gold have?”

Greenie: “I like gold.”

Greenie: “Liking it is fine. But the functionality of gold is very limited. What if the Torah said to make decorations for the ark out of say lead? Would gold have the same panache as it does today? In fact would gold have any value? Lead would be the desired metal. You know what I mean.”

Greenie: “I know. You’re saying backing the money supply with precious metals is as arbitrary as backing with a guarantee by the government.”

Jordan: “Exactly. Think about this. If the developed world decided tomorrow that gold was ugly, what do you think the value would be?”

Greenie: “Value would drop like a rock…or even a lead balloon.”

Jordan: “Gold has little inherent value. Backing currency based on a commodity with little inherent value makes no sense.”

Greenie: “Interesting. So if one looks strictly at what you might call collateral for supporting currency – like a banker looks for collateral for a loan – then gold makes no more sense than the Dutch using tulips for currency in the 17^th century. And the backing of the bitcoin this century. I still cannot understand how bitcoins make sense.’

Jordan: “You are not alone in not understanding bitcoins. But to some bitcoins are no more bizarre than a government guarantee to back currency. And how do you remember at the historical stuff – tulip craze in the 17^th Century?”

Greenie: “Who knows how I remember?. It was 1624 by the way. Back to currency…at least when government prints money and then buys something society usually gets some benefits – schools, roads, infrastructure development. Government might not be the most efficient organization but citizens get something in return.”

Jordan: “Greenie, you should be out there teaching people more about economics. You could have a blog or YouTube show titled ‘Greenie Talks Green.’ Give that some thought. I need to go.”

Greenie: “Jordan. I will think about doing something in the media. You know that is my first love. You might have a deal.”

usrevolution5

~ USA Headed for a 5th Revolution! Why?

Category Archives: Economics

#39 How Manufacturing Can Create Societal Wealth

#33 Rekindling the Emotional Bond with Detroit

Thank you for your response. ✨

#30 Government Has No Assets?

Thank you for your response. ✨

#29 Money Supply Backed by Gold – Logical…Illogical?