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Monday, November 10, 2008

You Won't Win The Race Facing The Wrong Way

I link to WoodWeb. I read their message boards as an insight into other woodworker's situations.

I'm not in the same business as 99% of the participants there. They generally make kitchen cabinets and sell them directly to the end user. I make furniture.

99% of those 99% of the business owners have no idea what business they're in, by the way. They think they are manufacturers. They are not.

Someone posted an article written by someone whose mouth moves when they read the (tabloid) paper that's got them in a tizzy.

You can read it if you want, but I advise not wasting your time. It's drivel of a very common kind; disconnected charts and weird, unrelated facts -- mostly unrelated to accuracy as well as each other -- with a "Someone should do something about all these problems!" bleat as a kind of turd cherry on top.

He's got graphs, all signifying not much. Here's my fave:
See, the graph goes down. I just fell off the turnip truck but even I know that a graph going down is bad.

But alas, I also know that the population of the US in 1950 was around 150 million people. I also know it's around 300 million people now. So the percentage of people in manufacturing has been halved, while the the population doubled. That would mean... hmmm... about the same number of people work in manufacturing now as half a century ago. You'd have to think it is a defacto societal ill that the proportion of people doing any particular thing in an economy changes over half centuries for this chart to matter. I wonder how many people were telephone operators in 1950? I wonder how many are now? I've haven't noticed that my phone service is worse, but maybe it's just me.

Why would our pixel-stained wretch think it matters? Because he's an economic troglodyte, that's why. Here's his theory on how wealth is created:
Wealth is created when we add labor and functional capability to raw materials that increase its value to an end user. Companies and individuals that produce durable and consumable goods create wealth. They then share some of that wealth with local, state and federal governments which consume the wealth in order to deliver the services and infrastructure we require. Wealth-creating jobs include manufacturing, construction, mining and farming.

Service organizations such as banks, accounting and law firms, retailers, newspapers and digital media, restaurants, hospitals and the like merely redistribute wealth across the economic chain, depending primarily on wealth-creating enterprises for their revenue stream.

If that theory of wealth creation sounds familiar, it should. It's the "Labor" theory of wealth, and its big daddy is Karl Marx.

It's fashionable to think that if you make tangible things you're swell, and everybody else is a parasite. It's also pre-renaissance economics. Actually, it might be pre-dark ages now that I think of it.

(Upon further reflection, it's probably pre-historic economics. Just because they still occasionally give this a go at the Universities doesn't mean it's cutting edge, guys.)

OK, let's "add labor and functional capability to raw materials that increase its value to an end user" and see how wealthy we get. They tried this method in Eastern Europe a while back: They stripmined coal and iron ore. They burned the coal in a furnace and made steel. They made the steel into... you guessed it... excavation machines to mine coal and ore. That's it. Everyone had a job. Stuff got made. But there was no wealth created.

As I recall, this ended with everyone standing on a wall in East Germany with sledghammers, not with anything remotely resembling a functioning economy. I was actually amazed they could swing the hammers with so much force after the diet of ration-card suet and vodka they'd been on for half a century.

I believe in personal responsibility, so it's Don Shultz's fault he can't write and won't think. Likewise, it's Wood Digest's fault that they publish stuff which is mildy inflammatory -- where it's coherent enough to be much of anything at all -- instead of enlightening for its readers. But I can't blame the readers for being upset, and somewhat at sea over their situation. No one talks any sense to them.

The reason that the amount of people in manufacturing doesn't go up is because productivity has skyrocketed. Watch "How It's Made" on television. A factory makes a lot of stuff with not many people working in it nowadays. Does anyone really think 300 million people in 2008 have fewer consumer durables than 150 million people in 1950 because their proportional representation in the workforce has been cut in half? We added 41% of the population to the workforce in the last 50 years, too, don't forget--women went from 26% to 67% percent employed in those intervening years. Just exactly who would you get to work in those American factories you demand we build? There's no one left to hire. And there isn't much for them to do there. Chinese labor isn't competing with American labor. They're competing with American machines.

As I mentioned earlier, my fellow woodworkers at WoodWeb are mostly in trouble, in my opinion because they don't even know what sector they're in. They think they're manufacturers, because manu= hand and factory = mill. But in any real sense of the term, they are not manufacturers. They are in the service industry and don't know it.

