Tuesday, December 10, 2013

What is the main structural cause of economic inequality?

By Ho-Hyung ("Luke") Lee
Recently, in an Apostolic Exhortation, Pope Francis urged global leaders to fight poverty and growing inequality in his first major work saying, "As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems."

Yes, we should solve the problems of poverty and growing inequality, but how? Is there any clear and better alternative to replace the existing free market or economic system? What is the real structural cause of inequality? Unfortunately, no clear answer has been developed or discovered on these until now.

Can we solve the problems simply with tougher economic regulation and democratic supervision of the capitalist system, with political change or even with more charity or goodwill toward the poor as Pope Francis suggests?  I think that’s not enough and, even if it is possible, it will take too much time in the existing divisive political and social situation.

What should we do then? What could the real structural cause of inequality be?

Here I would like to suggest you and our global leaders ponder the changed economic environment for jobs in the Modern Information Age.

I believe two major changes for jobs have occurred:

(1) Increased IT efficiency in robotics, various software applications, and electronic transaction systems usually leads to replacing rather than creating jobs in production lines or supply chains.  I think this is already a well-known change for jobs and many scholars are very concerned about the further advancement of technology, especially in robotics.

(2) Increasingly unfair conditions for competition between big companies and small- and medium-sized enterprises (SMBEs) in the changed modern supply chain processes have killed jobs in the market on a massive scale, along with raising barriers to market entry for new business creation.  This must result in a big change for jobs, but very strangely, nobody has recognized it and considered it in his or her ruminations about the economy until now.

More seriously, it seems that a vicious cycle for jobs between (1) increased IT efficiency and (2) increasingly unfair conditions for competition is already firmly established in the economy.  This situation is analogous to an ant death spiral.  That is, an economic death spiral has already formed in our economy.  If this is true, no sustainable solution will be found with the existing economic plans and policies until that economic death spiral is broken.

How can we break down the current economic death spiral?  Let’s see first how the supply chain processes have changed in the Modern Information Age.

Many information-based, streamlined, supply chain processes have been developed by remarkably reducing the number of transactions and functions in a supply chain process and significantly increasing the efficiency of each function through the use of information technology in all industries over the last 30 – 40 years of the Modern Information Age.  Almost all IT-based supply chains were privately developed and owned by big companies (such as Zara and Walmart) and used only for their own benefit.

On the other hand, most SMBEs and individuals are still using the conventional ways of separate supply chain functions exemplified by wholesalers and distributors.

Mainly due to the much faster speed and higher efficiency of the new streamlined supply chains than conventional separated supply chain functions, a new unfair competitive condition has been created between big companies and SMBEs.

Let’s see some examples:  Zara, the largest clothing company in the world, developed a private, information-based, streamlined, supply chain process and now needs just two weeks to develop a new product and get it to its stores, compared with a six-month industry average for other small- and medium-sized companies.  Walmart, the largest retailer in the world, also did it and could keep its "Low prices, always" advertising slogan, differentiating it from other small- and medium-sized retailers.

So what’s wrong with this? Something is seriously wrong.

If it is assumed that there is a supply chain river to cross between suppliers and customers, this situation is just as if there were no public bridges in the real world.  No publicly available information-based supply chain process (or infrastructure)!  Strangely enough, not even a single one has been developed in the whole world.  If this is true, it is the main structural cause of the current jobs crisis and thereby economic inequality.  That is, the loss of appropriate infrastructure in the modern supply chain process has caused extensive unemployment.

If an appropriate and efficient public information-based supply chain infrastructure is developed and implemented in the supply chain process of the economy, I believe the current economic death spiral will easily be broken down by providing a fair condition for competition to all and removing the blocks to new business creation.  Thereafter, many of the problems of the poor and also the current economic crisis will also be easily solved.

I hope our global leaders recognize this as soon as possible and take every possible action to solve the problems of the current economic inequality and save our economy, before it is too late.

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