Tuesday, December 21, 2010

An Open Letter to the Economic Leaders of the West -- especially the United States


Every senior level government official and many top economic experts have tried to solve our continuing economic crisis and revitalize the economy over the last several years, but to no avail. It seems we are now in a serious bind, and no clear solution has emerged to avoid an even deeper recession than the one we are now in.  If we are not careful, we could be facing Great Depression II.

Have I got your attention?  There’s more.  I believe you have missed something very important in your ruminations about the economy.

Consider what entomologists discovered recently, called the ant death spiral, an event that takes place in the natural world under normal conditions in one species of ant’s natural habitat.

The cause of this behavior is the ant’s use of ground navigation. Ants follow pheromone trails on the ground laid down by other ants. The system works well normally. A scout ant goes out and finds something. Other ants go back to get more by following the scent trail, or by following each other. However, if a loop gets created, the ants will march blindly, sometimes circling until they all die. Unfortunately, it seems that human beings sometimes exhibit similar behavior by blindly following the path others have taken.   

I use this analogy to point out a serious mistake made in the market over the last 20 to 30 years.  Nobody else has recognized that mistake.  Like the aforementioned ant spiral, I believe that mistake has created an economic death spiral in the economy. If we do not break down this cycle and explore a new order for economic survival, I believe that every new effort we make will be just as ineffective as everything else we’ve tried in the last three years.  If we don’t find the solution, our economy will atrophy and die.  I believe I have found that solution, and if I can get enough of you to sign on with me I think we can right the course of our moribund economies.

Consider the current rapidly deteriorating national economies, especially that of China, with its serious real estate bubble, and many European countries such as Ireland, Greece, Spain and Portugal with their high fiscal risks.  We must not gloat that we are better off than them; we are just as vulnerable and in imminent serious danger.

For a more in-depth analysis, I would suggest you read my recent article: "Breaking Down the Economic Death Spiral – and Saving the World Economy" http://t.co/8pMwQh7

If you find merit in this article, please contact me right away. We can discuss in more detail the real causes of the current economic crisis, and also the right economic “rescue” for your economy and also for the entire world.

The clock is ticking, and time is not in our favor. We should and must act immediately – before it is too late.

Sincerely,

Luke Ho-Hyung Lee, CEO
UBIMS, Inc.


Note to readers:

Please forward this letter to the economic leaders in your country and also to your friends.

Saturday, December 18, 2010

The Current Economic Situation is Analogous to the Ant Death Spiral

The current economic situation is analogous to the ant death spiral, an event that takes place in the natural world. I strongly believe we have made “a serious mistake” in the market over the last 20 to 30 years of the Modern Information Age, and it has created an economic death spiral in the market or economy.





If we do not break down this cycle and explore a new order for survival, I believe that every new effort will be just as ineffective and useless as everything else we have tried.

Suggest to see: A Discovery of a Serious Mistake Made in the Real ... http://t.co/QN2OyRh


By Ho-Hyung ("Luke") Lee (luke.h.lee@gmail.com)


Tuesday, December 14, 2010

An Open Letter From One Business Leader To Another

<My dear friend, John McCoy, made this open letter as his endorsement for me. I sincerely appreciate it, John.>
            
