Sandwichman,
It's not often I get requests, so this deserves my concentration. Sorry for the delay in responding.
Your question involves the relationship (if any) between the lump of labor theory or as we like to say fallacy and the Jubilee principle from Leviticus. Also, the comment cited that the passage of the 1868 law for federal employees to work an 8 hour day, and if this could be a "Jubilee of Labor".
First, I should say that from the look of your blog (and your obsession with lump of labor"), that you probably are smarter than I, and certainly more engaged with "the lump". I am sure you will find this post disappointing.
Regarding the "lump". I find discussion of the lump in economic circles to be a bit obtuse. I think it better discussed in business theory and management. My way of thinking has "lump" as something to be defeated by clever managers like say...moral hazard. If we were to use a restaurant as a testing ground. The bus boy could assume that he will enjoy x number of tables per day to bus, and if paid by the hour should stretch out his time, as x is all he is going to produce. The clever manager, should show him that if table turnover is increased and the demand for dinning there variable, he can both produce more bussed tables, work more hours and contribute to the greater good of the restaurant and his co-workers financial well-being. Now if the table turnover rate is not variable, and the demand not variable (as in the case of an office building where the firm enjoys 100% market share and no one becomes impatient and leaves before seating), than the bus mans "lump" assumption is correct and his work is fixed.
My view of the economics in Leviticus is that God's (or the author's) view of a just society is one where every citizen is guaranteed a certain level subsistence and income by virtue of the continuance the land ownership his ancestors acquired in the past. The Jubilee just "resets" the beginning land title (as best it can) every so often, so that no single bad event (bad crop, poor debt service decision etc) can cause more than one generation to suffer. It should be noted that this principle was seldom followed, and the Jews were both scolded by profits and punished by God for their "greed" in not following both the Sabbath and Jubilee principles to the fullest extent.
I admit my understanding of the 8 hour day movement to be very limited, and my frailty hurts my ability to respond correctly (if there is a right answer). It appeared to me that the 8 hour movement was motivated by a desire both to have a better home life and to start the process of increasing wages. In fact much of the debate over the movement was whether or not the wage for 8 should be the same as the wage for 12 hours of labor. What we think about "lump" is largely irrelevant as it was not our motivation that fed the movement.
The comment cited that some said the success of the 8 hour movement would be a "Jubilee of labor" seems to point to a difference in understanding about the motivation and effect of a properly executed Jubilee between myself and the speaker cited. If he believed that the laborer would raise his standard of living closer to the robber barron's of the day with the adoption of the 8 hour day, we both know that that could'nt and didn't happen. The 8 hour Day did not change (appreciably) the capital accumulation of the working class, so there was not real gain made in class differentiation. Did the 8 hour day "reset" the class and wealth differences that the author(s) of Leviticus sought? I say no. So the "Jubilee of Labor" comment was way off, in my view.
My view of the 8 hour day movement is that it was the beginning of a more just view of the working class, and perhaps the start of a burgeoning middle class. This middle class, has its own importance in our History.
I would like to know your thoughts on these issues.
My Best,
Tom
Saturday, September 19, 2009
Thursday, September 10, 2009
Lump of Labor… and other items in Labor Economics
“Ours is a laboristic rather than
A capitalistic society...” Sumner Slichter
Continuing in our Keynesianism refresher series, we now look at labor through the economic lens. Unless we are either hoboes or the idle rich, work is a primary activity for all society. Whether we labor at supervision or the hardest manual work, 80% of national income is derived from work. The “economic problem” as it applies to labor concerns, who will do what tasks, how they will do them, how much they will be paid, and under what rules.
Labor is not the typical good or service that we think of in economic terms, we are a little uncomfortable pondering someone’s (or some firm’s) demand for our help. We would much rather ponder the demand for hamburgers or cars, than to think in terms of our own labor as having a demand curve. But, labor like any other good would have a supply curve, or demand curve and a theoretical equilibrium (or proper wage and amount consumed). Like some other markets the market for labor is not free to react to supply increases (or decreases) or similar changes in demand. Keynes recognized that labor was not as elastic as other goods back in the 1930’s even prior tot the development of the Federal minimum wage laws. Keynes knew that people generally aren’t willing to take pay cuts whether or not deflation is present in the economy. With price floors, (which is what a minimum wage is minimum wage recipients don’t generally worry about whether inflation or deflation is present in the economy. Price ceilings (like rent control)are less common in labor wages and still relatively unheard of until the recent congressional action taxing certain higher paid – high profile executives effectively limiting their pay. Of course we should recall that any price control will result in either labor shortages (price ceiling) or gluts (the increase in unemployment).
