Lean economics yesterday, today and tomorrow

In the early 20th century, Henry Ford’s invention of the assembly line revolutionised the manufacturing system. That’s where the idea behind lean manufacturing, followed by a large number of companies worldwide, originated. But what Ford was trying to create was something more than a manufacturing system. He understood economics and lean, and was aiming at creating “real wealth” by focusing on the improvement of the community — something most companies have failed to do. A review of Henry Ford’s ideas.

I often consider my lean journey, and it has become absolutely clear to me that very few people truly understand what lean is supposed to actually achieve. Seems to me that everyone is busy reading modern lean literature such as Machine that Changed the World, Lean Thinking, The Toyota Way, and so on, but hardly anyone today reads the Bible of Lean, Today and Tomorrow by Henry Ford. You have to remember that Toyota executive Taiichi Ohno gives full credit to his readings of Ford for the creation of the Toyota Production System (TPS). So what is it that is in Today and Tomorrow that is so important? What is it that Ohno read in this book that created the impetus to create the world’s most efficient manufacturing system?

 

Ford was trying to create something more than a manufacturing system. Today, we are only trying to implement manufacturing systems without any regard to culture, community, or people. This is due to a basic misunderstanding of lean and economics. Ford understood economics and lean, and he proved that real wealth is created by focusing on the improvement of the community that you live in through hard work and productivity improvements. Today, we are reading all these modern lean books, and professing ourselves to be lean leaders, but the general results are that products are becoming more and more expensive and service is becoming worse and worse.

We are living in Ford’s “tomorrow” and his vision of tomorrow, what today should have been, has not been achieved. Today, the US is basically bankrupt. For all of the advances in technology and improved standards of living, we can easily see in our world, more poverty, more pollution, more war, more suffering.

All this so-called wealth has been created through extension of credit or “dead money”. It is not real wealth, and it is not real money, and eventually the bills will have to be paid. Certain individuals have benefited, but in the end the net worth of society has decreased dramatically and continues to do so. This in itself is not the fault of lean, but a basic misunderstanding of lean, free market capitalism economics, and how they relate to lean.

Questions need to be asked. For instance, how are we driving value to our customers, if the world’s conditions are getting worse? Is this the lean society we are trying to create? We advertise all these great achievements in lean thinking when actually it is exactly what lean is not supposed to be. We have achieved nothing in reality in regards to Ford’s vision of lean.

Today, due to this basic misunderstanding of lean and free market economic principles, the main strategies of business in order to lower manufacturing costs is to move operations to low-cost countries, destroy local communities, then exploit foreign workers for less pay, usually under poor working conditions, then implement “lean” cost-cutting activities and advertising them as necessary to lay off unnecessary workers in order to stay competitive.

Or, threaten your current workers that you will outsource your work to low-cost countries, to avoid wage increases. Not everyone follows this trend, but many do, and the results of these activities affect us all in the long run. The real sad part is that in many instances this is all done under the name of lean.

These activities lower the living standards of our main customers, and in the end, have a negative effect on our business activities over the long run, and for our communities of “tomorrow.” We have destroyed the healthy business culture we need in order to survive. How can people afford our products if we pay them so poorly? How can they afford our products if we put them in debt in which they can not repay? How can we build healthy communities on poor wages? How is it that we have forgotten that the wealth of the middle class is the power of our economic systems? Today, we are creating more poor societies, with the money being stripped from the middle class.

With all the enormous wealth that has been created over the last few decades, there are more poor people and poor communities today than ever before. This is a direct result of our lack of understanding of lean and lean economics.

So in the end what has been the value of these activities, if our culture is declining instead of improving? What does our tomorrow look like if we continue on this pace? What have we missed?

First let’s review some of Ford’s ideas from “yesterday”, for those who have unfortunately not read Today and Tomorrow. Then we can review what has changed (today), and how we can get back on track to creating the “lean society” envisioned by the father of lean thinking and understood by the creator of TPS (tomorrow).

Ford wrote Today and Tomorrow in 1926. He believed that business leaders needed to work together with communities to build a better society. His revolutionary ideas were based on the concepts of “wage motive” and the “money power.”