             It has become customary to bash big government, and for good reason. Government gets in the way when it tries to interfere with the private sector.   But things got so bad in 2008 that everyone turned to the Fed, the Congress and the President, and his Treasury Secretary, to do something to avert the train wreck we all saw coming. They did do something; and most people were grateful, including the business community and the financial community.  But in allowing them to intervene as they did, we – and I mean business leaders -- shirked our responsibilities.  It was our mistake in the first place.  Now it is the turn of the business community to take drastic steps.  We need to start by telling our government leaders, “Thanks, but no thanks” to their further efforts to jumpstart the economy.  They simply don’t know how to do that, and why should we expect them to do what they are not designed to do? 
             So, what is the next step on the road to recovery?  The first step is a painful one; it is the recognition that we in the business community erred.  What kind of error am I talking about?  I am talking about a failure of imagination.  We pride ourselves in the business community for our ingenuity, our creativity, our willingness to think outside the box.  We have done nothing of the sort.  If we had, we would have avoided this train wreck long ago.
             So, now for the next step – after we admit to ourselves the horrendous mistake we made, and I do mean “we” in the broadest sense.  The next step is for someone to step forward and make the gutsy call that he has come up with the solution.  It takes a lot of nerve to tell everyone else that they are wrong and you have it right.  For one thing, they may not listen.  They might even laugh at you.  And why shouldn’t  they?  If it’s one against the world, whose view usually prevails?  That’s why it’s so gutsy, but someone has to do it.  That someone happens to be Luke Lee.
             Luke Lee may be new to this country but he knows what has made this nation great and, more to the point, the dominant economic force it became starting in the second half of the 19th century.  Yes, it’s important to have superior natural resources.  Yes, it’s important to have a political system that promotes economic growth.  It’s important to have  persistence to get through the bad times.  We Americans did not throw in the towel at any time during the worst of the Great Depression.   We persevered along with our allies to a favorable outcome in World War II.  We then seized upon the opportunity to make ourselves the dominant economic force in the world.  Need I also add, we had luck on your side – many times.  But the last ingredient for what has made us a great economic nation is that we encourage innovation.  We encourage somebody with great ideas and vision to succeed in this country, and then we reward him for his vision.  All the great names have formed our pantheon of great leaders:  Rockefeller, Henry Ford, J.P. Morgan,  Andrew Carnegie, and even great innovators-inventors like Thomas Edison.  Admittedly, they are a rogues gallery for those who despise the system, but not to those of us who prize great men willing to make personal sacrifices that ultimately benefit all of us.  Luke Lee may just be such a business leader.  I’ve been reading Luke Lee’s articles and I must say they make a lot of sense.
             We value somebody with great ideas then – and now.  After we criticize them for being someone who bucks the trends and the system.  Then, all it takes is for one or two, or ten, or more to start to listen.  When people are willing to try something new, and get others to join – the Internet, Google, Ebay, Facebook – a tsunami takes place.  The good kind of tsunami, I should add, not the bad one that sweeps everything away in its path.  
             Luke Lee has some great ideas.  Now that the naysayers have had their day in downplaying something they don’t understand, is someone now willing to listen? 
             Lee has spent the better part of the last 10 years on developing a technology that will fix the market system once and for all.  He has also spent most of that same 10 years in trying to convince someone, anyone, that his system will work.  Painfully, he has tried to press his solution forward as he has watched our entire economic system come apart.   
             Where does he get the audacity?  It comes from his belief in the free enterprise system.  The beauty of the free enterprise system, once you’ve made it a part of your personal belief system, is that it is predicated on the firm belief that innovation will always trump staying the course.  But it’s hard for people to change a losing course when, first of all, they don’t recognize the mistaken path they are on, and, secondly, when they lack the training, ability and creativity to come up with a solution to what everyone else cannot see.  That’s called vision.
             Again, Luke Lee is that someone.  So, take a few minutes to read his most recent blogs.  And if you agree with him, write to him and tell him.  Then, tell a friend.

John V. McCoy


Suggested articles to read:
"Breaking Down the Economic Death Spiral – and Saving the World Economy" http://t.co/8pMwQh7  
"A Real Market Revolution as a Solution for the Current Economic Crisis: A Reappraisal of Current Forecasts of Upcoming US Federal Deficit and Employment" http://t.co/2bLXYqT

Friday, December 10, 2010

Breaking Down the Economic Death Spiral – and Saving the World Economy

By Ho-Hyung (“Luke”) Lee

The Western countries, that is, the United States and Great Britain, and including Japan, are among the most innovative countries in the world. They have the best universities; they have the best political systems; they have the best technologies. Unfortunately, they have failed to revive their own economies over the last several years. Japan, for one, has had a stagnant economy for almost two decades now. What’s wrong with them and their economies? Isn’t there anyone who can figure out what the real causes of the current economic crisis are and suggest a clear solution?

We are in a serious dilemma, and no solution has emerged to avoid an upcoming even deeper recession.

Is this the start of the decline of the Western world? No, not yet.

The Western Economy has been "Stuck in a Rut"

Imagine that no bridges or tunnels were built in San Francisco or New York – no Golden Gate Bridge, no Lincoln Tunnel. If you think we have traffic problems now, it could have been far worse. In fact, San Francisco and New York City could never have become the great cities they are without their great infrastructure. In other words, they would have been mired in a rut without their great public bridges and tunnels.

Imagine that no information based supply chain “infrastructure” were built in the real process of the modern information market. Then, what might have happened in the modern information market or economy? Quite simply, the economy would also have been in a rut without any information based supply chain infrastructure.

Some basic questions may arise, such as: “What is the information based supply chain infrastructure?” and “Why does the market process matter with the economy?”

Let me explain by citing the case of Zara, the largest clothing company in the world.

During the 1980s, while their competitors simply followed the industry-wide trend towards transferring fast fashion production to low-cost countries, Zara started changing the design, manufacturing and distribution process to reduce lead times and react to new trends in a quicker way. The company based its improvements in the use of information technologies and using groups of designers instead of individuals.

In the new system Zara needed just two weeks to develop a new product and get it to stores, compared with a six-month industry average, enabling it to launch around 10,000 new designs each year.

Zara has been remarkably successful over the last 20 to 30 years, and as a result, Amancio Ortega, Chairman of Zara, was named the ninth-richest man in the world by Forbes in 2010.

Let’s examine how the company became so successful and what kind of impact it has had on the world.



Let’s assume that there is a river between sellers and consumers (buyers). It looks as if Zara has built bridges on the river for its distribution through the use of information technology, whereas others have stuck to the conventional ways of distribution. That is, Zara has developed information based supply chain networks for its distribution, while others have used the conventional ways of supply chain networks for their distribution.

The result was tremendous. Zara’s efficiency and effectiveness is far superior to other companies. Its achievements include a two-week time span from design to display vs. the six-month industry average, and 10,000 new designs each year vs. just a few designs achieved by other companies. It means that the more the information age has progressed the less other companies have been competitive to Zara. It also means a worse employment situation in the clothing industry as a whole (mostly for middle- and lower-income workers).