Generally when mechanisms other than price determine the distribution of scarce resources (like labor or any good) shortages or gluts are created. This forms the origin of the critique of minimum wage laws as they contribute to unemployment. Most economists believe that unemployment has a natural rate that will exist in a healthy economy. Variances in the natural rate would result from variances in fictional unemployment (which occurs when a worker moves from one job to another), structural unemployment (which is caused by a mismatch between workers and jobs) combined with the effects of minimum wage laws. A good example of a structural miss-match between workers and jobs is the tech bubble that was created in the late 1990’s (causing labor shortages) followed by a tech burst in 2001, resulting in a corresponding amount of unemployment.
Opportunity cost which is the purest measure of cost is defined as the next best thing, or the thing that is given up to obtain something. With labor as the “good”, opportunity cost is entertaining to consider. Initially we give up only our leisure in exchange for work so the opportunity cost of working is watching TV or the like. Later in our lives the opportunity cost of a job is a more lucrative second job. Think of the busboy who considers waiting tables; every day he keeps the lower wage job he loses a little income. Adam Smith’s invisible hand indicates this will be unsustainable, that our innate desire to better ourselves may take over. Lastly, perhaps, (if we are lucky) we could describe our own personal supply curve as backwards leaning that is, when our wage is high enough we begin to value our leisure as highly as our work.
The “Lump of Labor” fallacy is a commonly heard but mostly miss-understood theory. It started life as an effort to reduce unemployment and has reared its head notably in both Hoover and Roosevelt’s administrations labor policies. The theory follows that if hours of work are reduced, more employees would be needed, presto, no unemployment. Some obvious problems with the theory are increased costs due to increases in recruitment, training, and supervision costs. Unfortunately, the lump of labor fallacy has effected how citizens view topics as diverse as immigration to labor saving devices, this has been to the detriment of society, remember the Luddites’ rebellion. The Luddites rebellion was a movement based in England 1812 where workers violently objected to easier to operate looms. The Luddites reasoned that less skilled workers would “push” down their wages, and protested. Ultimately workers were arrested, tried and convicted of treason by the government. It could be argued that the introduction of these large stacking frame looms solidified the dominance of British woolens. The fallacy of the Luddite-loom problem is that it assumes employers would chose reduced workforce size over increased production. Other factors that make the lump of labor theory fallacious are increased administration costs due to higher recruitment, training and management costs.
Labor is an economic good like any other with a supply and demand curve, and an equilibrium amount demanded and wage for every job. If we allow false concepts to enter our arguments we might end up with an error in judgment. As with every other input we use in creating our products, a failure to value it properly in relationship to other inputs may leave us less competitive and ultimately less successful.
“Ours is a laboristic rather than
A capitalistic society...” Sumner Slichter
Continuing in our Keynesianism refresher series, we now look at labor through the economic lens. Unless we are either hoboes or the idle rich, work is a primary activity for all society. Whether we labor at supervision or the hardest manual work, 80% of national income is derived from work. The “economic problem” as it applies to labor concerns, who will do what tasks, how they will do them, how much they will be paid, and under what rules.
Labor is not the typical good or service that we think of in economic terms, we are a little uncomfortable pondering someone’s (or some firm’s) demand for our help. We would much rather ponder the demand for hamburgers or cars, than to think in terms of our own labor as having a demand curve. But, labor like any other good would have a supply curve, or demand curve and a theoretical equilibrium (or proper wage and amount consumed). Like some other markets the market for labor is not free to react to supply increases (or decreases) or similar changes in demand. Keynes recognized that labor was not as elastic as other goods back in the 1930’s even prior tot the development of the Federal minimum wage laws. Keynes knew that people generally aren’t willing to take pay cuts whether or not deflation is present in the economy. With price floors, (which is what a minimum wage is minimum wage recipients don’t generally worry about whether inflation or deflation is present in the economy. Price ceilings (like rent control)are less common in labor wages and still relatively unheard of until the recent congressional action taxing certain higher paid – high profile executives effectively limiting their pay. Of course we should recall that any price control will result in either labor shortages (price ceiling) or gluts (the increase in unemployment).
Generally when mechanisms other than price determine the distribution of scarce resources (like labor or any good) shortages or gluts are created. This forms the origin of the critique of minimum wage laws as they contribute to unemployment. Most economists believe that unemployment has a natural rate that will exist in a healthy economy. Variances in the natural rate would result from variances in fictional unemployment (which occurs when a worker moves from one job to another), structural unemployment (which is caused by a mismatch between workers and jobs) combined with the effects of minimum wage laws. A good example of a structural miss-match between workers and jobs is the tech bubble that was created in the late 1990’s (causing labor shortages) followed by a tech burst in 2001, resulting in a corresponding amount of unemployment.
