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Blog #4 - A New Paradigm?
by Dr. Lawrence Nannery
2012-03-05 07:45:36
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The reason for fluctuations in the capitalist economies was found over time to be the accumulation of inventories, which, unchecked, often slowed and then stopped production sooner or later. 

Solving this problem was the focus of at least three strategies since the time of the New Deal onwards. 

Strategies for fixing the law of supply and demand on the part of the government first arose in the field of agriculture.  Since 1865 there had been a sometimes downward push on prices on account of overproduction, or, the opposite: a run up of prices followed by a crash.  It was demoralizing to the farmers, and emigration to the cities was the major response, since occupations there seemed more likely to be steady.

When the Great Depression came, the farmers, who by that time were quite capitalist oriented, were very badly hit because the market for their products slackened.  Incomes had fallen substantially almost everywhere.  The Department of Agriculture was tasked with two major problems.  First, stabilizing the living conditions of farmers, lest the producers in that sector become too scarce.  They did this in several ways, from making it easier to get bank loans to pay off mortgages and seed money, to introducing new, scientific techniques of farming to those who were ignorant of them.  Second, the agricultural agents tried to stabilize their living conditions by helping them to set up cooperatives, not of producing, but of marketing their goods. 

Over time, other things were tried, such as price supports to keep the “family farm” going, despite uneven competition from more advantaged competitors.  Every year the Department would publish a list of specified crops for which there would a minimum price that the Department would pay farmers if no one else would.

In the decades to come they, the government, fought overproduction by paying farmers for not bringing to market a certain percentage of what they were capable of growing.  This policy set an upper limit to the amount of produce coming into the market, which had the effect of keeping prices up.  This was in effect a minimum wage.

The mechanization of farms went on apace, to the point where one large machine for harvesting wheat or maize might cost $2,000,000.  It surely was an advance, but the cost was the family farm itself, now transformed into a large enterprise, closely monitored in great ways and small by government agents.

As a result of such policies, virtually the entire sector was transformed into a business, managed and paid for by government money, even though rhetorically it was claimed that they had saved the family farm.  In these ways and many more, the control of inventories was the rationale for making the agricultural sector of the economy part of a socialist government managed and controlled sector of the economy.

Turning to a wider frame of reference, there were two other developments that had the aspiration of taming the business cycle by smoothing out the highs and lows of inventories.

The first was the invention of Management Information Systems, which occurred in the late 1960’s, and with the introduction of computers became a very handy tool of controlling inventories.  H. Ross Perrot, the Texas billionaire who ran for president in 1992 and 1996, was a prime mover in this development.  He garnered oodles of cash for helping businesses set up systems tailored to their needs to cut costs of management and to control the amount of goods on hand. 
But, although it was an effective tool up to a point, this new system also had negative effects.  In the first place it devastated the ranks of mid-level managers, since their functions could almost all be performed by entry-level clerks.  Second, MIS systems conferred greater control over staff at all levels, by entering matrixes of information tracking their movements, functions and “productivity.”  This eliminated the possibility of labor unions and gave autocratic powers to top management. 

Another change in the practices of corporations was that of preordering products with very exact parameters.  It was something like what had always prevailed in tool-and-die factories.  The marketing corporation addressed the actual producer directly and required the latter to deliver products that the marketer desired to retail in terms of exact descriptions of the parameters of all types, and the terms of quantities of such items would be set by agreement between the producer and consumer corporations. 

The first thing the consumer corporaation had to establish was a suitable price, and everything else flowed from that.  In the end the producer is not asked to produce more than a certain amount of goods, within the context of making a profit for both entities.

It is easy to see that such “produce to order” type of operations will not be caught with useless and profitless inventory, but it also requires that both producers and marketers be very large entities, and raises the level of economies to scale to such a point that sheer size alone might eliminate quality products and, too, much variety in items of consumer interest.  In addition, it remains to be seen whether the marketing firms, which pay low wages to marginal employees, and seek producers in third-world countries with very low paid workers can be a successful model for consumption items for long. 


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