Why haven’t individual companies developed that kind of information based supply chain network for their own distribution? Since a seller’s customers typically are geographically scattered, and significant expense and effort are required to operate actual distribution functions such as warehouses and distribution centers, it typically would have been very difficult and expensive for each company to separately develop such networks independently, even if they could use the information technology.

Zara is not an isolated case. We are not just talking about Zara in the clothing industry. With the development of information and networking technology, collaborative function activities have been significantly facilitated in the whole distribution (supply chain) process. That is, many big companies in every industry could just as easily have developed a similar information based supply chain network for their own use in distribution. Sadly, the employment situation for middle- and lower-income workers has seriously worsened in almost all industries. This could have been prevented.

Let’s go back to my bridge analogy. What if the bridges or tunnels in San Francisco or New York City had been built by individual companies, and only those individual companies could use their own bridges or tunnels? We already have many information based supply chain networks in the real distribution processes of the market, but they were developed by big companies, and only those big companies can use their own information based supply chain networks for their own benefit. That is just as if there were no public bridges or tunnels in San Francisco or New York – no Golden Gate Bridge, no Lincoln Tunnel. Correspondingly, no efficient information based supply chain infrastructure has been developed in the real distribution (supply chain) processes of the market. That’s the real problem.

In this situation, the more the Information Age has progressed, the more the employment situation has worsened, and policies aimed at the improvement of the employment situation have been unsuccessful. No matter how powerful the adopted expansionary economic policies and stimulus plans were, they have been ineffective and almost useless. In other words, the economy has been stuck in a rut. That, in a nutshell, is where we are today.

What is the Information Based Supply Chain Infrastructure? Why Do We Need it?

Why do we need infrastructure? Without the necessary infrastructure in place a society or enterprise cannot be properly operated, and an economy cannot function well. Do we have the necessary infrastructure in the real distribution (supply chain) process of the market? Considering the worsened employment situation in the real market process, I believe we do not have the necessary infrastructure for the Modern Information Age. Why haven’t we recognized the importance, indeed the necessity of this infrastructure?

Numerous real transaction systems and applications, including various collaborative function systems, have been developed by companies such as eBay, Amazon.com, and numerous other logistics and supply chain solutions through the use of IT and networking technology. But here a serious mistake was made, and nobody has recognized that, until now. Real transactions are directly restricted by time and space. There have also been many different and complex rules and standards in the real transactions across the spectrum. So, in developing those systems and applications, they should have simplified them and simultaneously constructed a fair rule and standard for transactions by directly overcoming the restriction of time and space with IT and networking technology. Instead, they simplified by manipulating the constituent factors of transactions, such as products, services, providers, and customers, which increases the efficiency and productivity of real transactions only to a limited degree.

Let us look more closely EBay and Amazon. EBay’s auction system is an effort to simplify the rules and standards by a product or a service, and Amazon.com’s e-seller system is an effort to simplify them by a company (i.e., a seller). However, they overlooked the opportunity of facilitating competition among providers. This was a huge mistake. The developers of eBay’s or Amazon.com’s e-marketplace system tried to simplify them by the character of products or services. In this case, only products or services that are not sensitive to the rules and standards can be efficiently traded through these systems. Some large enterprises have tried to simplify them by their buying power to manage their purchasing alone (e-buyer model). Most collaborative function systems and applications have been developed through simplifying them by services of individual functions. There are many other cases, but almost all of them have this characteristic. Perhaps this is due to the desire to immediately increase productivity and efficiency. Oddly, nobody has recognized the mistake in developing those systems and applications -- until now.

We need to consider a basic question here. Why have there been so many different rules and standards? Have they been made due to the constituent factors of the transactions such as products, services, providers, and customers, or due to the restriction of time and space itself? I believe the latter is correct. To develop an efficient transaction system, not only must they be simplified but also a fair rule and standard must be put in place. Yet, without directly overcoming the restriction of time and space, it will be almost impossible to construct a fair rule and standard in the real market process. That is, it will be almost impossible to construct an efficient infrastructure between multiple sellers and multiple customers in the real market process. To simplify and construct a fair rule and standard, the restriction of time and space should have been simultaneously introduced. That is, IT and networking technology should have been used in such a way that directly overcomes the restriction of time and space. Unfortunately, that was not done. It means there has been no efficient information based infrastructure in the real market process over the last 20 to 30 years. More strictly speaking, numerous information based supply chain networks have been developed, but only for larger individual companies, whereas no efficient information based supply chain infrastructure has been developed for both sellers (companies) and customers in the market as a whole.

How could this have happened? To help us understand how this gross oversight took place, I will refer to something called the ant death spiral, an event that takes place in the natural world. (See the picture below.)