Opportunity cost which is the purest measure of cost is defined as the next best thing, or the thing that is given up to obtain something. With labor as the “good”, opportunity cost is entertaining to consider. Initially we give up only our leisure in exchange for work so the opportunity cost of working is watching TV or the like. Later in our lives the opportunity cost of a job is a more lucrative second job. Think of the busboy who considers waiting tables; every day he keeps the lower wage job he loses a little income. Adam Smith’s invisible hand indicates this will be unsustainable, that our innate desire to better ourselves may take over. Lastly, perhaps, (if we are lucky) we could describe our own personal supply curve as backwards leaning that is, when our wage is high enough we begin to value our leisure as highly as our work.
The “Lump of Labor” fallacy is a commonly heard but mostly miss-understood theory. It started life as an effort to reduce unemployment and has reared its head notably in both Hoover and Roosevelt’s administrations labor policies. The theory follows that if hours of work are reduced, more employees would be needed, presto, no unemployment. Some obvious problems with the theory are increased costs due to increases in recruitment, training, and supervision costs. Unfortunately, the lump of labor fallacy has effected how citizens view topics as diverse as immigration to labor saving devices, this has been to the detriment of society, remember the Luddites’ rebellion. The Luddites rebellion was a movement based in England 1812 where workers violently objected to easier to operate looms. The Luddites reasoned that less skilled workers would “push” down their wages, and protested. Ultimately workers were arrested, tried and convicted of treason by the government. It could be argued that the introduction of these large stacking frame looms solidified the dominance of British woolens. The fallacy of the Luddite-loom problem is that it assumes employers would chose reduced workforce size over increased production. Other factors that make the lump of labor theory fallacious are increased administration costs due to higher recruitment, training and management costs.
Labor is an economic good like any other with a supply and demand curve, and an equilibrium amount demanded and wage for every job. If we allow false concepts to enter our arguments we might end up with an error in judgment. As with every other input we use in creating our products, a failure to value it properly in relationship to other inputs may leave us less competitive and ultimately less successful.
Thursday, May 07, 2009
Wall Street Journal Tuesday May 5th 2009.
A Texas bank destroys new and unfinished houses acquired through foreclosure. Where to begin, Firstly the bank (Guaranty Bank of Austin), made a rational business decision.
Details:
4 of 16 were complete. Squatters and druggies (yes I said that) were using, stripping and vandalizing the houses, this lead to fines from the city . The market is depressed, and more homes for sale would theoretically depress it further. The federal office of Thrift Supervision had issued a "cease and desist" for "unsound banking practices" so additional funding and exposure didn't look good.
Marginal thinking holds sunk costs as irrelevant. It costs more to finish than revenue expectations. Simple shut-down decision. The sad truth is sometimes losing money is the profit maximizing decision.
Vision Victory Manifesto guy sees this as some kind of validation for his beliefs.
I see it as proof of the textbook shutdown decision.
A Texas bank destroys new and unfinished houses acquired through foreclosure. Where to begin, Firstly the bank (Guaranty Bank of Austin), made a rational business decision.
Details:
4 of 16 were complete. Squatters and druggies (yes I said that) were using, stripping and vandalizing the houses, this lead to fines from the city . The market is depressed, and more homes for sale would theoretically depress it further. The federal office of Thrift Supervision had issued a "cease and desist" for "unsound banking practices" so additional funding and exposure didn't look good.
Marginal thinking holds sunk costs as irrelevant. It costs more to finish than revenue expectations. Simple shut-down decision. The sad truth is sometimes losing money is the profit maximizing decision.
Vision Victory Manifesto guy sees this as some kind of validation for his beliefs.
I see it as proof of the textbook shutdown decision.
Monday, April 27, 2009
Health Care Delivery Systems Notepad Only
externalities of vaccinations
asymetrical information= providers know more about both demand and supply
use of conventional medical insurance presents higher transaction costs
does universal coverage reduce adverse selection?
some co-pay is necessary to reduce moral hazard
can the medical savings plan reduce moral hazard?
is multi tier pricing needed to help with poverty (both primary and secondary)?
externalities of vaccinations
asymetrical information= providers know more about both demand and supply
use of conventional medical insurance presents higher transaction costs
does universal coverage reduce adverse selection?
some co-pay is necessary to reduce moral hazard
can the medical savings plan reduce moral hazard?
is multi tier pricing needed to help with poverty (both primary and secondary)?
Thursday, April 16, 2009
Animal Spirits and the Velocity of Money.
