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Elegant Technology:

Chapter eight

Producers are ambivalent about money. They love the resources that money can buy, but loathe the time-consuming restrictions. Producer heaven is permanent funding, a modest living, and minimum supervision--such as once a year. Those who made it to producer heaven in the past forty years have given us the microchip, artificial heart valves, . . . examples abound!

Many top industrial companies in the United States pride themselves on how many producer heavens they can create. Companies that nurture industrial creativity include Microsoft, Merck, and 3M (Minnesota Mining). All agree on something important--if you want to sell pet rocks, the development time is short, but if you want something a bit more interesting, it will take a bit longer. Patient money is the Holy Grail of producers because with it, a producer can be the best. High interest rates produce impatient money--it is not that the meter is running, it is that it is running so fast.

Japanese and German banks are notorious for patient capital. This allows the Japanese to extend lifetime employment to top industrial workers in society. The Germans fund extended and very expensive apprenticeship programs, try their best to provide permanent employment and generally organize their society (long vacations, full medical coverage, old-age pensions) so as to minimize the distractions to industrial producers. Both countries define industrial excellence.

The reason producers need patient capital is that new products often require new tools. Tools define the producer pecking order. The best tools make the best products. When patient capital is spent most wisely, it is used to make or buy better tools or to invent better uses for existing tools. Turning money into useful tooling is the defining problem of industrial capitalism.

Producers are not ambivalent about tools. They polish and organize them. They scheme to find new uses for them. They dream of owning better ones. They name them. This is not merely true of the motorcyclist who works on his wheels, it is true of the most advanced scientist. The proposed Texas supercollider was but the highest manifestation of tool lust.

Tool lust also serves as a defense mechanism during times of hardest exploitation. Producers have been second-class citizens in most historical epochs, but could always believe that in the end, tools will bring justice. Toolmaking drives the evolution of man. Man made tools before he was called man. "The hand is the cutting edge of the mind." If the ability to make tools gives dominion of man over beast, toolmakers must ultimately triumph over oppression.

In the Viking pantheon of gods, the sailor-warriors described Odin--the god of courage and cunning, the farmers described Freyr and Freya--the gods of fertility and increase, and the builders shaped the description of Thor.

Thor was patient but hot tempered--not unlike the producer who has worked on a project for six weeks, which then is ruined at the last moment. Thor fought with a hammer. His mind was slow, but deep--much like the producer who has "noodled" an idea for ten long winters before telling another soul about it.

Fortunately, the Vikings never took their gods very seriously. Gods were mostly good-luck charms that folks who traveled about the North Sea in open, handmade, wooden boats could always use.

The secret to Viking society was that all occupational groups had, more or less, equal power. Iceland has already celebrated the 1000th anniversary of her parliament. In the beginning, it was not a perfect democracy and Thorstein Veblen argued that the coming of Christianity in the thirteenth century ruined it for six hundred years. Modern Viking society is very egalitarian--1000 years of practice will tell. The cultural, political, and economic distribution of power between the banking-clergy-nobility bureaucracy, the agricultural sector, and the industrial interests is cordial and fair. Modern Scandinavian societies carefully debate the allocation of power and rewards between these groups.

In important ways, tools spared Sweden the horrors of twentieth century wars--escaping even World War II. Swedish industrial output was so important that a German decision was made not to invade. The Germans feared that what they wanted would be destroyed in the conflict. Ball bearings saved Sweden.

Relying on the power of tools--beating swords into plowshares--is morally challenging in a world that still believes power comes from the end of a gun. Sweden still agonizes over the moral dilemmas of World War II. Making ball bearings for the Germans was not morally neutral nor was allowing occupation troops to cross her land.

Sweden atoned for this by helping Europe to rebuild following the war. From housing for Finland to medical assistance in Greece, the desire to help asserted itself. Even today, Sweden spends more money in absolute terms for emergency assistance than the United Nations High Commission for Refugees. Tool-driven societies have different foreign-policy objectives than weapons-driven societies. Veblen was correct: great producers bring peace.

Humans can only modify nature in positive and useful ways with tools. The rise of industrialization, including manufacturing and agricultural activities, is a study in the advance of tools. Sophisticated products and mass production are inextricably tied together by the very nature of tools.

