by Luke Ho-Hyung Lee
Every high government official and many top economic experts have tried to solve our continuing economic crisis and revitalize the economy over the past several years, but to no avail. It seems an even bigger and longer-lasting crisis, with an economic tsunami, lies ahead. Why have existing policies not been effective? Why did this situation happen in the first place? Even though many experts are studying this issue, none have found clear answers to these questions, let alone a solution. Could they be looking in the wrong places?
I have noticed that the current economic situation is analogous to diabetic disease. Generally, it is difficult to detect diabetes from a single, simple symptom before it develops a serious complication. This is because this one symptom, apart from any other, does not look to be seriously harmful to the body and because it is not easy to detect the relationship between the symptom and the disease. Likewise, it will not be easy to determine the real causes of the current economic conditions which afflict us. If each complication is treated separately, the proper treatment will escape us. Moreover, this may also cause other potential, perhaps fatal, complications.
Market (or supply chain) process is the bloodstream of the economy. If the existing market process is outdated or not suitable for the modern information market, all the efforts we are now pursuing for solving the current economic crisis and revitalizing the economy will be ineffective and eventually useless. Unfortunately, nobody except me has seriously considered this yet in their ruminations about the economy.
Characteristics of Real Transactions and the Construction of Efficient Market Systems in the Real Market Process
We have developed numerous market (transaction or supply chain) systems or applications for real transactions in our history, and they have realized the market process.
Because the distribution and delivery of real (physical) products and services and the activities of providers and customers are directly restricted by time and space, there have been many different rules and standards (or complex conditions) for real transactions between multiple providers and multiple customers in the real market process. Therefore, it has been very difficult to construct an effective market (transaction or supply chain) system that is regarded as fair and straightforward in the real market process.
To construct an effective market (transaction or supply chain) system or application in the real market process, what must we do? Not only must the rules and standards (the conditions of transactions) be (1) simplified but also (2) made fair, transparent, and straightforward (3) by directly overcoming the restrictions of time and space (i.e., by directly improving the conditions of real-world processes).
Have we ever constructed any such market (transaction or supply chain) systems or applications in the real market process? Yes, we have constructed many, such as LA Fashion District as a wholesale marketplace and retail farmers’ markets in many local areas.
We have also developed numerous e-market (e-transaction or e-supply chain) systems or applications for real transactions including various collaborative e-function systems and applications such as eBay, Amazon.com and numerous e-logistics and e-supply chain solutions through the use of IT and networking technology in the Modern Information Age.
Have we also developed any such e-market (e-transaction or e-supply chain) systems or applications by following the same requirements for the construction of an effective market (transaction or supply chain) system or application in the real market process? No, we have not developed any in such a way at all. Then, what has happened?
In developing those e-market (e-transaction or e-supply chain) systems and applications, we have tried to simplify the rules and standards or to construct a fair rule and standard only by manipulating —that is, classifying or limiting—the constituent factors of the transactions such as products, services, providers, and customers, instead of by directly overcoming the restriction of time and space.
Let us consider some examples. E-Bay’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 both made the mistake of giving up the opportunity of facilitating competition with a fair rule and standard among providers. The developers of eBay’s or Amazon.com’s e-marketplace system or home shopping system have tried to simplify the system and construct a limited fair rule and standard by the character of products or services. In this case, only products such as dry goods or services lacking time sensitivity, which are not sensitive to the rules and standards, can be effectively traded through these systems. Some big companies have tried to simplify rules only by using their buying power to manage purchasing alone (e-buyer model), in effect creating monopolies without fair rules of trade. Most collaborative e-function systems and applications have also been developed only through simplifying them by services of individual functions. There are many other cases, but almost all of them have this characteristic aim: an immediate increase in productivity and efficiency.
At a glance, people might wonder what is wrong with these. Actually, things have gone wrong from the beginning for the employment situation in the market or economy, but nobody has recognized why it has happened and how serious it has been, until now.
Because IT and networking technology have been used mostly in this way for developing those e-market (e-transaction or e-supply chain) systems and applications, (1) the number of transactions and functions in a real market (or supply chain) process has shrunk remarkably—as with Wal-Mart, e-buyer, e-seller, and e-auctioneer systems, and existing e-marketplace systems in the real market process—and (2) numerous collaborative activities to increase efficiency of function have arisen in all sectors of the economy. Moreover, (3) big companies have developed private information-based supply chain networks in all industries in which they are engaged. In this situation, employment continually declined, and policies aimed at improving it have been unsuccessful. Let me explain more details about these:
(1) The number of transactions and functions in a real market (or supply chain) process have been remarkably reduced
This diagram explains how much the reduction of the number of transactions and functions in a real market (or supply chain) process has contributed to the worsening of employment in the economy as a whole.
In the existing functional supply chain process, every supplier has been in the situation of competition by size for more market share. That is, they suggest similar prices for a similar product--around $10 for a hypothetical product. If a supplier can offer a better price, such as $9 for Supplier H, by reducing the number of transactions and functions in its supply chain process, it could get more market share. Suppliers B, D, F, G, and I would lose some market share. It seems nothing is wrong here under the current theory of a free market economy. Yes, nothing is wrong with the current free market economy, but something else must be seriously wrong, as shown above.