Which came first the "animal spirits"or the reduction in aggregate demand? If we held on to our money, whether or not, we had perceived a threat to our future cash flows; would we create the kind of atmosphere likely to persuade others to spend? Does my observation to others concerning slowing turn over at Nieman Marcus or Chili's make it worse?
I propose that Keynes' "animal spirits" might be rational rather than irrational. He defined it as the result of a spontaious urge as opposed to quantitativly reasoned. Perhaps yours (and my), tales of business woe are valid knowledge inputs?
Which came first the "animal spirits"or the reduction in aggregate demand? If we held on to our money, whether or not, we had perceived a threat to our future cash flows; would we create the kind of atmosphere likely to persuade others to spend? Does my observation to others concerning slowing turn over at Nieman Marcus or Chili's make it worse?
I propose that Keynes' "animal spirits" might be rational rather than irrational. He defined it as the result of a spontaious urge as opposed to quantitativly reasoned. Perhaps yours (and my), tales of business woe are valid knowledge inputs?
Wednesday, February 04, 2009
The Assembly Line
One of the “jobs” of the firm is the transformation of inputs into outputs. For most of us that means taking some amount of capital mixing it with some amount of labor and producing clean garments. The cost of producing a given level of output depends on the level of technology available to the firm, and input costs. If the prices of the inputs or technology changes differing production methods may be chosen to reduce average unit costs. I have heard many calls for increased investment in R & D as it applies to the Drycleaning industry. Unfortunately, I am certain that our industry is not lucrative enough to support this function, but I notice that “knowledge leaks” as it applies to adaptation of technological innovations from other industries.
Probably the most significant innovation in industrial production was the development of the assembly line. Henry Ford, and great inventor and great businessperson according to friend and mentor Thomas Edison, who employed him early in his career, would be the driving force. Henry Ford’s development of the assembly line began on April 1st 1913 in the flywheel magneto department where the project reduced the person-hours to finish the flywheel – magneto from 20 minutes to five. The concept spread from flywheel, to engine, to transmission and finally chassis, where it finished the auto entirely. Ford loved machinery and technology and believed that he was revolutionizing society (American) for the better.
The transforming power of the assembly line changed not only the availability of the automobile but also the perception of it in society. During this time of the assembly lines development, the price of the Model T actually dropped from $525 in 1913 to $345 in 1916. Most cars in the period cost from $600-$1000 for Buicks and Studebakers to $1000-$2000 for a Chalmers or Cadillac. Ford has been quoted as saying that “since there are more poor people than rich, they should just make one model for the poor.” Of course, the price competition was a major factor of the success, and fully 1/3 of all the cars on the road were Fords. Ford would say of the success that “this raising the automobile out of the list of luxuries, and bringing it to the point that the average citizen may own and enjoy hours automobile.” Today, we can hardly imagine life without the automobile.
Fords inspiration is said to have come from a visit to Gustavo Swift’s meat packing plant in Chicago, where he observed an overhead trolley carrying carcasses thru the plant. Swift had noted that a major cost (input) for the processed meat business was shipping and that shipping animals “on the hoof” caused shipping costs 60% higher than already butchered meat. Swift would also be responsible for the development of the refrigerated rail car to complete his contribution to “the era of cheap meat”. Here he would first imagine work moving to men, rather than men moving to the work. Thus, the concept of “knowledge leaks” (William Easterly concept) reminds us of what we can learn not only from each other, but other industries as well.
I should say a few words about the strange paradox that was Henry Ford, an anti-Semite and a social reformer, whose policies although ultimately valuable in the end, were for his own benefit in the short run. The five-dollar day was said by Ford publicists an attempt to create additional customers for his Model T, but this is more of a spillover effect than its true purpose. The five-dollar day was created in 1914 to help alleviate labor shortages caused by the success of the burgeoning automobile industry. Shortages in labor were the result of numerous firms’ entrance into the auto manufacturing industry “bidding up” labor wages and the poor quality of the American workforce of the time. Keep in mind clean water was not available in much of the nation at the time and the average worker had beer with lunch and dinner. Again, we find this difficult to imagine. The Degas painting from 1884 called the Ironers shows two women hand ironing shirts. The first time I saw the painting and noticed one of the women yawning with a bottle of wine in her hand, I assumed drunk at work. After a history lesson, I realized fatigue and dehydration was a greater part of the story. Fords Five-Dollar Day called “an economic blunder if not crimes” by the Wall Street Journal, was designed to allow Ford to chose more carefully from the worker pool. The wage of 5 dollars was actually broken into two parts a $2.34 daily wage (average of the day) plus a $2.66 profit sharing feature. The profit sharing contained some of the social engineering that Ford is famous for. Ford’s Sociology Department would investigate workers moral standing. Workers were to avoid saloons, prove savings account participation, not smoke or gamble and show support of family. It is also worth noting that an employee could fail his profit sharing portion while still receiving his base wage. While this still sounds noble, Ford was trying to fix a 370% turnover problem with its estimated $1.8 million costs. The five-dollar day was discontinued in 1917 and a distant memory by the time Ford’s security people beat labor organizers in 1937 at The Battle of the Overpass.
