Marginal product of labour & marginal product of capital. Two phrases you won’t often see in economic analyses but two concepts that must be understood in the wide scheme of implementing a formal QMS. This article will touch on why China is innovating faster than the West and more importantly answer the following questions:
- Why has the West lost jobs
- Why people (economists) think that that’s no big deal
- The destructive effects long term of this short term thinking
Let’s face it, the number one issue in the Western World is not food security, water shortages or border disputes, it is jobs. We’re not talking about Steve here, but actual jobs and even China & India seems to thinking along the same lines. It’s something that Thomas Piketty has pointed out in his Economic Analysis also and it is, as countries mature and start solving the relatively easy problems (e.g. how to feed and educate their population), they will be able to compete with the West for industry. We’ve already seen the destructive boom that Chinese Manufacturing has laid upon the Western Manufacturing World and it’ll only get worse. China is very focused on controlling and creating a cost advantage when it comes to delivering goods to the world at large (google OBOR initiative). I have covered this a little in separate articles but let’s be a little more clear here. There’s a few reasons why the West has lost jobs, the primary reasons being:
- Minimum wage laws
- Lack of transparency for goods imported into Canada
- Chinese SOEs
Let’s briefly touch on each of these factors. Minimum wages laws – they are touted by the Left as the way to bridge the gap to wage inequality – decreasing metrics like the Gini Index (an index that reps how much wage inequality is present in a country). The increase in the Gini Index is supposed to tell people how much more inequal in income a country is getting and apparently it’s gone up in the last few decades in the Western World. People have correlated this with decrease in taxes and other “right-wing” tactics but that’s all talk. I do not think there’s a definitive controlled experiment to validate this relationship because there are many inefficiencies present in the world we live in. I do not dispute the increase in the Gini index, but the question is how do you decrease the Gini index so there’s more income equality across jobs and borders. I argue Minimum Wage laws actually increase the Gini Index. The reason for this is simple, you have a cohort of high school students all at the beginning of their careers and the number one metric used by people before they choose a career, is how much money they’ll make and minimum wage complicates this. At the beginning of people’s careers, everyone earns around the same, it’s not until people are around a year into their careers that they see opportunities for advancement or not. This early low pay across the board is due to high schoolers just not having the marketable skills at their age. Other avenues of misinterpreted data can come directly from high schools themselves; in Canada, I took a grade 11 careers class that really failed to communicate tangible information, I know for a fact this influenced a lot of people my age to go into careers with minimal pay. Again pay is not everything in life but you need to get paid to make a living and have flexibility and when your misdirected from the beginning that is a massive deficiency in the system. Getting back to minimum wage, it introduces inefficiencies that cannot be quantified because you don’t know what percentage of people would’ve taken the hard road and realized that at the end of the day, if you work hard, all the time, you will get rewarded.
Now let’s touch on the lack of transparency for goods imported into Canada. I’ve touched in my Economist’s Moment from this article and illustrated it with a very rudimentary example. In that article, I explain how legislative differences across borders can create manufacturing arbitrage scenarios for large multinationals who can create products in one country and import them into another with relative ease circumventing local laws that add to domestic country costs. This is a deep sentence, so let’s take a step back and explain it a little further. All it means to say is the following, Country A has lax labour standards, so Company XYZ takes advantage of these lax labour standards and produces goods there & imports them for sale in Country B. The goods would have been created for a higher cost in Country B but this can be mainly attributed to labour and employment standards. This is where the free traders (every modern day economist) would go and say that well that’s how free trade works, one country specializes in one activity and another country specializes in another activity and everyone is better off. I would agree with this, had it not been for basic industry standards that stress workplace safety and human rights that large multinationals are able to circumvent through outsourcing production. To get back to the paragraph matter, if there was greater transparency during the goods creation process in external countries to ensure that labour standards and environmental standards are adequate (to Western Standards), then there will be greater fairness applied to domestic manufacturing industry (large or small corps). In Canada, Canadian manufacturing will be on the same footing as the developing world and consequently, the developing world will attain our industry standards faster. Currently when a company wants to go abroad, there’s very little incentive to ensure that products are made in factories that are safe and honest (see worldwide manufacturers exploiting Bangladeshi garment factories).