[Ant Death Spiral]
In 1921, a researcher by the name of Beebe, noticed the following in an ant colony. He described a circular mill (Imagine an old fashioned mill propelled by a donkey or horse travelling a well worn circular rut.) witnessed in Guyana. It measured 1200 feet in circumference and had a 2.5 hour circuit time per ant. The mill persisted for two days, with ever increasing numbers of dead bodies littering the route as exhaustion took its toll. Eventually, a few workers straggled from the trail thus breaking the cycle, and the ant raid marched off into the forest.
The cause of this behavior is the technology ant societies use for ground navigation. They follow pheromone trails on the ground laid down by other ants, or they simply follow other ants visually. The system works well normally. A scout ant goes out and finds something. Other ants go back to get more by following the scent trail, or by following each other. However, if a loop gets created, the ants will march blindly, sometimes circling until they die.
Unfortunately, it seems that human beings sometimes exhibit similar behavior by blindly following the previous order. I think it’s time to break down this cycle and explore a new order for survival. This time we may be saving the world economy. 

Why does the market process matter?

Unfortunately, all these things have happened in the market over the past 20 to 30 years of the Modern Information Age.
Why the market process? Because the market process provides connections (bridges or bloodstreams) to all members in the market. The market process comprises the market systems and applications, and realizes the market results. The market requirements are made through market changes. If there is no built-in infrastructure in the market process, what could happen in the market or economy? Couldn't a structural mismatch occur between the market requirements and the market results for employment and consumption? If this situation is left alone, a serious imbalance and vicious cycle between the supply side and the demand side could occur by damaging the self-generation capability of the market itself. This could lead to a deeper, more serious recession. 

So, what’s really the matter with the economy? It is the outdated market process without the necessary infrastructure in place. Thus it is almost impossible to solve the current economic crisis by means of existing economic policies, as the Modern Information Age progresses.

I therefore strongly believe the most viable and effective solution for the current economic crisis is developing the necessary infrastructure in the modern information market as soon as possible. That’s what I have been calling the Information Based Supply Chain Infrastructure.

What Would Happen to the Economy with a New Information Based Supply Chain Infrastructure?

Let’s go back to the diagram and Zara’s case again.

The new information based supply chain infrastructure is an open link for both sellers and customers. Therefore, individual designers and manufacturers can easily and independently work for themselves, and will have a much better competitive situation to Zara. Delivery time and cost will be significantly saved for all sellers, and for Zara, too. Many new designs could be easily launched in the market. Numerous individual stores with different brand names could be easily created. These will bring more effectiveness to the market in the form of employment.

As a result, manufacturers and designers that off-shored and outsourced to lower-labor cost countries will eventually come back to domestic areas. Moreover, new businesses and jobs can be easily created in the local areas. Not only would employment stop declining, but more jobs could quickly be created in the clothing industry of the domestic market.
 
If this new information based supply chain infrastructure is extended to other industries and fully implemented, the existing outdated efficiency-oriented market paradigm would be changed to a new effectiveness-oriented market paradigm by promoting the voluntary participation of all members of the market. This would significantly contribute to the improvement of employment conditions as a whole.

This new effectiveness-oriented market process would exert such influence, that today's competition by size would change into competition by quality and service. Current efficiency-oriented mass production processes and mass consumption would also become more effectiveness-oriented, diversified, and individualized production and consumption systems. Due to these changes, domestic employment conditions would improve considerably, and the business environment for middle- and small-companies and for the general service industry would also improve significantly. A real market revolution could result.

As a mutually complementary relationship is established between the supply side and this new, more effectiveness-oriented market process, job creation for middle- and lower-income people would be enhanced, and the polarized gap between poor and rich moderated.

These mutually complementary phenomena for the improvement of employment conditions would be a positive force for economic recovery and revitalization. The self-generation capability of the market could finally be restored and transformed into a structural force that increases the level of consumer spending.

In this scenario, a policy for a functioning economic environment would be established, and no more excessive expansionary economic policies would be needed. Thereafter, the budget deficit at both the local and the federal level could be reduced, and many economic abnormalities would be resolved naturally.

I strongly believe that this is the most effective path to get out of the current economic and social crisis and revitalize the economy.

Conclusion and Recommendation

Some people lament that the decline of the Western world, especially the United States, has already started. But I don’t think so. Because the current economic crisis is only the result of a mistake we accidentally made, it can be corrected. Our fundamentals are still strong and productive. If we fix the mistake quickly and effectively, the self-generation capability of the market will soon be restored, and the economy will be revitalized and grow again to realize a new prosperity.

Nevertheless, over the last several years, various economic bubbles in the equity market have not been removed and still remain in the market. Potential fiscal risks such as high deficit problems have been significantly aggravated in many countries, especially in many European countries such as Italy, Ireland, Greece, Spain and Portugal. We cannot predict when they will burst or when the new crisis will occur. In other words, the possibility for these events to become an economic tsunami is very high. In this case, employment in every country will inevitably plummet, and the deficits of almost all countries in the world, particularly the US Federal Deficit, will uncontrollably skyrocket. It could be another Great Depression. This is the worst case scenario. We must not allow this to happen. But the clock is still ticking, and time is not working in our favor. We should and must act immediately – before it is too late.

Therefore, to avoid this worsening crisis and to revitalize the economy, I strongly recommend the national economies of the Western world and their governments’ leaders initiate and support the development of this new information based supply chain infrastructure as soon as possible, and thereby create a real-market revolution.

