Wednesday, February 27, 2013
(Or creating "new" value)
In one of my previous posts the subject of externalized costs was dealt with in some detail (see the posting of December 29th, 2012 to be specific.) The idea that we are not really paying for the true expenses associated with the products we consume. The discussion went on to muse about how we might address that.
You might also recall a posting in this blog a long time ago (July 2009) speaking about the "next leap forward" in manufacturing. The evolution of manufacturing in terms of productivity, flexibility, response time, work philosophy or business model, and market responsiveness/customer “pull” shows the evidence of tremendous changes from the earliest organized industry or manufacturing in the 1800s up to today. These changes correspond to distinct periods of production. These periods can be characterized as the craft period, mass production period, flexible production period and lean manufacturing period. The point was that, over the years in the progress of manufacturing, different individuals observed ways to increase the value of the operation by, for example, increasing machine availability, reducing errors/increasing yield, organizational improvements, etc. and then adjusted/modified the processes or systems or business models to capture that value.
On a recent trip to Europe for a conference I spent some time catching up on magazines I never get to spend enough time with. The Economist issue of January 12th had an article titled "Has the ideas machine broken down" on the loss (or apparent loss of) innovation in the world - specially the US. It showed a number of types of data purporting to show the decline in growth of GDP per capita (specifically the decline in "percent increase on previous year") in the US starting in about 1950 after several hundred years of steady increase year over year. Don't worry - the GDP/person is still increasing in the US as it is in the world, but the rate of increase is declining. The article quotes Peter Thiel, one of the founders of PayPal, an internet payment company, and the first outside investor in Facebook, a social network, who says that "innovation in America is 'somewhere between dire straits and dead'. Engineers in all sorts of areas share similar feelings of disappointment. And a small but growing group of economists reckon the economic impact of the innovations of today may pale in comparison with those of the past."
Wow. Could it be we don't need any more gadgets or apps?! Maybe we need something that generates real new wealth!
Could sustainable, or at least green, manufacturing be a way to both enhance value and real growth (meaning insure that the resources created by successful businesses and their employees go to growth and not to fix problems created by non- sustainable practices)? That is, if we are not taxed with the costs of healthcare required to "fix" the impacts on humans of pollution (air, water or land), work related problems (hearing loss, injury, etc.), disposal of waste from production and consumption, wouldn't we be able to put some of that revenue towards growing our economy and,at the same time, improve the standard of living of a lot off people?
This semester Dr. Margot Hutchins and I are teaching the Sustainable Manufacturing graduate course in Mechanical Engineering at Berkeley. We have a great group of students who are engaged in the issues, challenges and opportunities. So, a week ago I was starting a lecture on linking manufacturing to sustainability and made the statement to the effect that "there are only three means to create new value in the economy - mining, agriculture and manufacture." Everything else is just redistributing that money in some way (Wall Street/banking money changers, healthcare and education sectors, various other services -- insurance, haircuts, making frapuccinos, etc).
The reaction of the class was strong and immediate. Howls of concern were raised ranging from the inappropriateness of using GDP as a measure of value created (referring to an earlier discussion of the IPAT equation in the class) to comments that this does not value the work or contributions of service sector, psychologists, hairdressers, etc. I tried to explain that this does not create anything "new" and, in some cases, is questionable as to any value. But, the class was not convinced.
So, I resolved to prepare some more background information to prepare the discussion better and try to offer a more reasoned argument.
Although I've seen it referred to in other documents, Bob Lutz, former Chrysler executive and auto industry driver, summed it up like this in a New York Times opinion piece (“Coming Back Home,” New York Times, August 4, 2011):
“From the earliest days of economic activity, it's always been recognized that there are only three ways to add value. The first is to "get it out of the ground" by mining (or drilling), thus creating a commercial commodity where none existed before. The second, of course, is "grow it": prepare the soil, fertilize, seed and harvest; again producing, through agriculture, an economically desirable product. The third, and most important, is "making it": using ingenuity, labor and capital to transform the products of mining and growing into hard tangible consumer goods. Other activities, like services, are helpful, but they do not create new wealth the way mining, agriculture and manufacturing do.”
This is bolstered by data from the Bureau of Economic Analysis in their input-output tables (available at link). That data shows the economic activity generated per unit of output of a sector. Manufacturing and agriculture are the only two sectors for which one dollar of activity generates more than one dollar of broader economic activity - $1.35 and 1.20, respectively. All others generate less and sometimes significantly less, for example, transportation $0.95 and retail $0.55. Mining is not included in the data.
There is an interesting discussion on this topic on the "as green as it gets.org" website. First, they distinguish between creating wealth and getting rich. They list a few examples - I can inherit a million dollars, and I’d be rich, but I didn’t create any wealth. I can convince my government that I’m a good candidate for a research fellowship, and I can get wealthy regardless of what I create. I can steal from my neighbor and make myself wealthy without making wealth. I can exploit natural resources and pull trees out of the jungle and generate income, though most of the wealth was actually generated by Mother Nature.
Turns out, economists identify four different economies:
- Primary economies - the production or extraction of raw materials such as agriculture, forestry,
- Secondary economies - manufacturing and processing.
- Tertiary economies - retail, distribution, and service.
- Quaternary economies - research and development, creating ideas and inventions that can later be used by folks in other sections to make a new or better product.
So, continuing to draw on the "asgreenasitgets.org" discussion, wealth is principally generated in manufacturing. In Primary economies, we utilize wealth from Mother Nature. In Secondary economies, we manufacture wealth. In Tertiary economies, we move wealth around. In Quaternary economies, we prepare the manufacturing sector to make more wealth. If you are going to create wealth (which should not be confused with making someone wealthy) you must manufacture. And, the more value added in manufacturing, the more wealth you create.
So, back to innovation and green manufacturing. I used what I thought would be my killer closing argument with the class by again referring to the IPAT equation. In that equation, you'll recall, one term that engineers can influence is "impact/GDP." Meaning, if we wish to offset or blunt the drive for improved standards of living by people around the world (hence consuming more of everything) and the continuous growth of population, then we need to develop manufacturing technologies that reduce the impact (environmental, social, etc.) associated with production and GDP growth.
That's where innovation needs to come in. Processes and systems in the secondary economy that convert materials into new products with substantially reduced impact.
We've actually discussed a number of these kinds of "innovative manufacturing" technologies in other postings here. And we will keep introducing them from time to time as examples of what can be accomplished. As a member of the fourth economy - this is my small contribution to creating wealth.