Chinese SOEs (State Owned Enterprises). Imagine, you’re worldwide manufacturer based in Canada/USA of a good with Steel as a primary input. In the Canada/USA market, you buy this steel at the free market price since you buy it from a separate company & it makes up 30-40% of your total product cost. You have a fully automated line so you think you have your costs controlled. You put in a bid and notice you’re bidding against a Chinese company. The Chinese company puts in a bid that’s very much at your level of cost. Questions start to flow across your company as you wonder how this Chinese company could’ve outbid you so easily. There’s one clear solution, the Chinese company has leveraged SOEs, whose primary goal is to employ people, not play in the free market – but again due to the lack of transparency required in the supply chains of manufacturers, this can all be hidden. This is the path to the slow and steady decline as in nearly every manufacturing industry private market organizations will go up against Chinese SOEs who use shoddy engineering, integrated SOE supply chains, and loss leading contract bids to bankrupt domestic industry. As the Western World loses contract-by-contract to Chinese SOEs, remember that this steady decline will be marketed by government as a non-issue because government will slowly take on more debt and raise taxes on the remaining private industry. This will increase costs for private industry as well since they will have to pass on these costs to consumers. Remember this will likely happen when interest rates rise because then debt carrying costs will increase. I have touched on this topic in a previous blog article but I feel the need to further expand on this. The impetus of government to focus on short term thinking is one of the most destructive long term effects on a nation. Again this can be seen by initiatives of the Provincial Liberal Government led by Kathleen Wynne to deliver short term hydro cost savings to people through borrowing free money. Free money being the Trojan horse of borrowing money at today’s interest rate while not factoring in clear evidence of interest rate increases in the future. This type of short over long term thinking is also used and abused by government to push their marketing initiative. They market Annual budget surpluses like it’s something to be proud of, all the while ignoring all the small problems that are creating massive inefficiencies elsewhere in government & society. Let’s take the example of schooling again. Remember education is the bedrock of a nation, it should be the primary goal of nations to fully educate people for minimal cost so that we can create a system where people can be fully educated. Education is also the primary driver that will create a just, free & open society – noone dare challenge a man/woman with an education because work is by definition, non discriminatory. Anyone can do work and it’s up to the education system to be as fair and open as possible so that people can learn and free themselves from the shackles of persecution. Now let’s talk about education in Canada, the decrease in education standards and how this is manifesting itself in unpaid internships that are being blamed on private industry. Blame is being transferred from one group (people responsible for education) to another group, modern day corporations. This kind of falls hand in hand with minimum wage laws because if people knew that certain careers had a cap of $15 bucks an hr, people would likely not go into them. Sometimes you cannot know this until you start working and you’ve already invested years into a field & at this point the realization of greener pastures in another field, are just not present anymore.
Short term over long term. Notice the silence from Government on the lack of investment by the Automotive Industry in Canada. The only way the CDN government is able to keep auto manufacturing here is by bribing large multinational organizations because there’s such a cost advantage in producing in Mexico. Examples are below:
Forget helping Small to Medium Enterprise business succeed, the government only cares about the big dogs. They’re able to mask their inefficiencies through outright bribing companies and that’s wrong. That hides the inefficiencies and it is not a scalable business practice. Bribing companies is wrong. There is a reason that defense contractors face stiff penalties for bribing developing nations in weapons contracts. Recently SNC Lavalin was blacklisted from bidding on government contracts and it is because bribing is not a scalable business practice, all it does it put government in a bargaining position that it does not deserve to be in.
Today, in the Western World, the Public Sector makes up 30-40% of total spending and this is basically a fixed cost for any company wanting to do business in the West. With growth in the Public Sector, countries are transitioning costs to a monster that cannot deliver services efficiently and in turn, a culture of laziness has developed in government – this is a primary by-product of inefficient organizations. It’s a snowball effect where people who cannot solve problems are given more of a responsibility to solve problems. A culture of zero accountability also manifests, where the message that if you work for government, you’ll get higher pay, a pension and relatively easy work, so why not take the path of least resistance. The path of least resistance is marked by zero focus on KPIs and consequently zero focus on the customer. Cultures where there is ample idle time also lend themselves to greater instances of sexual harassment, bullying & other non-value add tasks and this can be solely attributed to people having too much time on their hands. Just as a side note, I don’t partake in workplace gossip because once you go down this road, you keep driving.
No government entity truly focuses on its customers and no government entity changes fast enough to keep up with tech and customer changes. Let’s be clear. What I mean here is that 1 instance of a process breakdown can completely change the way private organizations function – this would likely never transpire in government because government does not have a formal QMS. Customer pushes as well as cost saving exercises regularly happen in private industry but that is with the assistance of a corporate QMS, that allows for companies to change internal processes while still focusing on the customer and product. For example, how easy would it be to cut travel and meeting costs by employing a teleconferencing initiative among government entities. Again there’s third parties who are clearly stopping these kinds of process improvements but I believe that ultimately the government will be forced to decrease non-value add costs but this will be difficult without a QMS. I hope this article has been able to summarize why the West needs QMS and Quality Standards to play a bigger & bigger role in government.
Marginal product of labour & marginal product of capital
So let’s get to the meat of the article, I have written on this topic before but I like to educate people that what Governments worldwide need, is a formal QMS in order to drive inefficiencies out of their organizations. Voters need to understand that money spent is money lost. If we’re allowing our governments to spend money inefficiently, we as voters have to stand up and say, “enough is enough”. I will touch a little more on why I think free traders need to reassess their mindsets. In today’s world, automation plays an ever increasing role in production. Compared to the 70’s we can not employ 1/100 of the required labour to attain the same levels of production with ALL products. I can say ALL products here because with the advent of PLCs, IOT (Internet of things), Control systems, and other Quality Standard Processes (ISO 9001, AS9100, ISO16949), manufacturing has been revolutionized. In Industry, people are given more data and more responsibility when it comes to what they’re hired to do and there’s absolutely NO reason why a nation cannot produce all domestic products it needs. We need to hire more engineers, technicians and skilled tradespeople because the needs of our world are not decreasing but increasing. This paragraph has summarized the concepts I’ve detailed in the heading better than any economics class could but it’s based around the fact that labour is no longer as required as previous. If you have $1M dollars to invest in a factory, compared to the 70’s, capital owners realize that they need to invest more in technology and skilled trades to create products more robustly at lower costs as compared to the 70s when you would’ve just hired 1000 people to do the work.