The conditions and circumstances for the development of this new information based supply chain infrastructure are already in place. That is, information technologies, facilities, devices, and people are already in place to develop it. The only issue that remains is the will to develop it. Moreover, the solution is already in sight. It only needs to be implemented. Once decision-makers are willing to make the necessary choices, it will be relatively easy to implement, and it will not take long to see positive results.

Finally, I’m warning the leaders of the Western world, especially the United States: If you don’t heed my advice, you will not only destroy your own countries, you’ll be dragging the rest of us – the entire world – down with you.


Note to Readers:

We are now in serious danger. I hope you’ll participate in the efforts to save our economy. Please circulate this article to your friends and government leaders. Please also urge your decision makers to take appropriate actions as soon as possible.


Please also take a look at:
An Open Letter From One Business Leader To Another... http://t.co/WMDvXNt

[Ho-Hyung (“Luke”) Lee (luke.h.lee@ubims.com) is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the CEO of UBIMS, Inc.]


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Wednesday, December 1, 2010

An Analysis of the Current Economic and Social Malaise, and How We Can Get Out of It – August 29, 2008


<Note: This article was written on May 9, 2008 by Luke Ho-Hyung Lee.

At the time this article was written, The 2008 Olympic Games were on and the presidential candidates had picked their running mates: Obama picked Joe Biden and McCain picked Sarah Palin to round out their tickets. The presidential campaign was entering its final months.

But all was not well in the financial community. The Dow Jones descended precipitously from August 29, 2008 (when this article was completed) to 9,319 on election eve (November 3, 2008). And, it would drop even more before it hit bottom. All was not right in the markets. I thought then that we were too focused on fixing only our most immediate economic problems instead of trying to solve the structural gap itself. That is, instead of trying to recover the self-generation capability of the market which was impeding the balance and development of the market, we were allowing ourselves to be ruled by our myopic vision of the present -- the housing market collapse, sub-prime mortgage failures, financial market meltdown and credit crunches.

I advocated then still do that a market system be developed with multiple-source based networked communication, in order to have a more efficient e-marketplace, with a fair rule and standard. Only then would we be able to right the wrongs of the past. I have not changed my mind in this view.>


Information Technology (IT) has brought many great changes in the Modern Information Age. But the greatest one is yet to come. It will be when the existing single-source based communication system has fully developed into a multiple-source based communication system, and further again to multiple-source based networked communications.

When market systems had only single-source based communications that were linearly constructed, only linear or arithmetical changes could be expected from them. Examples of Linearly Constructed Market Systems include: Three-Tiered Functional Market Systems, Two-Tiered Functional Market Systems, E-Retailer Market Systems, and E-Buyer Market Systems. Most of these have proven to achieve far less than they could have.

As market systems first developed with multiple-source based communication, into two-dimensionally constructed market systems, progressive changes could of course be expected. However, it is difficult to construct an efficient e-marketplace, with fair rules and standards with only a simple, two-dimensionally constructed market system. The market is directly restricted by time and space, so the degree of the actual changes will not be significant. Examples of Two-Dimensionally Constructed Market Systems are: E-Marketplace Systems (like EBay’s Marketplace System). Yes, EBay’s system is far less efficient than it could have been.

When market systems are developed with multiple-source based networked communication, it will be possible for an efficient e-marketplace, with a fair rule and standard, to be constructed comparatively easily. From these three-dimensionally constructed market systems, geometrically progressive changes can be expected. Unfortunately, there has been little recognition in the market of the necessity of, or even on the existence of three-dimensionally constructed market systems. Companies like Ebay are reluctant to change a business model that has made them a billion dollar company. Accordingly, there has been little interest in developing them. That is about to change.


On the other hand, three-dimensionally constructed information systems with the base of multiple-source based networked communications have been well developed. We have had the capability of producing numerous geometrically progressive changes in the information market. (Examples of Three-Dimensionally Constructed Information Systems include: Internet Explorer, Google, Numerous Software Applications, Digital Contents, and Digital Synergies)

Likewise, geometrically progressive market changes have been possible by using the three-dimensionally constructed information systems; while on the other hand, the market results made through the market process which comprised the existing market systems could still have only produced arithmetical or limited progressive changes. As the requirements made through market changes could have been satisfied only by the results made through the existing market process, a structural gap has existed in the market. The more the modern information market has developed, the more the self-generation capability of the market itself has been damaged as well.

Major defects resulting from this structural gap have already appeared. They include, first, a steady worsening of the employment condition (or the steady weakening of job-creation capability) for lower- and middle-income people; second, the slowing of consuming effects on the products and services that cannot keep up with the speed of market changes. Accordingly, the inequality of earnings between affluent and poor was aggravated. Because these phenomena were unrecognized, a serious imbalance and vicious cycle between the supply side and the demand side occurred in the market. This led to a serious recession, not just a “languishing” of the economy, or a mere "slowdown" in the business cycle.

It seems that we have focused on fixing only the most immediate problems over the last several years, instead of trying to solve this structural gap itself. That is, instead of trying to recover the self-generation capability of the market which was impeding the balance and development of the market, we have relied too much and too long on the existing expansionary and stimulus economic policies to balance the development of the market.

