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,, 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’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’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...

[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.]

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  1. This is very insightful and illuminating. It may not be the solution, but it does illuminate the fundamental cause of our current problems.

  2. I read the whole article, but I have no idea what the actual proposal is - you talk about what the information based supply architecture would allow and what problems it would solve, but you never outright describe what the system would be... I felt almost as though you were missing a section in the middle - it went straight from the statement of the problem to the effect of the solution. It sounds like you have some kind of universal production and distribution system in mind, but it was not clear.

  3. Dear Guy,

    My proposal is simple; we should develop an efficient information-based supply chain infrastructure to fix the mistake as soon as possible and implement it in the market, quickly and effectively.

    If this infrastructure is quickly, effectively and fully implemented in the market, we could easily solve two major problems of the current economic crisis, unemployment and lack of consumption, at the same time. That is, the level of consumer spending could be significantly increased by improving the consuming effects with more direct transactions between providers and customers, and the employment condition could also be remarkably improved by creating a more innovation friendly market condition.

    A system for real transactions such as the information-based supply chain infrastructure can be effective only in a limited area where a required condition is equipped. Therefore, to get a satisfactory economic result from this infrastructure system, we should equip the required condition all over the United States as soon as possible. Considering the current rapidly deteriorating economic situation, I believe that this is the time for Federal Government to initiate and support the development and implementation of this new effective information-based supply chain infrastructure with the collaborative efforts of local and state governments and private sectors. This is the reason why I wrote this article.

    I would also suggest you read more of my other articles on this blogsite.



  4. I propose a different explanation to the sudden halt in economic growth:

    Economies produce services, manufactured goods and natural resources. Science and technology R&D can mostly help improve productivity of the latter two.

    Western economies produces mostly services 70%) which can be improved by investing in human capital. Through research in humanities, not science and technology, will we be able to make the economy grow again.