Sunday, July 23, 2017

The mobility of capital continued

I failed to speak about the mobility of capital in the previous post.

In this context, I am not referring to money as capital.  I am talking about the physical means of production.

As society self-organized and produced goods in excess of immediate needs, enterprising souls ventured forth and traded those excess goods for other villages' and farms' excess goods.  In total, most people's standard of living rose as goods and services that were scarce or difficult to produce locally became more abundant.

Fast forward to the industrial revolution
The means of production was not very transportable early in the industrial revolution.  You cannot easily move a harbor or a water power site.  Steam engines were colossal for the power they produced.  Extractive industries like mining were not mobile.  Foundries and steel mills are enormous and must be sited near transportation and critical inputs like ore and fuel.

It was similar with human capital.  Processes were wing-of-bat, eye-of-newt.  Processes were found by empirical methods.  The science behind the processes was not know.  The master craftsmen who knew how to heat treat steel or make tools was something of a wizard.  They were rare and not easy to replace.

That gave collective bargaining a huge advantage.  Going on strike shut down the means of production and forced the owners to carefully weigh the cost of increased wages versus the cost of lost production.  Since the strikes did not happen in isolation, the owners were able to increase wages because they knew that their competitors would also be forced to do the same.

It should be noted that municipalities were also elbowing their way to the trough to collect their "rent".  They raised taxes because they could. It went beyond the basics of cops and firefighters and collecting the garbage.  Monuments called City Hall were built.  Statues, arts, festivals and other diversions were forcibly subsidized.  Payrolls were larded with nephews, nieces and mistresses.  Consulting fees were paid.

The owners still had "pricing power".  They were able to pass the costs on to the customers.  The customers were still glad to have the burgeoning output and continued to snap up every pin, needle and ingot at the price asked.

Lean manufacturing
Lean or Flexible manufacturing is an entirely different kettle of fish.

Automobile plants are no longer three story, masonry buildings with docks and blast furnaces at one end and the shipping dock at the other.

They are pole barns sided with sheet steel and the floor is at ground level.  The tools are moved from flatbed trucks and train cars by ordinary fork-trucks into the building and then the sides are installed.

They are disassembled and the tooling shipped anywhere in the world by simply reversing the process.  The sides are stripped off of the building and the entire factory can be on-the-road (or rail) in a week.

Work is "standardized".  If you can read English and have a modest amount of physical ability then you can follow the directions.  It may take you 10,000 repetitions to become totally proficient at the most challenging jobs but that is twenty working days at standard production rates.  Simpler jobs (i.e., most jobs) can be learned in three shifts.

The owners of the means of production now have the ability to flee unfavorable environments.    Too many regulations?  Gone!  Too much civil violence and strife?  Gone!  Taxes too high?  Gone!  Infrastructure not being maintained?  Gone!  Too many frivolous law suites?  Gone!

It is a fascinating game.  How much "rent" can suppliers, municipalities and labor extract from the owners before the owners move the factory to a more favorable location?  I expect that folks are watching Illinois with the same interest that baseball fans watch the preseason.  Look for a lopsided score.

Legislators are not used to businesses voting with their feet.  They are still stuck in the old paradigm of harbors, blast furnaces, steel mills and railbeds.  They are ill equipt for the mobility of lean manufacturing and professionals who can do their job just as efficiently sitting beside the pool in Cancun as they can from an office 500 feet above the Chicago Loop.

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