Sunday, August 25, 2013

The Nature of Trade in General


I've recently read Cantillon's Essay on the Nature of Trade in General, a piece written in the early eighteenth century about the fundamentals of economics, and while it pains me to admit it, I think that the French may be onto something in their approach to the topic that makes their approach particularly relevant to the present day.

The more popular English school (Adam Smith and those who followed) tends to have forgotten or pointedly ignored a foundational premise, which seemed to be dispensable for a time when demand struggled to keep pace with supply, but is become of increasing importance in the present day: why should man choose to engage in productive activity at all?

That is to say: the English school takes production to be an end in itself.  Eveyrone must be productive because the only alternative is to not be productive, and to not be productive is sinful, wasteful, and bad in all regards.   And so, the English school fails to consider the very reason for economics, and in doing so has missed a few subtle but significant points that have been damaging to the western approach to economics.

Production is for Consumption

Cantillon recognizes, from the start, that production is not an end in itself, but is a purpose-driven activity that serves an objective: providing goods and services for consumption.   This would seem to be self-evident and require no further consideration, but a great deal of dysfunctional behavior has arisen from failure to consider this.

Primarily, the present-day emphasis on customer experience reflects the fact that many companies have focused so much on profit that they have forgotten the very reason that people give them money - the desire to consume their products.  Many products are marginally satisfactory and a customer service is barely tolerable because firms focus on maximizing profit by minimizing the value they provide in exchange for the price consumers consent to pay.    Meanwhile, firms that recognize that production is done for the sake of consumption focus on maximizing the benefit delivered by consuming their products, and find that by doing so they earn considerable profit from highly satisfied and rabidly loyal customers.

The consumer has also been forgotten in the design of many products - engineers make things that meet certain qualities that they feel are important (durability, speed, efficiency, etc.) without considering whether these qualities deliver value to the consumer.   Why should we endeavor to make a vehicle that has a top speed of 150 mph or faster when most customers will never drive faster than 80 (on the highways, maybe 50 on surface roads)?   Why should we make computer processors faster when the typical user's needs are more than served by present capabilities?   Why should we invest a dime in any capability that does not serve the need of the customer?    Such questions are seldom ever asked, which indicates that firms are more interested in pursuing the qualities they admire (or are best capable of pursuing) rather than considering the needs of the consumers.

A product that ignores the needs of the customer, being suitable for the needs of consumption while being wildly overdeveloped in ways that are essentially meaningless, had been viable for many years, but only for the lack of options.   Given a plentitude of choices, customers will take the option that best serves their needs and is indifferent to excellence in regards that do not matter to them.

With this in mind, the French perspective becomes poignant, and production for production's sake becomes a meaningless and very expensive ritual for producers to continue to pursue.

Production beyond Consumption is Waste

If the needs of the consumer are ignored and production for production's sake pursued, then the objective of a firm is "more."   To make more widgets, to sell to more customers, to increase market share, ad infinitum.    And while demand exceeds supply, there is always the ability to locate a consumer for an additional unit of production.

But the limit is not infinite - as the world economies develop and more people are included in the marketplace, there are fewer people who are not included, and less potential to continue with growth.    There is a theoretical limit at which point people are producing and consuming all the goods they possibly can, and though it has not been reached, each day we draw closer.

Consider the example of food: in the most developed economies (United States and Germay), lack of food is not a problem, but its abundance certainly is.  Simply stated, when there is too much food, people grow fat consuming the excess, and yet the rule of "production for the sake of production" encourages the cultivation of even more.     While I'll concede that the dream of a world where no-one is starving is worth pursuing, the dream of a world where everyone is morbidly obese is dysfunctional.

With this in mind, and with the terminus approaching, firms must consider a sustainable level of production rather than infinite growth - and the path to sanity is the same: to consider that production is for the sake of consumption, and when the needs of consumption are satisfied, further production is wasteful and even harmful.   So stop pursuing it.

Focus on the Consumption = Focus on the Consumer

In all, the premise provided by the French economists of the eighteenth and nineteenth century is one that yields a valuable insight to the world of the twenty-first.   If we are mindful that production is done for the sake of consumption, we are reminded that the quantity and quality of our products must be aligned with the needs of the consumer, and that the mindless pursuit of more quantity than is needed and more features than are wanted must be mitigated by considering the extent of consumer needs in addition to their nature.

For most industries, this has not yet reached the point of crisis - but it is already impacting their success to some degree, and it seems reasonable to predict that this will only become more pronounced in future.


No comments:

Post a Comment