Economics Questions

Re: Austrian Economics and Lean Manufacturing

didoslament — Thu, 08 Sep 2011 01:21:29 GMT

Sorry for the late comment (I happened across this while looking for something else)....

I knew a good deal about Austrian economics when I first heard of lean, and lean immediately brought Austrian economics to mind:

Mass production is not only expert-driven, but also plan-driven, leading to the sort of mal-investment associated with the boom-bust cycle. In Lean, we observe what is happening and modify to get better value to the customer.
Mass production does not acknowledge or admit spontaneous order; Lean provides a beneficial environment for it.
And, of course, the very same people who think that regulation is a solution to business problems say that lean won't work in their company.

Re: Austrian Economics and Lean Manufacturing

Torsten — Wed, 06 Jul 2011 16:58:47 GMT

John Podlasek:
To me lean is business, so it applies to mass production as well.

When I am talking about mass production, I mean the paradigm or strategy not necessary just “producing a lot”. Of course mass production was already a major a huge leap forward in terms of productivity (and getting more lean via standardisation, flow on the production line etc. ) just like Adam Smiths pin factory was. But the main emphasis is still on economics of scale. Produce more, get better terms, sell at lower price, be able to cut margins. Also note that mass production is a derivative from FW Taylors “scientific management”.

Here is a comparison between craft, mass production, lean manufacturing:

Feature	Craft	Mass production	Lean Manufacturing
Focus	Set of Tasks	A specific product	Value for Customer
Operational style	Single, unique items, done by craftsmen	Batch and queue pushed through production line	Synchronized flow activated by a pull
Overall aim	Master the craft	Reduce cost per item
Quality	Workmanship	Inspection	Prevention, design, process control
Business Strategy	Customisation uniqueness of product	Economics of scale, standardization	Flexibility, quick response to customer
Improvement	Master driven experiential improvement	Expert Driven improvement projects	Team Driven continuous improvement
Management style	Seniority	Scientific management	Delegation to work force

Also see Table 4.1. on p97 in Lean Enterprise Value Insights from MIT’s Lean Aerospace Initiative by Murman et al.

Of course it’s not always possible to apply all the aspects of Lean.

Re: Austrian Economics and Lean Manufacturing

John Podlasek — Mon, 04 Jul 2011 15:02:42 GMT

To me lean is business, so it applies to mass production as well. You must improve, you must keep your customer happy or you will go out of business. TPS (Toyota production system) is a mass production system, and does not apply to other companies. In my companie we make over 500 different products. We do not make a product per say. We have machines and produce whatever fits our business model. We will never have one piece flow,or a direct pull system, and we have to keep inventory, but I argue that our company is very lean in regards to our industry.

I would attribute our business as a product of Keynesian economics,, but that is the world we live in, and what needs to be understood.

John

Re: Austrian Economics and Lean Manufacturing

Torsten — Mon, 04 Jul 2011 11:02:35 GMT

John Podlasek:

I guess you would have to tell what exactly is fat manufacturing. I have am not up to date with that.

He made that term up as a contrast to lean manufacturing. He claims that all business try to be "lean" and not to be "fat". I did say something above on this. The opposing paradigm to lean manufacturing is mass production. Needless to say that the same arguments that apply against "lean" would also apply to "mass".

Re: Austrian Economics and Lean Manufacturing

John Podlasek — Sat, 02 Jul 2011 22:31:31 GMT

I guess you would have to tell what exactly is fat manufacturing. I have am not up to date with that.

So non-Keynesians prefer to sell their wares below the highest price possible?

yes non Keynesians do, if you look back to the time when the US was the closest to an Austrian Economy, a man name Henry Ford evolved and created the greatest lean company in world history and his idea of wage motive over profit motive is buried by Keynisian and banking interests.

Henry Ford stated, "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" - (this is still the prevailing system in today's society). On "Profit Motive", Ford stated, "we have discovered a new motive for industry and abolished the meaningless terms "capital," "labor," 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, labor - 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-labor-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."

The banks shut Ford down.

read my book at www.leaneconomics.org

John

Re: Austrian Economics and Lean Manufacturing

Torsten — Sat, 02 Jul 2011 18:16:11 GMT

z1235:
Every business targets the "leanest" point of its cost/benefit optimization curve... I meant the "lean" part of "lean manufacturing" is redundant.