To be sure, temporary balances were achieved from time to time through similar expansionary and stimulus economic policies. But the effects of those policies were easily stunted by the already damaged self-generation capability of the market. Thus these policies had the unintended consequence of exacerbating many abnormal phenomena in the market. Thus, while the self-generation capability of the market was continuously weakened, bubbles formed in the equity market owing to the abruptly increased monetary liquidity. Federal and state budget deficits have increased uncontrollably. Welfare expenses have also risen rapidly for the growing “missing class” (or near poor class). Consumer spending power has fallen steeply and consumer savings rates have sharply dropped to 0% or less. (In other words, people were spending more than they were earning.) Moreover, because of increased monetary liquidity in the world market, a weak condition for inflation pressure has been introduced into the domestic market.

Reviewing the past year, one can easily recognize the current economic and social problems we are facing, such as the housing market collapse, sub-prime mortgage failures, financial market meltdown, and credit crunches. They are the result of these abnormal phenomena which have accumulated in the market. Because these abnormal phenomena still exist, it can be safely predicted that more economic and social problems lie ahead – unless we do something about it.
It seems that the government has adopted a plethora of policies to revive the economy, occurring almost daily. The Fed has joined in, going beyond its role of monetary regulator. That is, it seems that the government has fallen into a defensive position. Policy makers have unimaginatively relied on methods that worked in the past, but have little efficacy now.

Many economic experts still propose expansionary and stimulus economic policies despite having little confidence in their success. Some suggest economic revitalization through infrastructure improvements. We may be able to escape the crisis once or twice with these policies. Eventually, however, we will face bigger crises in the midst of revelations of other concrete economic and social problems. This will eventually lead to a bigger economic catastrophe than we have ever experienced before.

The economic and social problems which currently afflict us are caused by the structural gap between the market requirements (which have rapidly changed and enlarged in the modern information society) and the market results, which cannot satisfy them. That is, they are the results of the weakened self-generation capability of the market itself. The only viable solution for this structural gap (the weakened self-generation capability of the market itself) will be the application of three-dimensionally constructed market systems developed along with multiple-source based networked communications. We are now at that stage. Therefore, if these three-dimensionally constructed market systems are not developed soon, especially in view of the rapidly worsening economy worldwide, I predict that we will not be able to avoid a serious economic and social catastrophe in a very short time to come.

Fortunately, the personnel, material and technological resources for developing these market systems are already in place. Therefore, even though there may be some side effects, by taking the initiative now we may not only avoid catastrophe but can turn this misfortune into a blessing. Our national competitiveness and prosperity will be restored.

I believe this is the most urgent issue that all Americans are currently facing. The new president, his team, the Congress and business leaders should work together to make the restoration of prosperity our major goal in 2009.


Author: Ho-Hyung Lee (luke.h.lee@gmail.com) - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the president of Ubiquitous Market System, Inc. (UbiMS).

Sunday, November 28, 2010

“It’s the Market Process, Stupid.” – May 9, 2008


<Note: This article was written on May 9, 2008 by Luke Ho-Hyung Lee.

In order to avert a recession, the Fed reduced its key interest rate from 2.25% to 2.0 on April 30, 2008. The price of oil rose to a new record of over $135 a barrel (May, 2008), more than twice what it had been a year previously. The Dow was still hovering above 12,000 (a considerable decline from the dizzying heights before the subprime collapse), but the worst was yet to come. As the 2008 presidential election reached its climax, we were about to witness the nadir, a Dow in the 7,000’s by year’s end. This was not a time for hope and change, but one of fear and trembling.

Borrowing a phrase made popular by President Bill Clinton when he defeated George Herbert Walker Bush for the presidency in 1992 (“It’s the economy, stupid!”), I called this article, “It’s the Market Process, Stupid”. I was hoping that the candidates running for president would heed the warnings, but as it turned out neither of them did. In near exasperation, I wanted to call attention to the horrible state of the market structure. But nobody was listening. It’s time to make drastic changes, before it is too late. That’s what this article is about.>

Nobody will deny that THE current issue is the economy. But, politicians, take heed, it’s not the economy, stupid; it’s the market process. Even though a raft of more economic troubles seems to be coming, there is not the slightest sign of solving the present economic malaise that afflicts us. I’m referring of course to the financial crisis caused by sub-prime mortgage failures, and housing market troubles in general.

Most economic experts have identified massive monetary liquidity, formed in the market over the last several years, as the main cause of the economic malaise. They think that due to high monetary liquidity formed by aggressive expansionary fiscal and monetary policies, a bubble must have been built into the equity market across the board, such as in the housing market and the stock market. This bubble burst is thus linked to the collapse of the housing market. It is what brought about the failure of the sub-prime mortgage system and the turmoil of the stock market. Also, this high monetary liquidity could cause more serious economic troubles with the threat of inflation. Some economic experts even blame Alan Greenspan, former Federal Reserve board chairman, as a cause of the current economic troubles for his policies that caused this high monetary liquidity in the first place. While we’re at it, let’s blame the Bush administration for its support of high monetary liquidity by increasing government spending and adopting tax reduction policies.