That brings us to our industry and today. Although we cannot and should not split the process of pressing a garment into segments to increase specialization, some automation has visited the Drycleaning industry recently, in the form of assembly conveyors.
It all began in 1978 when a recently laid off engineer Augusto Santicchi went to a Drycleaning show in Milan with his brother-in-law. The two men wondered around, enjoying the equipment when Augusto pondered why only American conveyers were for sale, and that no European firms were meeting local demand. As the men rode the escalator from one floor to another, Santicchi saw his inspiration for how his product would be different. His would be based on a moving belt base and a continuous piece of stainless steel on top. In 1994, Metal Progetti mated computer software POS systems with the conveyer to bring computerized assembly to the “average” Drycleaner.
Today, White Conveyor and HMC have both added their own and economical models to the marketplace. I would suspect that more firms would fill the market until saturation level, much like POS computer systems have. As to exactly how a computerized assembly improves productivity I suppose it is a function of opportunity costs. In other words , the energy required in walking to and from in a large assembly bay with a garment (S) in one’s hand and numbers on ones mind must be converted, to the next best use (definition of opportunity cost) which hopefully would be actual inspection of the garment.
If a firms “job” is to convert inputs into outputs; (inputs like labor and capital and outputs like clean garments) then the true cost of production depends on the available technology and the price of the inputs. Ford may or may not have been right that technology would improve the lives of every American but if we as small businesspersons can share knowledge among the industry, we can insure each participant’s success against the tyranny of the status quo.
One of the “jobs” of the firm is the transformation of inputs into outputs. For most of us that means taking some amount of capital mixing it with some amount of labor and producing clean garments. The cost of producing a given level of output depends on the level of technology available to the firm, and input costs. If the prices of the inputs or technology changes differing production methods may be chosen to reduce average unit costs. I have heard many calls for increased investment in R & D as it applies to the Drycleaning industry. Unfortunately, I am certain that our industry is not lucrative enough to support this function, but I notice that “knowledge leaks” as it applies to adaptation of technological innovations from other industries.
Probably the most significant innovation in industrial production was the development of the assembly line. Henry Ford, and great inventor and great businessperson according to friend and mentor Thomas Edison, who employed him early in his career, would be the driving force. Henry Ford’s development of the assembly line began on April 1st 1913 in the flywheel magneto department where the project reduced the person-hours to finish the flywheel – magneto from 20 minutes to five. The concept spread from flywheel, to engine, to transmission and finally chassis, where it finished the auto entirely. Ford loved machinery and technology and believed that he was revolutionizing society (American) for the better.
The transforming power of the assembly line changed not only the availability of the automobile but also the perception of it in society. During this time of the assembly lines development, the price of the Model T actually dropped from $525 in 1913 to $345 in 1916. Most cars in the period cost from $600-$1000 for Buicks and Studebakers to $1000-$2000 for a Chalmers or Cadillac. Ford has been quoted as saying that “since there are more poor people than rich, they should just make one model for the poor.” Of course, the price competition was a major factor of the success, and fully 1/3 of all the cars on the road were Fords. Ford would say of the success that “this raising the automobile out of the list of luxuries, and bringing it to the point that the average citizen may own and enjoy hours automobile.” Today, we can hardly imagine life without the automobile.
Fords inspiration is said to have come from a visit to Gustavo Swift’s meat packing plant in Chicago, where he observed an overhead trolley carrying carcasses thru the plant. Swift had noted that a major cost (input) for the processed meat business was shipping and that shipping animals “on the hoof” caused shipping costs 60% higher than already butchered meat. Swift would also be responsible for the development of the refrigerated rail car to complete his contribution to “the era of cheap meat”. Here he would first imagine work moving to men, rather than men moving to the work. Thus, the concept of “knowledge leaks” (William Easterly concept) reminds us of what we can learn not only from each other, but other industries as well.
