September 28, 2021

September 28, 2021

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Push vs Pull Economics, and the Morality of Free Markets

by | May 21, 2021 |

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Economics is generally taught in two pieces: micro and macro. One of the primary differences, in fact, between the Chicago School of economics, and the Austrian School of economics, is that Milton Friedman baked macro measurements into the Chicago School, whereas Frederich Hayek argued that macro numbers ignore the things driving those numbers, inviting bubbles. Personally, I think there is merit in both camps. Macro numbers tell us what an economy did, while micro numbers tell us what is occurring within the economy. It is only in micro numbers that we can see what an economy is going to do.

One of the things I love about growing older is that having more years behind me, I have also had time to study more things. My father was a history teacher, and as a young man, I devoured my father’s library of history books. In my 30s, I discovered economics, and began adding economics texts to my library. In my 40s, I discovered lean manufacturing, earning my second degree. Now, at 50, I can draw from all of these areas. My understanding of economics helps me to better understand exactly how and why histories unfolded, and my understanding of lean manufacturing helps me to see some of the pitfalls and opportunities that lie ahead.

In this article, I am going to compare and contrast manufacturing techniques, as kind of a microeconomic look at how different businesses function. Then I am going to expand those concepts into our economy as a whole.

There are two ways to run a manufacturing company, just as there are two ways to run an economy. One is from a top-down approach, and the other is in more of a self-guided, or bottom-up approach.

All manufacturing companies utilize a concept called ‘one-piece flow’ at different places within their production systems. We call these ‘one-piece flow’ operations ‘production lines.’  If we think about material flowing down a production line, with each step in the manufacturing process taking a component, or a sub-component, one step closer to completion – the material really does seem to ‘flow’ from station to station.

Each individual production line in a company operates in a similar way to how a specific company, or a specific industry, operates within a nation’s economy. These lines must be managed efficiently to ensure that companies produce what is needed, when it is needed, as efficiently as possible.

Mass-manufacturing companies like to use Essential Resource Planning and Material Resource Planning programs to centrally plan and manage operations. Similarly, in a command economy, central planners try to anticipate demand, and then try to allocate resources to meet that demand. This is a push-based system, with resources sent where they are going to be needed, in anticipation of upcoming demand.

Lean manufacturing tries to create pull-based systems between manufacturing lines, such that the sale of finished goods drives production. Lean manufacturing companies used to use (many still do) physical cards, representing components and sub-components, and when a component or a sub-component was taken for a finished good, those cards would be sent back to the production lines of the components or sub-components, signaling those lines to produce another unit, for another finished good. Central planning is not needed – actual demand literally pulls production through the company’s operations.

In a manufacturing plant, those physical cards (which are today mostly electronic) are called ‘kanban.’ Something very similar exists within a national economy – we call it a ‘dollar.’

In a free market, when a consumer buys something from a retailer, the retailer replaces that thing, sending dollars back down the distribution channel to trigger the production of whatever was sold. An economy run entirely in this way is responding to actual demand, and as such, it needs no central planning, and no master computer trying to anticipate demand.

Over time, lean manufacturing has been slowly replacing mass manufacturing, and for good cause: no matter how well central planners can anticipate and react to anticipated demand, even if they were absolutely perfect, they would never do better than a pull-system reacting to actual demand.

Even if we take all of the corruption out of a push-based system, and even if we assume that some omnipotent being can run that system with no mistakes, such a system would only do as well as a pull-based system. Each mistake, each corrupt decision – anything that goes wrong makes a command-based system less efficient. Because even with the most advanced computers imaginable, people will always make mistakes, it is physically impossible for a socialist system to run as well as a free market.

As for disruptions, such as crop failures, pull-based systems respond faster, minimizing the damage.

In a free market, whoever positions themselves as the most efficient provider of some need will do well, whereas someone who does a worse job meeting that same need will not do as well. This is true irrespective of the needs and desires of providers. Consumer demand pulls what is needed from whichever producer best meets consumer needs – independently of what the producers might want. 

Some things are needed more than others, and in a free market, those things that are needed most will drive a higher price (or a higher wage) than do those things that are needed less, leading to more of the things that are needed and fewer of the things that are not.

The driving force behind socialism is not based on socialism being more efficient, but based on the idea that the ‘balance’ the free market moves toward is somehow not moral.

If people want cars instead of horses and buggies, those who make cars will make more money than those who make horses and buggies. Someone might decide that this is immoral for those working in horse and buggy companies, but someone else might say that it is immoral to force people to produce horses and buggies when what people want are cars.

The price of labor is driven the same way. Socialists will talk about entry-level wages and CEO wages as if those two things are related, but the difference between having the right CEO vs. the wrong one can be the difference between making billions of dollars a year and going out of business, whereas the difference between having the right vs. the wrong entry-level worker is trivial.

The market places a higher demand on qualified CEOs, and this is why CEOs make more.

The socialist looks at economic outcomes, and tries to control them in a top-down, command fashion. A lean thinker would try to manipulate the free market, to alter the outcomes it produces, instead.

In the case of labor, a worker will be paid what the market says their labor is worth. That might be less than what some people think is ‘moral,’ but if we use minimum wages to force companies to pay more, they will try to employ as few people in those roles as possible.

Let’s say, hypothetically, that instead of mandating higher pay, the government created a business tax, and used the proceeds to augment the wages of low-skilled workers. Suddenly, employers are not paying employees more than their economic worth (they actually still are, but the tax makes it an indirect cost unrelated to the hiring of anyone employee), and there is no disincentive to hiring.

For the individual worker, whether the government mandates a minimum wage or taxes employers to augment the wages of low-skill workers, makes no difference. Either way, entry-level workers make whatever society finds to be moral. The difference is that if businesses cover that cost indirectly (through a tax), then there will be more workers, which is better for society.

Minimum wages are but one example of where top-down, command thinking, provides worse results than does bottom-up, lean thinking. Lean thinking always provides better outcomes, and because free markets run on lean mechanics, free markets will always be better, overall, than socialism. That does not mean free markets are perfect, but it does mean that where free-market outcomes are politically undesirable, the solution needs to be as minimally invasive on the free market as possible.

To me, the most moral system is the one that produces the best outcomes for the most people while causing the least amount of harm. Such systems will always be pull-based, reacting to (not anticipating) actual demand. And because of this, to anyone who understands history, economics, and lean manufacturing, free markets will always be more moral than socialism.

Wallace Garneau

Wallace Garneau is a two-service military veteran, with four years in the United States Marine Corps Reserve, and four years in the US Army. He has twenty-three years of experience in process improvement roles, having served as the E-Commerce Manager, IT Manager, and Director of Business Systems for a variety of medium to large manufacturing companies. Wallace holds a Bachelors of Science from the University of Phoenix, and an MBA in Lean Manufacturing from the University of Michigan. Wallace is currently finishing a Masters of Science in Lean Manufacturing, at Kettering University.

Wallace is a published poet and essayist, and recently finished his first book - The Way Forward: Lean Leadership and Systems Thinking for Large and Small Businesses.

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