What anyone that wants to help them make sense of their place in the modern economy needs to tell them is to find out what the customer wants and give it to them, and they will flourish. And it's the "finding out," not the manufacture of the goods that offers an opportunity for the small to medium sized woodworker to add value and create wealth. The end product is less than 50% of that equation. A customer gets better service from Home Depot installing Chinese-made cabinets than they do from the average woodworker that makes custom cabinets. The average cabinetmaker treats the customer like an annoyance, and thinks that by paying close attention to the last 50% -- the made good -- that he's all done and people will beat a path to their door. But manufactured goods are not scarce, and you'll get killed if you try to paddle across the ocean of manufacturing in a raft. People need to add value to the process, not just the item, and the only thing you can offer a customer that he can't get from a factory with almost no one working in it is service. But if you think all ancillary functions of a business are parasitic, you'll never even try.

The WoodWeb is there for people who are in the woodworking business. But they have been taught from birth that accounting, banking, actuarial analysis, sales, insurance, advertising, and almost all forms of pure management are parasitical. Don Shultz is just the latest guy to tell them that, he's nothing special. And why shouldn't they be confused by macroeconomics? We just watched a few hundred thousand Ivy League, Sorbonne and Oxford educated MBAs run the international banking and investment system into the ground, then throw up their hands and say: We have no idea how to assess value in the modern economy. Let's make charts of workforce participation in the manufacturing sector like it was still 1950, and have a liquid lunch with a government official.

Small businessmen post questions that break my heart at the WoodWeb. Business is bad, should I think about printing business cards? How much is a "fair" price to charge for a cabinet? Why do I even have to talk to the customers? They're annoying, and they always want stuff I don't want to give them. Can't I just make stuff like I want to and why can't people just mail me money and wait for me to make it?

They've been told from birth that if you build it, they will come. They were told wrong. Wrong like Don Shultz. Stop listening and save yourselves.

14 comments:

jimgrey said...

"Why do I even have to talk to the customers? They're annoying, and they always want stuff I don't want to give them. Can't I just make stuff like I want to and why can't people just mail me money and wait for me to make it?"

It ain't just cabinetmakers who think this way. I work in the software industry. I've heard the same kind of thing coming from the mouths of software designers and developers.

Steve F said...

Filed under "Sage Sander." Printed and delivered to senior management. Supplying inputs to farmers, which is what I do, can be a price game. But you'd better make it a service game.

PatHMV said...

You said it, jimgrey. I was once hired as a consultant for a company looking to develop and sell a significant software product to a portion of the legal industry. I had 5 years as a professional in that corner of the law, as well as extensive experience exploring our work-flow in order to design the product my old office had been using. A former colleague was also providing advice to the company.

I can't tell you how many times we were told by the non-lawyer software programmers with no experience of any sort in our field: "Yes, well, we designed it this other way, instead of doing what you said, because we think some other lawyers (whom we have never met or spoken with) might prefer to do it the way we want it." Insane. And yes, they eventually closed down that side of their business.

Sippican, a particularly profound post. As I was reading the quote about the definition of value (I swear I wasn't skipping ahead), I thought to myself, jeez, does this guy even realize he's quoting Marx?

The value of a thing is what that thing will bring. THAT is the only definition of value that matters. Neither labor nor any good has any "inherent value." You may excel at converting food stuffs into bacterial growth culture, but the labor you do adds no value to the end result... unless you are a horse or a cow, in which case farmers DO value the end product.

Pastor_Jeff said...

Before entering ministry, I worked in marketing.

At one place, the customer service reps were measured and compensated based on how many calls they completed an hour, so they always complained about how much time they had to spend talking to people. Customer service was just a "cost center," so the goal was to keep costs as low as possible. They were manufacturing calls, not creating value for the customer.

The buying group developed monthly sales based on what deal they'd made with the manufacturer. Then they'd come to marketing and ask us to find some people to sell this stuff to.

The company had been started years ago by a guy working phones out of his dad's basement, selling product for less than traditional stores. He thought he was in the low-cost sales business, but when warehouse stores opened up they killed his margins, which he thought was the only way to offer value.