The Nature of Tools

A persistent notion that has survived into the twentieth century is the notion of hand-made goods. Nothing can be manufactured without the use of tools. Hand-made is only a term to describe goods that are made with primitive tools. Some items, like sweaters and furniture, can be made with primitive tooling and still compete in the marketplace.

Most items can only be manufactured with advanced tooling. There are no primitive options for making a color picture tube and although no one has been heard to brag that his television is hand-made, the television set was assembled with thousands of hand operations. In this context, hand-made and its opposite machine-made, are only rough descriptions of the sophistication of the tooling necessary for production. Understanding the levels of sophistication in tools is to comprehend a very great deal about industrialization. Imagine a continuum with primitive hand tools at one end and the most sophisticated machine tools at the other.

Hand Tools Machine Tools
Pure examples:
Hammer, Screwdriver

Pure examples:
Robot welder, Punch press

Labor intensive Capital intensive
Low skills required by the primary operator High skills required by the primary operator
Extremely versatile Highly specialized
Critical for making prototypes Necessary for mass production
Inexpensive Expensive
Resource intensive Resource efficient
High chance for error Virtually idiotproof
Limited product sophistication High product sophistication
Easily adaptable to change Locked into product line
Higher unit costs Lower unit costs past break-even
Limited marketing needs Sophisticated marketing necessary to deal with large production
No two finished products exactly alike Production runs extremely close to identical
Relatively inaccurate Extreme accuracy possible
Very fulfilling work Some jobs are very boring

There are two basic reasons why humans have been interested in making sophisticated tools: to enable production and to increase production. Sophisticated products can only be made with sophisticated tools. A computer cannot be made with a stone ax. The primary producer motivation for increased sophistication in tools is to permit the production of sophisticated products. Peoples who can fabricate sophisticated tools usually dominate peoples who cannot.

The other reason tools become more sophisticated is that simple products can be made much more rapidly as the tools become more complex. Factories displace skilled artisans.

The most interesting fact about tools is that it takes tools to make tools. Making primitive tools with sophisticated tools is a simple proposition. Making a pair of pliers is easy if there is a steel mill and a drop forge. Making sophisticated tools with simple tools is an extremely difficult proposition. The ability to go up the ladder of tool sophistication is the essential story of industrial development.

Artisans are often portrayed as victims of this process. Actually, they are the main culprits. It is impossible to go up the ladder of tool sophistication without extremely skilled artisans operating on every rung.

The fact that sophisticated products and mass production are intrinsically linked means that there is a product business cycle intrinsically linked to the nature of tools. As products get more sophisticated, the up-front investment of time and resources becomes much greater as it becomes harder to learn how to make a product.

The first stage is product design. This research and development stage is always a money loser and must be supported from external sources. The early market stage is also a loser when production volume is low, mistakes are still being made, and market introduction costs are high.

If the product is a hit, there follows a period of very high profits when only one company makes a desirable product. High profits attract attention, and inevitably, competition. As the competition enters the market, prices fall because the new competitors do not have to spend the money discovering a market for a new product. Falling prices reduce profit margins that can only be made up by increased volume. Every market has its saturation point so eventually increased volume becomes an effort with diminishing returns.

Prices fall dramatically as markets become more saturated and the pressure to reduce production costs become more acute. The shakeout of competition begins. Competition which leads to lower pay scales has the effect of shrinking the potential markets--especially if this phenomena of overproduction is extended to many industries at the same time.

These features would suggest that as product sophistication rises, the product cycle shortens. This is true because tools are in and of themselves industrial products. Almost no product has ever been produced at a profit the first time it was made. The first product is the most expensive and probably contains the most errors. It is inevitable that toolmakers, like anyone else, would wish to profit from their learning experience, which in most cases, represents a considerable investment. But when toolmakers begin to mass-produce production equipment, the possibilities for overproduction become great.

People in business are quite aware of this problem. Producer monopolies are built around specialized tools. The reality is that anything that can be made with mass-produced tools is not likely to produce a profit.

