What value or service a business creates and the significance of markets has varied dramatically throughout human history. From local stakeholders to foreign ownership and providing a service to making a profit, business has had such a diverse history that many faces would be unrecognizable to our modern shareholder-lead economy. While there are many reasons for this, it is hard to deny the effect that technology and the ability to process information has had on the modern trend of maximization. From the rise of econometric models to the ever-changing climate forecasts, knowledge has allowed us to view our world in a way previously unachievable.
The effects of this trend are felt in every sector, from the more sparsely staffed and furnished Starbucks to the more tightly packed and analytically built shipping containers. These changes have effectively saved money or increased profits, fueling the massive increases in global GDP that we have seen over the past century. However, what this system optimization means for the larger economy has garnered little to no debate. It’s hard to convince someone with more dollars in their pocket at the end of the day that the change they made to get those dollars is damaging much more than their benefit. Because of this, we have started to feel the consequences of over-optimization.
One of the major issues to arise from the COVID Crisis, the drastic impacts to the supply chains and supporting systems, highlights exactly how this “optimization” can lead to harsh societal consequences when the goal is to increase profits rather than improve the service provided. Because the industry has created a system built around moving the most profitable amount of product rather than the most significant demand for development, in scenarios that vary significantly from the regular business cycle, the system proves to be unable to operate efficiently in any sense of the word. This can be seen in the alarming number of ships stuck at the port and the ever-increasing cost of reserving space on these same “more efficient” vessels.
While it’s not hard to see how turning an economy (let alone the globe) on and off again could cause some unforeseen ripples throughout the industry. It cannot be denied that for those that watch the shipping industry and its impact on consumer prices, the consequences could be seen from even before the shutdown. With optimization being the bread and butter of the business, shipping had decided on not only more optimized infrastructure but also hiring systems that allowed for larger workforces during peak seasons and smaller labor bills in the less profitable ones.
Because of this optimization, when the Pandemic first started to creep into the news, many businesses began to plan for tight supply chains and rising material costs. In doing so, significant industries worldwide saw orders rise to unprecedented levels, and in response, shipping began to amp up to accommodate these out-of-season demands. After this initial surge in purchases, much of the business saw a slow down in orders. They had already purchased enough to last through what was seen as a three-month shutdown, and therefore shipping slowed down. Because of this shift towards “profit retention” rather than investment, when markets began to reopen at a faster pace than those in charge had planned for, our world collapsed.
With this collapse came drastic consequences not just for the businesses that had manufactured this crisis but also for the consumers that relied on this chain to sustain their quality of life. Not only did shelves go empty (think the toilet paper crisis or mask shortage at the beginning of the pandemic), but slowly and surely, the hardships rippled into other areas of our life. As it became increasingly expensive to operate and ship oil worldwide, energy prices saw a historic rise, drastically reversing a decade’s decline. The hardships could also be felt in the overheating housing industry here in the US. As more people sold their homes in cities in favor of remote work in less populated areas, builders became stretched thin, adding to existing house price inflation while also limiting the market’s ability to correct.
The reason for this slowed “return to normal,” and colossal consumer consequences are partly due to many in business diverting emergency aid, not to reinvestment, but instead using these public funds to ensure that profits stayed high; which, arguably, is a shareholder based economy is the role of business management. The consequences of this are that much of the labor force and infrastructure have suffered lags as the world has turned back on. The previously mentioned ports suffering from massive delays are just the tip of the iceberg. Both the manufacturing and service sectors have also seen an uptick in quits strikes. Even Zillow had to shut down and reevaluate its Zillow Offers program earlier this month due to a considerable backlog in homes.
To see a change in how this business optimization is carried out, you only need to look at companies such as Revision Energy or Hy-Vee supermarkets. Employee-owned models offer a different outlook on what is efficient in a business model. This is because the benefits of business are not retained by shareholders that may or may not actively participate in a firm but instead shift the rewards of innovative business practice to those that develop and grow along with them. Through this model, companies see greater retention of talent, more sustained growth, access to increased benefit systems, and increased profit sharing to ensure equitable development. These are the same benefits I highlighted in the previous post on Public Utilities and their importance to the community.
By changing how the benefits of increasing production capacity are utilized to develop business practice, we can not only create a more equitable society but a more productive one as well. As highlighted in a 2017 piece by the Economic Policy Institute, these rising rates of inequality have cost the nation as a whole 2-4% of aggregate demand GDP just in recent years. By changing how companies such as John Deere and other manufacturers share the benefits of actual efficiency gains (not increased profit but long-term business development), not only will the workers see an increase in their quality of life, but the manufacturers and service sectors would see a broader customer base to draw from. While it may not be immediate profit, the more people can invest their incomes in their personal growth, the more our nation as a whole will grow; if we continue to focus on driving the benefits of our ever more “efficient” markets into the hands of capital holders, we will continue to deprive ourselves of not only higher incomes for all, but also a smaller social safety net and scope of government. For the betterment of our nation and people as a whole, a shift in business values is the only option if we wish to solve the major issues of the 21st Century.
My Maine Musings 