He sold out to one of those warehouses a few years ago.

Pastor_Jeff said...

"People need to add value to the process"

The only way wealth is created is by offering something -- anything -- of value for more than it cost you.

I am employed as a vocational minister. I apparently produce value to people, because they keep paying me. Yet I manufacture almost nothing. Same could be said of education, entertainment, law, medicine, and every kind of service.

I recently caught a few minutes of a barely-intelligible "urban youth" on NPR talking about how he and his friends were beginning to lose hope after filling out job applications and not getting any offers.

Does he have any useful skills? In what way has he prepared himself to offer value to a potential employer? There are a disturbing number of kids being raised to think that the world owes them a job -- and that if it doesn't, there's some injustice being perpetrated (which government action probably needs to redress).

PatHMV said...

Too many people don't understand that the economy is a circle, not a line. There is no "bottom" of it, providing the "real" value, which is siphoned off by the rest of it. Those manufacturers sell more because they hire design and marketing experts who tell them what the people might buy. They decide what goods and services to buy to go into their own products through seeing advertisements. They find sites for new plant locations using real estate agents, and lawyers, and market projection and labor supply analysts. Without all those services, there is no manufacturing, or at least not nearly as much.

And of course without the manufacturing, there are no services, either. They feed into each other. There is no one point which one can identify as the "beginning" or the "core." People are both producers AND consumers. It's all connected, and treating it as if it's not will cause massive problems.

Thud said...

"why can't people just mail me money?"...the govt has been doing that for years!

Pogo said...
This comment has been removed by the author.
Pogo said...

Brilliant piece.

Doctors very often think this way, too. We are encouraged to think our actual customers are Medicare and other insurers, rather than those annoying patients.

Where I work, we too often forget that the extra service we provide is often the only reason they travel to this godforsaken little town in the first place. Curt, anonymous, bureaucratic indifference they can buy anywhere.

So why come here?
What do we offer?
What business are we in?
I return to these questions rather often at work; one reason people tend to avoid me, I suppose.

But we are a service, too. I don't sell MRI procedures, but the thinking behind it; whether to get one, what we'll do with the answer, who else we should consult, etc.

Travis Clark said...

I used to design slot machines.

Everyone thought it would be like printing money, but it wasn't.

It was a mystery to some why some machines that had "good" payouts (The alchemy of how slots get rated is arcane, just trust and don't bother to play) got played less than machines that had poor payouts.

But why? Well they were friggin ugly for one. All 1970's era graphics in ugly colors.

So a few of us started designing slot glass with cute cartoon characters, tropical scenes, cool bond-esque characters.

Sales went up.

Even in an industry where people are literally throwing their money away, there is value to be added.

dr kill said...

So true. Sad, but true. We are all in the people business, that is where the value is added. Those that don't know, starve. There are clients out there for every personality, you only need to meet them.

An Edjamikated Redneck said...

One or two little quibbles with an excellent piece:

Your right that manufacturing has become more productive in the last 50 years, which has lead to teh need for fewer employees, but what of the heavy industrial part of manufacturing? We produce fewer tons of steel now than in 1950, and import more than we make. In some cases its what we manufacture or don't that makes a difference.

Second, I seperate work into two catagories: adding value and shuffling goods. When I worked as a machinist, I added value by taking a hunk of raw steel or iron and making a useful end product. My skill made a connecting rod out of a doorstop. As a paraleagal, I am adding value by using my skill with the law to transfer property, making an owners' non-liquid asset into spendable cash.

I can understand we do not need as high a percentage of the workforce in manufacturing as we used to, but if we do not make a product that we can sell to someone outside our economy, we are not adding value.

For instance, the barista at Starbucks, who is suffling goods without adding any value. We cannot shuffle gods amoungst ourselves and add any value to our economy, which is where we have recently gotten into trouble; if we don't export (even our ability to make entertainment and software) we cannot increase our economy.

Now we are suffling cash from one pocket to the other, as we sell goods made in China to one another, and losing a percentage on each shuffle to the Chinese.

Bissage said...

Sipp, many of your posts make me feel ashamed of myself.

This is one of those.

SippicanCottage said...

Bissage- Well, as long as you're not ashamed of me...