No they don't, even, if it is the pious wish of the business owners. Internally you will see that Managers strive to increase their budgets, workers do "create work for themselves", engineers add as many gadgets to the product as they like etc. All that without considering real value for the customer or the interest of the company.
Besides that you'll find that many business owners do strive to increase volume of their company as well and that may even be a suitable strategy.
As for the lean part is just as redundant as the quality in total quality management or the safety in occupational health and safety programs. Don't we all strive for quality and safety? And lean isn't just about cutting cost or head count reduction. It's a set of principles and techniques that help an organisation to increase the share of value adding, while reducing waste. Perhaps I should outline the key differences on some core issue between lean and mass production philosophies?!

Re: Austrian Economics and Lean Manufacturing

z1235 — Sat, 02 Jul 2011 17:53:18 GMT

Torsten:

If it would be redundant, how would you explain for example accounting practices in evaluating your business based on principles that aren't lean (With the common misconceptions relating to mass production and a fat asset base). Just have a look into factories, workshops, offices and I can assure you they aren't lean with value adding activities being far less then 5 percent.

I meant the "lean" part of "lean manufacturing" is redundant. Incurring expenditures (costs) that are not justified toward better or more products (i.e. your "value adding activities") is not "not lean" or "fat" -- it's plain ignorant or stupid. Every business targets the "leanest" point of its cost/benefit optimization curve.

Re: Austrian Economics and Lean Manufacturing

Torsten — Sat, 02 Jul 2011 17:03:20 GMT

z1235:
Sorry, but I don't get this thread at all. Are Porsche, Virgin, and Polo applying lean (as opposed to fat) manufacturing? Isn't "lean manufacturing" redundant like harmonious singing, fast racing, or reasonable thinking?... Are there any proponents of fat manufacturing out there?

The alternative paradigm towards lean manufacturing is mass production. Which as the name says aims at maximising quantities of a specific good. That works well with novellities (like Ford demonstrated with cars). But on more competetive markets this is not enough to keep the edge. If it would be redundant, how would you explain for example accounting practices in evaluating your business based on principles that aren't lean (With the common misconceptions relating to mass production and a fat asset base). Just have a look into factories, workshops, offices and I can assure you they aren't lean with value adding activities being far less then 5 percent.

Re: Austrian Economics and Lean Manufacturing

Torsten — Sat, 02 Jul 2011 16:45:20 GMT

John Podlasek:
lean manufacturing is austrian economics.

Thanks for the reply John, I am amazed by the Tsunami of responses we just got!

John Podlasek:
The reason lean fails to make any headway is that we do not have an actual free market as described by Mises.

I was thinking to bring that into my course (under the module for theory and historical roots of lean) discussing amongst others Adam Smith, Wealth of nations, removal of political obstacles to the flow of goods etc.

John Podlasek:
Please contact me if you want to try and work together on this. My goal is to start a lean economics conference in which lean leaders and free market leaders come together to promote these ideas.

That sounds like a great idea. I am droping you an email. Surely more could be achieve, if the lean enterprise institute, mises institute etc. would team up.

If you have articles or want to promote the conference, I am more the willing to publish that on my lean manufacturing web site.

Re: Austrian Economics and Lean Manufacturing

z1235 — Sat, 02 Jul 2011 13:29:48 GMT

John Podlasek:
Lean is about results.

And manufacturing/business (lean or otherwise) in general isn't?

In fact I prefer to have the leanest (most efficient & highest quality) yeilding exactly the amount of product to meet customer orders, at the highest price possible.

Who doesn't? Fat manufacturers?

However the highest price possble concept is not lean, and is a function of Keynesian economics.

So non-Keynesians prefer to sell their wares below the highest price possible?

Re: Austrian Economics and Lean Manufacturing

John Podlasek — Sat, 02 Jul 2011 12:02:09 GMT

Stephen, Ok I see you straightened it out. Would be glad to have you on the site.

Stephen

The reason that economics to me is a fuzzy science is just based on the world as it is. We dont have Austrian economics, so it is just a theory that can not be proved. We can look back to pre-1913, and use that time as a reference, and I try to do that in my book, but to say its an exact science, when it can not be actually measured in any way, just makes it a theory.