Predator economics tends to focus on sophisticated tools for the effect they have on production output. This is most unfortunate because it focuses attention on quantity rather than quality. Quality improvements do not show up as productivity gains. Quality is extremely hard to count. All things being equal, economists are correct in assuming that people make their buying decisions based on price. Of course, all things are not equal when considerations of quality enter the picture. People make their decisions to buy on a perception of value, not merely on the basis of price. Value is determined by combining considerations of price with considerations of quality. Quality is far too esoteric a notion to enter into the considerations of economic thought. Yet quality as production excellence is the largest determinant of industrial success.

Quality as an industrial commodity is often at loggerheads with prevailing economic thought for an even more substantial reason. By the rules of predation, a successful business practice is to drive down labor costs. This assumes that labor is relatively interchangeable commodity. While lower labor costs would seem to lower the costs of production, this saving is usually a short-term affair that usually marks the end of a product's life. The implications of quality mean that a growing, expanding industrial firm must have the services of talented individuals. Driving down labor costs means driving out high-priced talent, the very talent necessary for industrial success.

The management attitudes of producer types versus those of predatory types are demonstrated forcibly by the attitude toward labor costs. The producer attitude is to pay employees as much as the enterprise can afford. The predatory attitude is to pay as little as possible. This may seem a subtle difference and, in fact, may lead to identical pay scales, but in the real world, this subtle distinction is the difference between a growing and a dying enterprise, or between a company with labor peace and one torn by strife. The result is that quality, and more importantly, the means to quality have been historically, the primary industrial, producer class concern. (1)

If economists are ever to understand the industrial societies they pretend to describe, they must not only understand the role of sophisticated tools as a means to increase production, but they must understand the role of sophisticated tools as a means to increased quality.

When a predator economist talks about increased productivity, he is referring to an index of automation. Industries run by industrial class minds will often make tooling improvements merely for quality improvements--the route to industrial superiority. Fortunately, sophisticated tools can enhance quality and productivity at the same time. The requirements of accuracy necessary for mass production are so stringent that to solve productivity needs, accuracy needs must be addressed. Accuracy is only one-half of quality, however; the other half is design.

The Economics of Design

Design is usually understood as an enhancement of visual attractiveness. The process of increasing a product's visual attractiveness is more properly called "styling."

The common misperception of design as styling is understandable--it is what people see. Visual design (styling) has obvious economic impact on clothing or furniture. In these enterprises, visual design is so important that everything else is secondary. Increasingly, visual design has become more economically important in other types of industrial production as well. Automobiles are an obvious example--for many consumers, appearance is the only design consideration when purchasing an automobile.

Appearance, however, is but a tiny fraction of the total design decisions necessary to produce a sophisticated industrial product such as a television. A consumer who chooses a television because it will look good in the bedroom has evaluated less than one percent of all the design decisions that brought the television to the store.

Sony® markets a second design feature in its televisions called the Trinitron picture tube. This is an example of design as function. Functional design considerations insist that a consumer should be more interested in a Sony® because of the way the picture tube is manufactured. The consumer is not directly interested in manufacturing, but is evaluating whether the unique method of manufacture produces claimed picture improvements.

Functional design is very Germanic. Because of the nature of the German language, many products are named with the manufacturing process included in the name itself. For Germans, function is design--appearance is a frivolous or secondary consideration. It was a German, Mies Van der Rohe, who said "form follows function." Obviously, if a culture values functional design highly, functional design has economic importance.

Functional design is much more important than visual design from a production standpoint. Depending on the product, function is 20 to 50 times greater a design problem than appearance. Consumers buying cars are usually unconcerned about the ease of muffler replacement, and so on, but if the manufacturers are clever, this is very important to them. If muffler replacement is very easy, the dealer will be more profitable, inventories can be less, and mechanics need less training. On the other hand, if the job is difficult, specialized tools must be invented and so on.

Even functional design is not ultimately the most important. Mies said "the Gods are in the details." Design problems increase exponentially as a function of the number of parts and manufacturing steps. From an environmental and economic standpoint, the most interesting design decisions are production designs. It is here that economics is just beginning to understand the role of design and where conventional econometrics utterly fails.