The suppliers, who cannot offer better prices, as well as the small wholesalers and retailers in their supply chains, lose their businesses. That is, the whole supply chain in this market becomes unstable: loser suppliers are easily destroyed, along with their suppliers, and as a result, conditions permitting employment, especially for middle- and lower-income workers in those supply chains, seriously deteriorate. Some suppliers could be subordinated to a strong function player such as Wal-Mart for survival, but the situation will still worsen.
Let me ask you directly: “Can you change this worsening course of the employment situation with the old economic policies or stimulus plans?” I believe it to be impossible in most existing functional supply chain processes. That’s the real problem.
(2) Numerous collaborative activities to increase the efficiency of market functions have created oligopolies
This diagram explains how increasing the efficiency of a function itself in the existing functional supply chain process through collaboration has contributed to the weakening of employment in the economy as a whole.
Structurally, the more the collaboration for a separate function is activated, the worse employment levels become, under competition by size for share.
As seen in Diagrams (1) and (2) together, the efforts for efficiency increase in this existing functional supply chain process have contributed to the weakening of employment in the economy as a whole, unavoidably and continuously. This worsening employment condition has had a greater impact on middle- and lower-income workers than anyone else. On the other hand, those same efforts have provided a better opportunity for increasing income to the more affluent. Thus, there has been a greater polarization between poor and rich due to market forces.
Here, a question could be raised: Can the existing functional supply chain process with competition by size for market share be changed only by manipulating the constituent factors of the transactions such as products, services, providers, and customers? Structurally, it’s impossible. Without directly overcoming the restriction of time and space, it will be almost impossible to construct a fair rule and standard for all in the real market process.
(3) Many private information-based supply chain networks have been developed in all industries of the market, mostly by big companies
This diagram shows Zara’s case as an example. Zara, the largest clothing company in the world, developed a private information-based supply chain network by vertically integrating its logistics and collaborative functions through the use of IT and networking technology and now needs just two weeks to develop a new product and get it to stores, compared with a six-month industry average, enabling Zara to launch around 10,000 new designs each year, far more than its competition.
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 person in the world by Forbes in 2010.
But what happened to others in the industry? Most small individual designers and manufacturers were much less competitive than Zara, and only some of them could be absorbed by Zara. As usual, the employment situation for middle- and lower-income workers in this industry has seriously and relentlessly deteriorated. Unfortunately, Zara is no longer an isolated case.
Large companies in every industry have developed similar private information-based supply chain networks for their own distribution, and those big companies have used their supply chain networks only for their own benefit. Thereafter, sadly, the employment situation for middle- and lower-income workers has seriously worsened in almost all industries, worldwide.
Strangely enough, this situation 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 effective public information-based supply chain infrastructure has been developed in the real supply chain processes of the market. That’s the real problem, but without directly overcoming the restriction of time and space, it will be almost impossible to develop a public supply chain infrastructure in the market.
The Changed Economic Environment in the Modern Information Age
More seriously, these events have contributed to the shift to a more efficiency-oriented supply side environment and changed the whole economic environment in the Modern Information Age. That is, a mutually complementary relationship between the supply side and the existing market process has been firmly established, and this has completely altered the economic environment.
Yet these changes also resulted in increased difficulties in job creation for middle- and lower-income workers and in a wider polarization between the poor and the rich. Moreover, they have contributed to the weakness or near collapse of the general service industry and aggravated unemployment. In my view, the existing market process has been so efficiency-oriented that it has not created enough businesses and jobs to keep consumer spending at the desired level. This is strongly correlated with the decline of the self-generation, or recovery, capability of the economy. This illustrates once again why Henry Ford paid premium wages to his workers: he wanted them as customers. But the workers impoverished by Zara cannot afford even its cheaper goods.
The decline in the self-generation capability of the market has reduced the level of consumer spending over time (Force [1]). I believe this has been the most important factor in the worsening of the recession. (The self-generation (or recovery) capability of the market: The market itself generates enough businesses and jobs, and also enough efficiency increase, to keep consumer spending at desired levels.)
To promote the level of consumer spending, there seemed to be little choice other than expansionary fiscal and monetary policies, along with stimulus plans, to keep the economy going. These measures have tended to act as a force to increase consumer spending (Force [2]) to promote growth and prosperity.
When Force [2] is more powerful than Force [1], growth appears in many parts of the economy. However, the problem is that Force [1] is a continuous force, and Force [2] only temporary. That is, when Force [2] disappears and Force [1] continues, the economy falls back into recession. Thus, we have repeatedly adopted excessive expansionary economic policies and enacted stimulus plans to stave off recession over the last nine to ten years. These only postponed the inevitable deep economic decline into which we have now descended.