I should say a few words about the strange paradox that was Henry Ford, an anti-Semite and a social reformer, whose policies although ultimately valuable in the end, were for his own benefit in the short run. The five-dollar day was said by Ford publicists an attempt to create additional customers for his Model T, but this is more of a spillover effect than its true purpose. The five-dollar day was created in 1914 to help alleviate labor shortages caused by the success of the burgeoning automobile industry. Shortages in labor were the result of numerous firms’ entrance into the auto manufacturing industry “bidding up” labor wages and the poor quality of the American workforce of the time. Keep in mind clean water was not available in much of the nation at the time and the average worker had beer with lunch and dinner. Again, we find this difficult to imagine. The Degas painting from 1884 called the Ironers shows two women hand ironing shirts. The first time I saw the painting and noticed one of the women yawning with a bottle of wine in her hand, I assumed drunk at work. After a history lesson, I realized fatigue and dehydration was a greater part of the story. Fords Five-Dollar Day called “an economic blunder if not crimes” by the Wall Street Journal, was designed to allow Ford to chose more carefully from the worker pool. The wage of 5 dollars was actually broken into two parts a $2.34 daily wage (average of the day) plus a $2.66 profit sharing feature. The profit sharing contained some of the social engineering that Ford is famous for. Ford’s Sociology Department would investigate workers moral standing. Workers were to avoid saloons, prove savings account participation, not smoke or gamble and show support of family. It is also worth noting that an employee could fail his profit sharing portion while still receiving his base wage. While this still sounds noble, Ford was trying to fix a 370% turnover problem with its estimated $1.8 million costs. The five-dollar day was discontinued in 1917 and a distant memory by the time Ford’s security people beat labor organizers in 1937 at The Battle of the Overpass.
That brings us to our industry and today. Although we cannot and should not split the process of pressing a garment into segments to increase specialization, some automation has visited the Drycleaning industry recently, in the form of assembly conveyors.
It all began in 1978 when a recently laid off engineer Augusto Santicchi went to a Drycleaning show in Milan with his brother-in-law. The two men wondered around, enjoying the equipment when Augusto pondered why only American conveyers were for sale, and that no European firms were meeting local demand. As the men rode the escalator from one floor to another, Santicchi saw his inspiration for how his product would be different. His would be based on a moving belt base and a continuous piece of stainless steel on top. In 1994, Metal Progetti mated computer software POS systems with the conveyer to bring computerized assembly to the “average” Drycleaner.
Today, White Conveyor and HMC have both added their own and economical models to the marketplace. I would suspect that more firms would fill the market until saturation level, much like POS computer systems have. As to exactly how a computerized assembly improves productivity I suppose it is a function of opportunity costs. In other words , the energy required in walking to and from in a large assembly bay with a garment (S) in one’s hand and numbers on ones mind must be converted, to the next best use (definition of opportunity cost) which hopefully would be actual inspection of the garment.
If a firms “job” is to convert inputs into outputs; (inputs like labor and capital and outputs like clean garments) then the true cost of production depends on the available technology and the price of the inputs. Ford may or may not have been right that technology would improve the lives of every American but if we as small businesspersons can share knowledge among the industry, we can insure each participant’s success against the tyranny of the status quo.
“The World has changed, and not for the better.”
Tom Brokaw 10/7/08
The drycleaning industry has not been great lately. We have seen increasing supply and energy costs, we are still overbuilt, and we are still waiting to lower our labor costs. Profits have been acceptable at best for most of us.
Now we are officially in a recession at best, or a depression at the worst; but, what can we expect from the economy in the coming year? A little background: The current crisis has been caused largely by a mortgage failure and sinking home valuation problem. Years ago, whether through a sense of social justice or a genuine belief that make more people home-owners would improve the US economy, the government began encouraging home lending to new groups of people previously unable to own homes. Rational businessmen filled this market niche and began selling what would be known as sub-prime mortgages. Rational consumers took advantage of this new opportunity to live their part of the American dream.
Home developers responded by building more homes, and soon new communities sprung up all over America. Perhaps you live in one. Perhaps you have such a loan, a sub-prime mortgage. Not all, but some, of the loans had a feature where the loan payment increased over time. Sometimes the increase is sudden, like on the anniversary of the loan, and sometimes it was more gradual in transition. This too seemed manageable to many. Either the consumer would receive wage increases over time, or the consumer was advised that a new loan could be taken out especially if the home had appreciated in value a reasonable expectation based on historical data. Now we know that was a bit too much of a gamble. Most did not see wages rise enough, and as mortgages defaulted, more houses for sale flooded the market.
$
Supply1 Sorry about the lose of this graph....
Demand
Units
Graph 1: Supply & Demand Model.
Generic but it helps us illustrate principles.
and this one..............