What you state about laws of returns or law or marginal utility I can agree with, but those are just components of the larger picture.I am sure your knowledge in this area far exceeds mine, so I would not start to debate these topics with you.

I like the theory. It has merit in my opinion, but the fact of the matter is that we have evolved into this current sitution due to Human Action. The Constitution or, free market, depends on moral people to function properly. We are not a moral people. We dont elect moral people. I have no problem with self interest, but immoral people have self interests as well. The Free market depends on creative destruction to succeed. People dont like creative destruction. I wish we were a moral people, but most people are sheep and like to be farmed. Make their life simple, with little complications. Austrian economics and the free market take effort, responsibility and honestly we have moved back on the evolutionary scale. Human Action is not a predictive science. If it is then we have to accept that Human Action brought us to this point.

Henry Ford warned us all abou this in his book "Today and Tomorrow". A must read for all wanting to understand the roots of lean. The "Wild Wheel", which can be purchased here at Mises, also is a great book for those wanting to understand how lean in its pure form was destroyed by the banking elite.

Most important I am willing to learn, and I appreciate any constructive critcism, or suggestions, or ideas. This is the way to move forward

Re: Austrian Economics and Lean Manufacturing

John Podlasek — Sat, 02 Jul 2011 11:43:14 GMT

John Podlasek:

Then how to you justify, Porche?, Virgin Airlines, Polo, and many other companies that sell products at much higher costs then competition. Lean is not so easily defined by one business model.

You produce only what the customer wants, and if you keep getting customers then you are doing something right.

The worst thing you can do in business is try to copy some other business. It means you have alread lost the battle. Toyota laughs at all these lean copy cats.

lean is not only about productivity, but if the siesta works, why not?

John

Sorry, but I don't get this thread at all. Are Porsche, Virgin, and Polo applying lean (as opposed to fat) manufacturing? Isn't "lean manufacturing" redundant like harmonious singing, fast racing, or reasonable thinking? What business wouldn't prefer the leanest (cheapest) manufacturing yielding the largest amounts of product sold at highest prices possible? Are there any proponents of fatmanufacturing out there?

Lean is about results. Lean in its current model is not the answer to every business model. One size does not fit all.

In fact I prefer to have the leanest (most efficient & highest quality) yeilding exactly the amount of product to meet customer orders, at the highest price possible. However the highest price possble concept is not lean, and is a function of Keynesian economics.

Re: Austrian Economics and Lean Manufacturing

John Podlasek — Sat, 02 Jul 2011 11:14:38 GMT

Here actually you are stating that economics has exact solutions.

You need to be consistent.

Re: Austrian Economics and Lean Manufacturing

z1235 — Sat, 02 Jul 2011 03:08:45 GMT

John Podlasek:

Then how to you justify, Porche?, Virgin Airlines, Polo, and many other companies that sell products at much higher costs then competition. Lean is not so easily defined by one business model.

You produce only what the customer wants, and if you keep getting customers then you are doing something right.

The worst thing you can do in business is try to copy some other business. It means you have alread lost the battle. Toyota laughs at all these lean copy cats.

lean is not only about productivity, but if the siesta works, why not?

John

Re: Austrian Economics and Lean Manufacturing

Stephen — Sat, 02 Jul 2011 01:20:54 GMT

Sorry. Typing error on my part. Yes, you are arguing that it is not an exact science and I am arguning that it is. That's my bad. Sorry about that.

I don't have a formal education in economics either. I have a BEng. in Manufacturing Engineering. So I am familiar with lean concepts, though its been a while. I am still a student in Austrian Economics, though I have read over 15000 pages of literature on or related to Austrian Economics. I am somewhat puzzled that you have read human human action and regard economics to be a fuzzy science. Mises is quite thourough and rigorous. He explains how action is different from animal behaviour, how we concieve of and understand action, what the various necessary categories that precede action are, and then goes on to reconstruct the body of classical economic laws and theorems from theses categories, adding several of his own innovations along the way.

It is not as though the law of returns or law of marginal utility can be fuzzy laws. They simply always hold true because they are implied by action.

You will probably see me on your site.