In spite of these events, economic experts still cannot suggest clear solutions for these economic troubles. That is because most solutions they suggest are only expedients to escape from the most urgent risks and put off the real healing for the future simply by maintaining the status quo. It could be said that most of their plans contain more potential to amplify future problems, rather than get us out of this mess.

Even in this vortex of doom, many new opinions about causes have been appearing. They say that it’s low consumer spending, the negative employment condition, the credit crunch, the low consumer saving rate, the high trade deficit or even the high federal budget deficit. However, their recommended solutions still remain ambiguous and abstract.

Then what is wrong? Why don’t we find the clear solutions for these problems? The reason is that the supposed causes, which numerous economic experts have suggested until now, are not the real ones. That is, the causes they have suggested are not genuine causes, but simply the secondary results made by some other unidentified cause. Therefore, the solutions for these secondary results cannot solve the real causes, but only temporarily postpone the most serious risks.

Then, what is the real cause of the current economic breakdown?

It’s the market process.

I realize of course that what I’m recommending smacks of economic heresy. Nobody in their right mind has suggested changing the market process. Why now? Because the market process needs fine tuning for the changed market circumstances. It’s past the point where it will fix itself. The existing market systems, which support the present market process, are outmoded for the Modern Information Age. I do not believe in paying homage to sacred cows, like the so-called “Invisible Hand” everyone learned about in introductory economics. If you think I’m suggesting we re-think the market process, then that is precisely what I’m suggesting. Our economic future depends on it.


The Relationship between Communication Changes and Market Process

In the Agricultural Age, when communication was person to person, and transportation was still in a very primitive stage, transactions among people were mainly through barter or through the early village or town markets, which were formed locally.

In the Industrial Age, information sharing and exchanges among people were more widespread. Communications between remote areas were now made possible by the development of the telegraph and telephone, and were accompanied by revolutionary developments in transportation. With these developments, the economy took on a three-tiered functional market process. To manage and develop the economy soundly under this new market process, some of our basic economic principles demanded re-evaluation. It’s time to do that again.

This three-tiered functional market process continued to develop into the two-tiered functional market process, such as that exhibited by the big chain stores in the early twentieth century. These forerunners of the shopping center were made possible by the development of radio and television, by the continuous development of transportation, and by the revolutionary development of inventory control through a bar-code system.

These market processes reflected the new capability of communication and transportation. Accordingly, they could provide relative efficiency and effectiveness. In realizing this, they also created new businesses and jobs to the degree we take for granted today.

Because these market processes were developed with locally restricted, single-source based communication, their development and operation were installed relatively easily. That is, because the effects from them were relatively simple, the business estimate for them was relatively easily and accurately gauged.
 
Fast forward now to the Modern Information Age. Communication has been transferred from existing single-source based communication to multiple-source based communication. Moreover, with the development of networking technology, these multiple-source based communications could be integrated. Because this multiple- source based networked communication is very economical all over the world, and also possible in all directions, its impact was far greater than first imagined. The result is a new paradigm, which could create far greater effects on efficiency and effectiveness than the existing one could ever make. That is, the single-source based communication, from which only simple arithmetical changes could be expected, had developed into the multiple-source based networked communication, from which geometrically progressive changes could be expected. Moreover, by breaking down the existing local restrictions through the development of the World Wide Web, it could be said that communication was no longer restricted by time and space.

Despite the advantages, these communication changes may have in a sense occurred too rapidly and abruptly. Insufficient thought has been given to how to apply them to other areas, especially to the market process. As a result, we have lost a propitious moment to apply them to the market process, and numerous abnormal phenomena have accumulated in the market and society as a result. What has resulted is the current economic malaise we find ourselves in.


The Role of the Existing Functional Market Process in the Modern Information Age

The existing functional market process is built on a single-source based communication foundation. As such, only simple arithmetical changes of effects on efficiency and effectiveness can be expected from it. Moreover, the creation of new businesses and jobs in an arithmetical way is all that can be expected. We need to fix that. We start by looking at what happened when communication developed from single-source based communication to multiple-source based networked communication, while at the same time the functional market process remained unchanged.

The paramount factors are these – and notice how they are interrelated and interconnected:

  1. The existing functional market process could not have provided satisfactory consuming effects structurally to the market. This is because only arithmetical changes of effects on efficiency and effectiveness could be expected from the existing functional market process. On the contrary, the market, which has been directly influenced by the new communication paradigm, has required more multiplying or geometrically progressive changes. Thus there must have occurred some gaps structurally between the consuming effects provided by the existing functional market process and the market requirement.
  1. Theses structural gaps must eventually have appeared as the missing phenomena of consumer spending in the market. That is, because consumer needs and wants increase faster than consuming effects, consumer spending will eventually be curtailed.
  1. Because the existing functional market process could create new businesses and jobs only in an arithmetical way it could not create enough income to satisfy existing market requirements. It’s as if consumer spending was held back due to the limitations of the market process.
  1. This curtailment of consumer spending must have caused an abrupt increase of consumer price sensitivity, and this must also have caused the abrupt increase of excessive price competition in the market. This situation must have developed concomitantly with the rapid expansion of efficiency-increase-oriented (cost-oriented) globalization activities such as off-shoring and outsourcing toward foreign countries with lower labor costs, and this must also eventually have been directly linked to the decrease of jobs or the reduction of income for lower- and middle-income people in the domestic market. Accordingly, the inequality of earnings between affluent and poor was aggravated.
  1. Moreover, because the existing functional market process has a fixed and closed marketing channel, it could not have handled all products or services. Keep in mind that there has been an vast increase in numbers and kinds of new products and services in the Modern Information Age and this should have required more marketing and distribution costs for new products or services. What this means is that the existing functional market process has actually impeded the creation of new businesses and jobs in the domestic market.
  1. If this situation continues, a vicious cycle will persist between the supply side and the demand side in the domestic market.