$
Supply1
Demand
Units
Graph 2: As we add the second (greater) supply line, we see the value of the average home sold, drop. As the equilibrium of sold homes drops the average value of homes, even more families find themselves unable to refinance due to the loss of equity which was cased by the home value drop. This situation is a type of market failure and has not stopped occurring. My best information is that this will continue to occur through the entirety of 2009.
The good news is that our Federal Reserve and Treasury Department are actively working to minimize the damage that this market failure will bring. We have heard talk of the Great Depression. The differences between the past event and the present circumstances are worth noting. After the stock market crash of 1929, the government made many strategic errors in policy making. Tax rates rose, tariffs rose (reflecting special interest groups attempting to protect domestic producers from foreign competition), and both presidents Hoover and Roosevelt strongly promoted industry-labor cartels that were designed to stifle competition. None of these mistakes will be repeated today. The body of knowledge in macro-economics has increases exponentially since 1929, and I can with great confidence state that only newer problems will be visited upon the world economy.
A note about macro-economics. The total stock-market losses as of the date of the writing will probably not last long. However, some significant market losses will remain for some time. These stock market losses represent loss of market capitalization or for our purposes loss of owner equity. We know that this loss of equity represents a corresponding loss of production capacity and therefore employment.
Let’s discuss how we as businesses will be affected. After all, if we do not act in our own self interest (remember the Invisible Hand?), the economy fails anyway.
- Our customers: are going to have a bad time. Many will find themselves unemployed or under-employed.
- Lenders: Banks are going to be hard pressed to loan much money, especially to marginal applicants. There will be less capital for acquisitions or startups.
- Landlords: will find business failures provide them with ample property to rent. Some opportunities may present themselves for dry stores.
- Employees: will suffer along with us, although mostly household costs will not inflate. Their family members will be out of work, though, lessening household income. I don’t see the reserve army of the unemployed forcing wages down much. Only the lower end of our industry will benefit from this.
- Equipment sales: Equipment will still be sold, often leased. But again, fewer start up plants will lessen this.
- Suppliers: will still be selling supplies, but most likely fewer of them, and collections will be challenging.
Bottom line: There will be fewer of us, due to failures and bankruptcies, at the end of 2009. Many will not be able to sell our businesses. Note the difference between the first supply and demand model and the second one. More of us would want to sell as compared to the banks that would want to loan, so the selling price would drop to a level where most would not be willing to sell. I look for more owner financing and store lease arrangements. If the consumer allows it, dry stores may rise in number because of an increase in available space (due to other business failures and the firm’s ability to self finance). In short, I expect a year of mixed opportunities, and a market correction that has been overdue. This would be an opportune time to get back to the basics of customer service and quality. Take care of the business, and the business will take care of you.
Tom Brokaw 10/7/08
The drycleaning industry has not been great lately. We have seen increasing supply and energy costs, we are still overbuilt, and we are still waiting to lower our labor costs. Profits have been acceptable at best for most of us.
Now we are officially in a recession at best, or a depression at the worst; but, what can we expect from the economy in the coming year? A little background: The current crisis has been caused largely by a mortgage failure and sinking home valuation problem. Years ago, whether through a sense of social justice or a genuine belief that make more people home-owners would improve the US economy, the government began encouraging home lending to new groups of people previously unable to own homes. Rational businessmen filled this market niche and began selling what would be known as sub-prime mortgages. Rational consumers took advantage of this new opportunity to live their part of the American dream.
Home developers responded by building more homes, and soon new communities sprung up all over America. Perhaps you live in one. Perhaps you have such a loan, a sub-prime mortgage. Not all, but some, of the loans had a feature where the loan payment increased over time. Sometimes the increase is sudden, like on the anniversary of the loan, and sometimes it was more gradual in transition. This too seemed manageable to many. Either the consumer would receive wage increases over time, or the consumer was advised that a new loan could be taken out especially if the home had appreciated in value a reasonable expectation based on historical data. Now we know that was a bit too much of a gamble. Most did not see wages rise enough, and as mortgages defaulted, more houses for sale flooded the market.
$
Supply1 Sorry about the lose of this graph....
Demand
Units
Graph 1: Supply & Demand Model.
Generic but it helps us illustrate principles.
and this one..............
$
Supply1
Demand
Units
Graph 2: As we add the second (greater) supply line, we see the value of the average home sold, drop. As the equilibrium of sold homes drops the average value of homes, even more families find themselves unable to refinance due to the loss of equity which was cased by the home value drop. This situation is a type of market failure and has not stopped occurring. My best information is that this will continue to occur through the entirety of 2009.