Nucor Corporation makes steel in Crawfordsville Indiana with .6 man-hours per ton. The industry standard is 14 hours. Do Nucor workers work 23 times as hard as Bethlehem Steel workers? Of course not! (2)

In 1986, Ford introduced a model called Taurus. Built in the Atlanta factory, Ford required 54 man-hours in 1986 to make a Taurus. By 1991, the time had been reduced to 17 hours. As the assembly-line rates were increased by only 10 percent during this time, other factors were much more important.

Production design is the difference, in most cases, between a company or product succeeding in the marketplace, or failing completely. Thousands of tiny decisions from the layout of the factory, the tools, the assembly scheme, materials selection, inventory methods, delivery schedules, and so on, ultimately determine whether a product can be made inexpensively enough to meet a price target. For the Marxists who believe in labor value, it must be remembered that little if anything about production design is about labor exploitation. This is not Taylorism!

The Nucor steel example demonstrates the concept of a technological breakthrough. Since 1847, steelmakers have tried to perfect a method of continuous casting. After over a hundred years of determined tinkering, a German firm perfected a mini-mill that achieved steelmaking's Holy Grail. Nucor was the first customer.

The Ford example demonstrates that hundreds of correct little decisions can equal a technological breakthrough. Ford did not develop the techniques--an engineer for Toyota named Kenechi Ohme organized detailed production design concepts such as Kanban, poke-yoke, and robotic pre-design. Poke-yoke means redesigning tools so that everything is "idiot-proof." If a part can be installed upside down, change the design so it can only be put on correctly. (3)

It was found in most cases, that by designing an assembly process so that a stupid robot could do the job, the job ultimately could be eliminated and the robot not purchased. A car bumper is a car bumper. The consumer does not care if it is assembled from 200 parts or 10; the consumer only cares about cost. If the 200-part bumper takes 2 more hours of assembly time than the 10-part bumper, it must cost more.

Along with incredible productivity increases (as measured by simple output per man-hour), lean production makes much higher quality possible. Toyota's Mercedes-beater, Lexus 400, had initial quality reports of less than one defect per vehicle. This is a VERY complicated car with thousands of parts (because an average car contains 13,000 parts, the big Lexus is estimated to have more than 20,000). Yet final assembly takes less than 18 man-hours without needing inspection. Defect rates of 1 per million are possible in some operations. A Lexus proves the economics of building a product correctly the first time. This form of production excellence is not a function of careful craftsmanship, it is a function of design.

Design as a Growth Factor

If quality is a confusing notion that economists would rather not deal with in their calculations, imagine their confusion with the concept of design. In fairness to the economics profession, some M.I.T. economists have actually attempted to quantify the economics of hyper-lean production in a book called The Machine that Changed the World. They are to be congratulated for even trying! If quality is a very difficult notion to quantify, design is impossible. Yet design is at the very heart of industrial success or failure and any description of an industrial economy must come to grips with the importance of design. Economists can describe the process of how the economic pie is divided without understanding design but cannot describe how the economic pie got there in the first place.

Because design decisions are so important, design know-how is an industrial asset. Which endeavors produce a commercially important product and which produce garbage is a function of design. Since it takes, in most cases, the same or less labor, energy, tooling, and natural resources to execute a good design as a bad one, it logically follows that design is the determinant of industrial success or failure. Design is the difference between wasted and productive effort. Wasted effort implies wasted resources and since the natural resource pie is finite, wasted effort means the available pie has contracted. Correct design decisions are the difference between and expanding and contracting economic pie. Industrial economic growth is a function of design.

Of course, design in industrial economics is not limited to simple things. When real energy prices stopped falling and began to rise in 1973, it became very clear that America had made some preposterous design decisions. From a design standpoint, everything was obsolete in the sense that everything was environmentally unsupportable: the cities were too spread out, the buildings used too much energy, the transportation system was addicted to liquid fossil fuels, and agriculture was based on petrochemicals for power, fertilizer, pesticides and herbicides. Millions and millions of design decisions that appeared to be correct when they were made, were now glaringly and demonstratively wrong.