Ford’s most controversial and at the same time revolutionary idea was based on how companies understood the method of making profits. His idea was called “wage motive”. Ford stated in Today and Tomorrow, “The real progress of our company dates from 1914, when we raised the minimum wage from somewhat more that two dollars to a flat five dollars a day, for then we increased the buying power of our own people, and they increased the buying power of other people, and so on and so on. It is this thought of enlarging buying power by paying high wages and selling at low prices which is behind the prosperity of this county.

It is the fundamental motive of our company. We call it “Wage Motive.” This is in direct conflict with the popular idea of “Profit Motive.”

On profit motive, Ford stated, “…..we have discovered a new motive for industry and abolished the meaningless terms ‘capital,’ ‘labour,’ and ‘public.’”

“For many years we have heard the phrase ‘profit motive,’ which meant that someone called a capitalist provided tools and machinery, employed men — that is, labour — at the least possible wage, and then manufactured goods and sold them to some strange collection of people known as the ‘public.’ The capitalist sold to this public at the highest price he could get and pocketed his profits.

Apparently, the public came out of the air and also got its money out of the air, and it had to be protected from the profiteering capitalist. The workman also had to be protected, and someone invented the ‘living wage’ notion. All of which grows out of a complete misconception of the entire industrial process.”

“It is true that petty business can work on the capital-labour-public mistake, but big business cannot, nor can little business grow big on the theory that it can grind down its employees. The plain fact is that the public which buys from you does not come from nowhere. The owner, the employees, and the buying public are all one and the same, and unless industry can so manage itself to keep wages high and prices low, its destroys itself, for otherwise it limits the number of its customers.”

“Since the public is the business, the primary obligation of business is to the public. Those who work for and with the business are part of the public. And this settles on fundamental corporate policy — to whom shall the benefits of improvements accrue?”

“Suppose an industry, through efficiency and approved service, is able to reduce costs to the customer. It gives the benefits of its improvements to its customers. If an article costs a dollar less to produce than formerly, a dollar comes off the price charged to the consumer. By that process more people are able to buy. More buyers make a still larger business. A larger business still further reduces costs, which in turn increases the business still more.”

Ford was against the idea that the goal of business was to increase prices and lower wages to maximise profits. He believed that this would lead to a weaker society and the benefits gained by improved productivity would be lost to the society as a whole. This idea was a major shift in thinking about profits and business.

Ford’s ideas were not accepted very well. He raised the wages of his employees to more than double the standard wage of the time. Companies were outraged by this tactic and accused Ford of ruining the society as a whole. Just think of the logic — Ford’s company was the most successful of his day, and he was killing his competition by raising the wages of his employees. How would they ever compete? His logic was foolproof as long as he was the most efficient. Of course, his competitors complained.

However, Henry Ford was not confused, he understood business and how it should react with society in order that everyone benefits from its activities. “Yesterday”, Henry Ford was also very critical of money and how it is used in our society. He talked about the concept of “big business and the money power” in chapter 3 of Today and Tomorrow. Ford talks about professional financiers, and their effects on society.

He stated, “The notion that money is the life blood of business and that if you can control money you can control business has just enough foundation to make it real, because we have to express in dollars what are not dollars at all.”

“You never see that inventory expressed in things. It is always in dollars. There are no dollars there, as dollars. There are furnaces, machinery, ovens, trucks, elevators, materials, and buildings. These things are valuable. They are intrinsically more valuable then dollars. That is, if you shoveled a building full of dollars, you would not have the same capacity for production and use as you would if you filled that same building with machinery and an organization of human skill.”

“On a tax sheet, however, all this mechanical capacity is put down as ‘dollars’ and on that basis a certain number of ‘dollars’ are demanded of it. More than one business has been destroyed by taxes levied under the impression that its assets were in dollars.”

“That is only one of the collateral effects of thinking of things as dollars instead of as things. We must learn to drive through all our thinking the profound distinction between finance and business. This is the country of big business. But, as previously shown, big business controls nothing. It is entirely at the mercy of public demand. It is amazing how few seem able to distinguish between industry and finance....”

“…the employer was always referred to as the capitalist. The whole trouble was that the employer was not a capitalist, but under the thumb of capitalists. In those years, most businesses were controlled on borrowed capital, which gave the capitalist a super control of the industry. The manufacturer, standing between hostile labour and rapacious capital, had a hard time getting anything done. Pressed from above for interest and dividends, pushed from below to grant more money for less work, he had small chance to give service.”

“When finance exists to serve industry, which is its proper function, then it is recognized as part of the service instrument of humanity.”