Finally, the government has adopted very powerful and ambitious economic policies in an effort to prevent this vicious cycle from occurring and attempted to revitalize the economy. However, it could be also said that the effect of many economic policies, adopted without having made changes in the existing functional market process, will generate little improvement.


The Role of Economic Policies with Existing Functional Market Process in the Modern Information Age

The prevailing free market paradigm has been predicated on the so-called 'Invisible Hand', because general factors, such as interest rate, money supply, tax, employment, and so on, could have chain effects that were easily traceable, and easy and accurate to estimate. Under these circumstances, it was possible to estimate how these general factors influence demand and supply. Therefore, the problems of demand and supply in the economy could also be solved by the fine tuning of these general factors.

The rapid development of the Modern Information Age over the last 20 years has quite simply changed the preliminary conditions for the efficient and effective estimate of a market economy, as follows:

  1. A perfectly competitive condition has been changed into an excessive and severe competitive condition, especially in a price-oriented competitive market.
  1. Due to globalization, the meaning of the efficiently restricted market range was curtailed. In other words, the market range has already spread to the whole world, and thus the restriction for communication and transaction is rapidly becoming meaningless.
  1. Due to the development of multiple-source based networked communication, the estimate on chain effect has already been reduced to near nonsense, and the role of autonomous systematic discipline for the market or economy has been lost.
  1. Therefore, it could be said that the role of dominant economic theory has been already shrunk to the extent of being meaningless in its predictive powers for the new globalized world.

Yet, even though conditions have changed, we have still stood by the economic policies of the past, despite the adverse impacts that can now be plainly seen.

While expansionary economic policies have served us well for directly maintaining or increasing the level of consumer spending, they have done nothing to stimulate economic revitalization. Due to the continuation of these policies, numerous abnormal phenomena and problems have accumulated in the market.

The recent high federal budget deficit, high monetary liquidity, high trade deficit, high inflation potential, and low consumer saving rate are the results from these accumulated abnormal phenomena and problems.

It seems that economic experts still do not recognize the reason and necessity about why the existing market process should be changed, and as they try to find solutions, they compulsively stick to their existing assumptions and principles. Their theories are rather becoming more complicated, ambiguous, and abstract.


Conclusion and Recommendation

The first step to get the economy back on track will be the construction of a stable relationship between the changed communication scene and the market process. That is, efficiency and effectiveness cannot be derived from them until they develop a mutually proper communication to go with a stable market process. If they do not, then the kinds of abnormalities and what economists call externalities (i.e., unintended consequences) cited above will persist.

In looking back at the last 20 years, I believe that communication has developed rapidly through the digital revolution and internet revolution -- from the existing paradigm of single-source based communication to the new paradigm of multiple-source based networked communication. But at the same time, the market process has remained virtually unchanged. For this reason, the variegated abnormal phenomena and problems we are experiencing now can hardly be surprising as we look back at economic events just over the past year.

By implementing the existing expansionary economic policies where the mutually “improper-unstable” relationship between the changed communication and the existing market process has remained in place, it seems that government decision makers have served to institutionalize abnormal phenomena and problems in the market rather than to revitalize the economy.

Therefore, it can be said that the real cause for the current economic malaise will be found in the market process, which is not equipped to handle the needs of the Modern Information Age. For that reason, it can also be said that the development of a new market process with more suitable market systems to the Modern Information Age must be the starting point to solve these numerous economic problems. If a new stable market process is not developed soon, economic problems will persist; and accordingly, national competitiveness, national prosperity, and the welfare and safety of the nation will fall into a graver danger.

Because the development of this new market process will eventually require changing the paradigm of the existing market process, resistance to such changes must also be expected. In addition, the development of new assumptions and principles for the changed new economic circumstances will be needed, and a re-thinking of old economic theories into new ones.

On a positive note, the conditions and circumstances for the development of a new market process are already in place. If decision makers are willing to make the hard choices, it will be relatively easy to implement.

Therefore, we recommend that all government, academic, and corporate heads should work together to find a solution to our economic revitalization through the development of a new market process better suited to the Modern Information Age. This means the development of more effective economic policies for the Modern Information Age. Especially, this means the active assistance and support from the government. New political leadership in January 2009 will be a good time to start, and none to soon. To all who are running for president, both Democrat and Republican: It’s the market process . . .


Written by: Ho-Hyung Lee (luke.h.lee@gmail.com) - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the CEO of UBIMS, Inc. ("Ubiquitous Market System").