Since design is placed outside economic thought, design solutions were almost never considered in trying to solve the economic problems that increased petroleum prices brought. Economists are loathe to talk about computer-designed, vegetation-generated microclimates around dwellings, for example, and the effect they would have on discretionary spending. Design has an economic impact but it is not considered to be economics.

By leaving design considerations out of economics, predator economists have demonstrated their preindustrial mentalities. Economics without design considerations may describe something but clearly it is not describing industrial societies.

Producer versus Predator Capital

Predator economists are often quite careful to point out that money is not capital in their writings, but no economist actually seems to believe that money and capital are quite different and only occasionally convertible. An economist talking about capital formation is talking about raising money using an array of financial instruments; not about patents, tools, skilled workers, factories, educational institutions, and the rest of the industrial infrastructure that is really capital. Real capital is the subject of textbooks. Capital as money is the subject of the world on Wall Street and in the halls of Congress. Economists give lip service to real capital but fashion their models around money.

Every product that is manufactured for sale must answer some significant questions before it becomes an industrial success. The number of questions is infinite because there is always the nagging doubt that the vital question was unasked. These questions are of four basic types.

Question #1: What is to be produced?

What is to be produced is usually solved by industrial creativity, often called inventiveness. Inventions, as perceived by patent offices, are not equal in importance, marketability, or effectiveness. Penicillin is more important than twist ties. A large percentage of inventive activity is not found at the patent office because it remains a trade secret. Industrial secrecy retards industrial growth because technology is cumulative. Inventions and trade secrets are not the only elements in the decision of what to produce for sale.

Question #2: How will the product be produced?

Economists are in love with the concept of productivity. Simply put, a worker is more productive when making 200 widgets a day than if making but 100. Early industrialization may be described in that manner. The textile mills were good examples of how technology made it possible for each worker to put out more goods. Sophisticated tooling was not the only method for improving productivity. Once the tooling was in place, work could be speeded up. The workers could be made to work faster and longer. Most economic arguments are about how to raise productivity and how to divide the proceeds.

Strangely enough, though political and economic arguments have raged since the dawn of the industrial revolution over the issues of productivity, most arguments are beside the point. Productivity, as measured by output per man-hour, assumes the settlement of some very interesting industrial questions. Productivity is merely one measurable form of industrial efficiency. If the goal is to make and sell the most desirable good for the lowest possible cost, other far more economically interesting forms of industrial efficiency must be brought to bear on the problem.

There is design efficiency. The quicker an enterprise gets to a cost-effective solution, the less has been spent on development and intangible costs. Designing a cost-effective solution involves other forms of efficiency. Effective use of resources is a primary design goal.

Resource efficiency at an oil refinery means that a method that gets 30 gallons of gasoline from a barrel of crude using 100,000 kilocalories of energy for the process is more efficient than one that gets 29 gallons of gasoline using 110,000 kilocalories.

Capital efficiency is important because it measures how effectively money is converted into the means of production. Equal amounts of money can have unequal outcomes in the conversion process.

Question #3: Are there any customers?

Anything made for sale has assumed a customer from the start. The assumption of customers is based on assumptions that range from a hunch to extensive market research. (Critics of market research maintain there is no difference.) Whether there are any customers when a product gets to market is the big question. Fickle customers and industrial competition for those customers are acceptable hazards of manufacture. The unacceptable hazard, the one that angers the producers more than any, is the final hurdle over which the industrial class has seldom had control.

Question #4: Does the customer have any money?

No matter what is made, how well it is made, or how cheaply it is made, a product cannot succeed if there are no customers with money to spend for the product. Customers have the least amount of money to spend during economic downturns. Periods of economic downturn, whether they are called panics, recessions, or depressions, have as part of their nature the destruction of productive capacity. Predator economists go as far as to say that the silver lining in the cloud of economic downturns is the elimination of excess productive capacity. The same thing, incidentally, is said about warfare. The elimination of the weaker producers allows for more prosperity for the remaining strong producers. The strong producers, it is argued, are making a superior product so periodic culling of the industrial society leads to stronger, more efficient producers and eliminates those producers who should be doing something else.