Because we have adopted these expansionary economic policies and stimuli too often as a stopgap, we have experienced serious side effects in the market: (1) budget deficits and privatization of public goods and services at both the local and federal levels have increased significantly; (2) because of huge liquidity increases, various economic bubbles formed, as in commodities and real estate; thus, (3) the potential for inflation increased; and (4) other abnormal phenomena accumulated in the market. Each of these contributed to a sudden lowering of the level of consumer spending to propel the economy into deeper recession.
What of course precipitated this crisis – i.e., the immediate cause -- was that we did not effectively regulate the creation of over-leveraged financial products such as sub-prime mortgage products. Despite the potential risks of those products, financial institutions went ahead, as it was felt they contributed to increasing the level of consumer spending. We now know better. So, to our peril, we did not put a stop to what we now recognize as a dubious policy that exacerbated the situation. Finally, from the housing market bubble burst to the current financial meltdown and Federal budget crisis, the economy has plummeted to a perilous level.
What is the real cause of the current economic crisis?
So, what is the real cause of the current economic malaise? Is it still the housing market bubble burst or the sub-prime mortgage system failures? These are just secondary or incidental causes. Then, what underlies them?
I can see free-market ideologues cringe now. But with the market (or supply chain) process as it exists, the economy as a whole cannot self-generate enough businesses and jobs and also enough efficiency increase to keep consumer spending at the overall desired level. That is, the existing functional supply chain process for the real market is too heavily efficiency-oriented and no longer suitable for the modern information market.
What has caused this existing functional supply chain process to be too heavily efficiency-oriented? It appears to be fact that we have not developed any effective e-market (e-transaction or e-supply chain) systems or applications for real transactions by directly overcoming the restriction of time and space (i.e., by directly improving the conditions of real-world processes). Oddly, the conditions of real-world processes have not been considered at all, and accordingly, constructing a fair rule and standard for all has been ignored. This is wrong. So, I believe the real cause must be the disregard of the conditions of real-world processes in developing those e-market (e-transaction or e-supply chain) systems or applications for real transactions in the Modern Information Age.
Why were real-world processes disregarded?
I would refer to something called the ant death spiral, an event that occasionally takes place in the natural world.
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 food. 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 we have made the same mistake in the economy over the last 20 to 30 years of the Modern Information Age, and it has created an economic death spiral.
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.
What should we do? What could be the solution?
Real transactions are directly restricted by time and space. Without directly overcoming the restrictions of time and space, it is almost impossible to construct an effective e-market (e-transaction or e-supply chain) system for real transactions defined as an e-marketplace system with a fair rule and standard for all and a public information-based supply chain infrastructure in the real market process.
By directly limiting the restrictions of time and space, such as directly limiting the market ranges, the same services (i.e., delivery times) of offerings from providers and the same price of like offerings from a provider at the final delivery point as a fair rule and standard for all would be established to construct an effective e-marketplace. By operating the public supply chain infrastructure in the limited market range, the integration of a supply chain would be facilitated to construct a system as a platform in the supply chain (real market) process like the Internet as a platform in information.
I believe a public information-based supply chain infrastructure system with an effective e-marketplace can easily be developed that will overcome the restrictions of time and space by using IT and networking technology.
If a public information-based supply chain infrastructure system is developed and fully implemented in the real market, the existing efficiency-oriented market process would be changed to a more effectiveness-oriented market process, which is more suitable for the modern information market. This would significantly contribute to the improvement of employment on the whole. The self-generation capability of the market would improve as well. With the influence of this new, more effectiveness-oriented supply chain process, the existing competition by size would change into competition by quality and service. The existing efficiency-oriented mass production process and mass-market consumption model would also be altered into a more effectiveness-oriented, diversified, or individualized production and consumption system. Owing to these changes, local employment conditions would improve considerably, and the business environment for middle- and small-sized companies and for the general service industry would improve significantly. Moreover, companies that off-shored and outsourced to lower labor cost countries would come back to the domestic arena.
As a complementary relationship is established between the supply side and this new effectiveness-oriented market process, job creation for middle- and lower-income workers would be enhanced, and the polarized gap between poor and rich moderated.
This synergy for employment would be a positive force for economic recovery and revitalization. The improvement of the self-generation capability of the market could finally be transformed into a permanent structural force to steady, and then increase, the level of consumer spending.
In this scenario, a policy for a well-functioning economic environment could be established, and expansionary economic policies would rarely be needed. Thereafter, the budget deficits at both local and Federal levels would decline, and many economic anomalies be resolved naturally.
I strongly believe that this is the most effective path to get out of the current economic crisis and to revitalize the economy.
I hope this public information based supply chain infrastructure system with the efficient e-marketplace can be developed as soon as possible, implemented quickly and effectively in the market, and save the world economy.
About the Author
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. ("Ubiquitous Market System"). UBIMS, Inc., is a patent-pending startup with a cloud-based software designed to link manufacturers and businesses directly, provide time and cost savings in supply chains, and promote new job and business formation as outlined above, particularly in “A New Supply Chain Process for the Modern Information Market.”