The good news is that our Federal Reserve and Treasury Department are actively working to minimize the damage that this market failure will bring. We have heard talk of the Great Depression. The differences between the past event and the present circumstances are worth noting. After the stock market crash of 1929, the government made many strategic errors in policy making. Tax rates rose, tariffs rose (reflecting special interest groups attempting to protect domestic producers from foreign competition), and both presidents Hoover and Roosevelt strongly promoted industry-labor cartels that were designed to stifle competition. None of these mistakes will be repeated today. The body of knowledge in macro-economics has increases exponentially since 1929, and I can with great confidence state that only newer problems will be visited upon the world economy.
A note about macro-economics. The total stock-market losses as of the date of the writing will probably not last long. However, some significant market losses will remain for some time. These stock market losses represent loss of market capitalization or for our purposes loss of owner equity. We know that this loss of equity represents a corresponding loss of production capacity and therefore employment.
Let’s discuss how we as businesses will be affected. After all, if we do not act in our own self interest (remember the Invisible Hand?), the economy fails anyway.
- Our customers: are going to have a bad time. Many will find themselves unemployed or under-employed.
- Lenders: Banks are going to be hard pressed to loan much money, especially to marginal applicants. There will be less capital for acquisitions or startups.
- Landlords: will find business failures provide them with ample property to rent. Some opportunities may present themselves for dry stores.
- Employees: will suffer along with us, although mostly household costs will not inflate. Their family members will be out of work, though, lessening household income. I don’t see the reserve army of the unemployed forcing wages down much. Only the lower end of our industry will benefit from this.
- Equipment sales: Equipment will still be sold, often leased. But again, fewer start up plants will lessen this.
- Suppliers: will still be selling supplies, but most likely fewer of them, and collections will be challenging.
Bottom line: There will be fewer of us, due to failures and bankruptcies, at the end of 2009. Many will not be able to sell our businesses. Note the difference between the first supply and demand model and the second one. More of us would want to sell as compared to the banks that would want to loan, so the selling price would drop to a level where most would not be willing to sell. I look for more owner financing and store lease arrangements. If the consumer allows it, dry stores may rise in number because of an increase in available space (due to other business failures and the firm’s ability to self finance). In short, I expect a year of mixed opportunities, and a market correction that has been overdue. This would be an opportune time to get back to the basics of customer service and quality. Take care of the business, and the business will take care of you.
Wednesday, January 28, 2009
Observations of Voir Dire
This was my third time as a jury panelist. And I am in seat number one, out of a panel of 99. Is this a really large panel? Unless the first row is really not the first row, I have this to lose. I guess we would figure it out by the number of questions each row were asked.
In this most recent example, many questions were asked, with the entire panel able to respond. Many on the third row were quite vocal about their opinions about sexual assault, gender issues, the perception of how the victim will be treated on the stand, and other issues brought up by the lawyers. In this case each defendant (3), had his own attorney, with one having 2.
Concerning the strikes each attorney had. I believe one reason the strikes are not revealed until the final jury is “introduced”, is to prevent the jury panel from learning. If for example an attorney asked how one felt about child abuse, and two panelists announced very strong views. And if the attorneys on both sides agreed that these two panelists were unsuitable, what would a potential result? If the lawyers imediatiatly asked for the dismissals of the two, how likely is the remaining panel to speak candidly? I found “my” recent panel particularly unsophisticated. Many (in the third row) seemed to feed off of each other, saying more and more outlandish statements. I think Judge Richard Mays allowed it (although clearly annoyed), to “strike” more panelists.
Although I represented my self well, I was (in the end) “struck” myself.
This was my third time as a jury panelist. And I am in seat number one, out of a panel of 99. Is this a really large panel? Unless the first row is really not the first row, I have this to lose. I guess we would figure it out by the number of questions each row were asked.
In this most recent example, many questions were asked, with the entire panel able to respond. Many on the third row were quite vocal about their opinions about sexual assault, gender issues, the perception of how the victim will be treated on the stand, and other issues brought up by the lawyers. In this case each defendant (3), had his own attorney, with one having 2.
Concerning the strikes each attorney had. I believe one reason the strikes are not revealed until the final jury is “introduced”, is to prevent the jury panel from learning. If for example an attorney asked how one felt about child abuse, and two panelists announced very strong views. And if the attorneys on both sides agreed that these two panelists were unsuitable, what would a potential result? If the lawyers imediatiatly asked for the dismissals of the two, how likely is the remaining panel to speak candidly? I found “my” recent panel particularly unsophisticated. Many (in the third row) seemed to feed off of each other, saying more and more outlandish statements. I think Judge Richard Mays allowed it (although clearly annoyed), to “strike” more panelists.
Although I represented my self well, I was (in the end) “struck” myself.
Subscribe to:
Posts (Atom)