There are two flaws in this form of reasoning: One is what to do with the people who are thrown out of business by economic downturns. There are humanitarian and social considerations that must be addressed. Are the displaced going to be supported by the rest of society, and if so, at what level? If the level is high enough, would it not be better if these people were doing something productive rather than nothing at all? If the level of support is very low, are not the successful producers running the risk of terrible social upheaval as the gap between subsistence and affluence widens? How rich can the efficient be at the expense of the rest? Is it really possible to be rich while one's neighbor is poor?

The second and greater issue is that all weak producers are not bad producers. Excellent products can fail if their introduction coincides with the onset of an economic downturn. Ongoing successful companies can collapse when a new product fails with the onset of recession and brings the rest of the firm down with it. A serious economic downturn is simply too crude an instrument for culling out bad producers because it takes good producers along with the bad.

Although traditional economic thought would lead us to believe that lower prices are always good because they enlarge the market by making goods available to more people, this assumption is intrinsically flawed. In order to remain in business, industrial producers must have a price high enough to cover fixed costs. It is in the buyer's interest, surprisingly enough, that prices do not fall too far. Buying any sophisticated industrial product, such as a car, stereo, or appliance, from a liquidator is risky if the producer has gone out of business. Buying a $10,000 car for $5,000 may seem a terrific bargain until it is realized that the failure of a special $10 part can render the whole car useless. Part of the price of any item must be the continued health of the producing industrial enterprise.

Veblen pointed out the main predatory instrument of the leisure class is the irrational business cycle. Industrial growth is a long-term thing. If an invention takes 13 man-years and the work is being done by one person, the work has to be financed for 13 years. That is long enough to cover 2 or 3 business cycles. Veblen's point is that it is in the interest of the predators to have booms and busts, while it is imperative for the producers to have conditions as constant for as long as possible. It was for this reason that Veblen called Wall Street speculators "industrial saboteurs." Veblen was right, of course. The greatest period of industrial expansion occurred immediately following World War II when international exchange rates were fixed, interest rates moved in very narrow ranges, and labor peace was bought in the industrial nations by giving workers a wage high enough to have some discretionary income. Widely floating interest and exchange rates, severe swings in the business cycle, and the lowering of the basic living standards should, according to Veblen, result in industrial confusion. Industrial confusion pretty well sums up the decades of the 1970s and 1980s.

The Justification for Green Design

It is production design decisions that are most important to an industrial-environmental solution. If a factory is thought of as one big tool, then tool design must cover every step from the moment raw materials are extracted from the biosphere until they are returned. If a new green mandate is introduced into the production design process, it may be possible to live more gently on the earth.

The Ohme-Toyota production concepts are now universally known to anyone remotely interested. Dozens of books have been written on the subject. Because it is possible to make everything perfectly, the design question moves toward environmental design by moving back toward functional considerations. Production perfection means that products can differentiate themselves in the market only by function and features. If everything is manufactured equally well, what will motivate the consumer to buy one product over another?

Producers hate such a situation--their nightmare is for their product to become a commodity. Then they must appeal to consumers only by price. Product differentiation by appearance is a problem with mature products. The alternative is to make environmental considerations a product feature. This is what makes green design attractive from an economic standpoint.

Green design is not a pipe dream. All 1992 cars made in Germany must be recyclable by law--even the Model-S class Mercedes-Benz. Volkswagen has established 20 recycling centers. The 1991 Frankfurt and Tokyo auto shows stressed environmental issues over quality or performance issues for the first time in history. In some markets like Canada and Germany, this fact is displayed prominently in all their marketing literature.

Now it is true that $120,000 gas-hogs claiming to be environmentally pure may be a bit much for most environmentalists to swallow--there is more to environmental purity than waste reduction. Yet, it is a beginning that proves the possible. Mercedes performed a useful service. By lending caché to upscale green marketing, the company is showing everyone else how it can be done.

When the claim is made that pollution is a function of design, the design consideration in question is about 75 percent production design and 25 percent functional design. Elegant technology is simply successful product design combined with environmental sensitivity. By this definition, elegant technology is already economically possible and partially successful. Products can be built perfectly to any design. The immediate goal must be to ensure that the next wave of new products is designed with the good earth in mind.

GO TO--Elegant Technology: Chapter Eight Notes
GO TO--Elegant Technology: Chapter Ten

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