“Money is not business. Big money cannot make big business. Men of money, foreseeing the approach of the industrial era, sought to seize and control it by means of their pooled capital. And for some time, the country rang with their exploits. Money brokers are seldom good business men. Speculators can not create values. However the idea got abroad that ‘money’ had grabbed everything and that ‘money’ controlled everything.”

“Their power is not in their gold, because there is no power in gold; their power is in their control of people’s ideas with regard to gold. It is not any enslavement to gold that menaces, but the enslavement of the people to a certain idea of gold. Money control does exist — not the control of mankind by money, but the control of money by a group of money-brokers. At one time, this meant the control of mankind by money. But now with the growth of real industry, money is slowly receding to its proper place as one of the cogs in the wheel, not as the wheel itself.”

“When anyone attempts to run a business solely for profit and thinks not at all of the service to the community, then also the business must die, for it no longer has a reason for existence.”

“A business can not serve both the public and the money power. As a matter of fact, the money power has always lived more by exploiting or wrecking business than by the service of business. There are signs however that this may be on the mend.”

“Money put into business as a lien on its assets is dead money. When industry operates wholly by the permission of ‘dead’ money, its main purpose becomes the production of payments for the owners of that money. The service of the public has to be secondary. If quality of goods jeopardizes these payments, then the quality is cut down. If full service cuts into payments, then service is cut down. This kind of money does not serve business. It seeks to make business serve it.”

“Money that takes no risk in an industry, but demands its toll whether there be profit or loss, is not live money. It is not wholeheartedly in the business as a part of it; it is a dead weight, and the sooner the business is rid of it, the better. Dead money is not a working partner, but an idle charge.”

You can read that Henry Ford was critical about how money was used and the banking industry as a whole. Again this did not make him very popular among the bankers of his time. Money, in his view, was a tool of society. It is owned by the society and must be used to better the society. When money was not used properly it would be a detriment to society and only benefit a small elite class. One of Ford’s most famous quotes was, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” It’s not that Ford was against profits, or bankers, Ford was aware that every business needed profits in order to serve the society.

However, he saw that the banking system was working towards only its benefit, and not to the benefit of society. His view for “tomorrow” was a monetary system based on driving value to the society through hard work and improvements. This would ensure that society would improve based on the gains in technology and industry. Has this happened? Where are we today?

So here we are “today” in Henry Ford’s vision of tomorrow. Have we achieved his vision, or should it be argued that the society has become worse over this time period. Have wages and earning power gone up in your community? Have prices of products gone down based on improved technologies? Has the quality of products and the quality of service in your communities gone up?

“Today” we are still living under the profit motive that Ford warned us about. Companies are pushing to lower wages by going to low-cost countries and paying substandard wages in order to achieve profitable numbers. No focus on service to the society as the main customer. All our activities today service the owners of our money system.

You can see already the effects of this today in the US. The US historically has been and is still the most productive and technically advanced country in the world. So why are products more expensive to produce in the US? Why is the standard of living in the US falling dramatically? Why is the dollar losing value at an unprecedented rate? Most companies today are well advanced in implementing lean manufacturing tools in the US.

Lean tools cannot, and will not save the US if the basic fundamentals of free market capitalism are not understood, followed, and balanced with lean thinking. This is a much bigger problem than just implementing kanban and supermarkets.

With all this advanced technology products should be less expensive and real wealth should be created. The US went from being the largest creditor nation in the world to the largest debt-ridden nation in the world in just the last 30 years. So what is the problem? Is it because of high wages? No, because Ford proved that high wages were necessary to drive lower costs. In fact, mean wages are going down in the US.

It is because of the use of “dead money” and the moving away from true free market capitalistic society. The US is debt-ridden/bankrupt. No productivity improvements will be enough to turn it around. Lean will not save the US or US manufacturing, unless lean starts to listen to Henry Ford’s words, and listen fast.

We need to take a hard look at ourselves and realise that our “tomorrow” will not be improving. Instead, it will be much worse if we continue down this path that Henry Ford warned us about.

John Podlasek is a US native with experience in the aerospace, injection molding, medical, and agricultural industries. He is managing director at Frohe Sp Zo.o. in Wroclaw, Poland, where he is a frequent speaker at lean conferences. This article was first published at Lean Enterprise Institute’s website, www.lean.org.