Over the past several weeks, we have debunked the idea that purchasing power—i.e. what a dollar can buy—is intrinsic to the currency itself. We have discussed a large non-monetary force that drives up prices. Governments at every level force producers to add useless ingredients, via regulation, taxation, labor law, environmentalism, etc. These are ingredients that the consumer does not value, and often does not even know are included in the production process. However, these useless ingredients can get quite expensive, especially in industries that are heavily regulated such as health care.
What Force Pushes Prices Down?
There is another non-monetary force, and this one is pushing prices down. Producers are constantly finding useless ingredients that they can remove. In the research for his Forbes article on falling wages, Keith discovered that dairy producers found ways to eliminate 90% of the ingredients that go into producing milk between 1965 and 2012. For example, they reduced by two thirds the labor hours that support each cow.
There is a school of industrial production that studies waste and ways that producers can remove it. It is called the Lean Manufacturing movement, also known as the Toyota Production System (TPS), as Toyota originated it. TPS identifies seven types of waste, called muda in Japanese. They are:
- Transport (moving products that are not actually required to perform the processing)
- Inventory (all components, work in process, and finished product not being processed)
- Motion (people or equipment moving or walking more than is required to perform the processing)
- Waiting (waiting for the next production step, interruptions of production during shift change)
- Overproduction (production ahead of demand)
- Over Processing (resulting from poor tool or product design creating activity)
- Defects (the effort involved in inspecting for and fixing defects)
Companies which commit to Lean have processes for continually discovering and eliminating waste, called kaizen in Japanese. We believe that our modern world would not be possible without Lean or other similar approaches. Goods would be far too expensive.
As we keep pointing out, many goods have fallen in price over three and a half decades. Some have fallen massively—computers come to mind. Others such as Levis 501 jeans, have fallen only 21%.
These price drops are despite massive increases in mandatory useless ingredients such as ADA-compliant bathrooms. The net result of added useless ingredients minus subtracted useless ingredients is a lower price. That’s pretty incredible.
Incentives Drive Every Producer and Every Consumer
At least, it seems incredible, until you realize that every producer has a powerful incentive to remove every useless ingredient it can find. Consumers generally choose the lowest priced good. Or even if some goods have higher quality, they want the one of highest quality combined with lowest cost that suits their preferences.
In other words, people may pay more for a Porsche 911 than for a Ford Mustang. But that is because it has higher quality (e.g. handling). They would not pay 911 prices for an ordinary Mustang.
Manufacturers that can produce products that consumers want, at prices consumers want to pay—always less—earn a profit. Manufacturers who can’t, don’t. So any manufacturer which can keep finding and removing useless ingredients—which by definition and by nature are things consumers do not value—will outcompete all other manufacturers. Many times, consumers do not demand a lower price, they demand new features or higher performance. They want manufacturers who substitute desirable ingredients for useless ones.
The automobile industry has a graveyard full of companies like American Motors Corporation, who couldn’t compete. The computer industry also has its failed producers, most famously is IBM, which once made Personal Computers. Though it pioneered the industry, it could not compete with the companies who sprang up in its wake.
It’s safe to say that every good from milk to automobiles to computers is made with an efficiency—that is, a lack of useless ingredients—that would have been unimaginable in the 1980’s or 1990’s. Toyota Production System teaches that removing what it calls waste, and we call useless ingredients, is not a one-time goal. It is a continuous process. First you remove 50% of the cost of production. Then you remove 50%. Etc.
In the same time that a monetarist can say “the Fed is inflating the money supply”, an assembly line worker at Toyota said “if we move this tool caddy a foot to the right, we can save two seconds on every bolt in every Camry.” The net result is that, between 2009 and 2019, the Camry went up in price by 20%. But it went up in horsepower by 28%, up in transmission gears by 60%, up in electronics, and other specifications. We have no idea how much it went up in useless ingredients.
Punching through the Prevailing Paradigm
We have talked a lot about non-monetary drivers of price. For several weeks, we covered the force that drives them up: useless ingredients. We dwelled on it, because nearly everyone accepts Milton Friedman’s profound-sounding bogus idea “inflation is everywhere and always a monetary phenomenon.” They accept this along with the equally bogus idea that inflation means rising prices, and that rising prices are the direct and linear consequence of rising quantity of money. Or the even-more bogus ides that irredeemable currency is money.
To debunk the prevailing paradigm, one must dwell on a topic, at the risk of belaboring it. This week we offer a more perfunctory explanation of one driver for falling prices. Because we are not arguing against mom and apple pie, we think most people will find it easier to understand the cause and effect of removing useless ingredients from products and the consequent reduction in price.
Next week, we will address a creature that all sensible people (sensibility being defined as accepting Friedman and the Quantity Theory of Money) would reject. This dragon is the powerful monetary force that pushes prices down (yes we said “monetary”).