Political Economy of Waste

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* Paper: The Great Domain of Cost-Plus: The Waste Production Economy. Kevin A. Carson. C4SS, 2010

URL = http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf

Excellent study on how much of our economy is actually unproductive and non-contributive


Excerpt

Intellectual History of Waste Recognition

Kevin Carson:

"A recurring theme, from the Enlightenment on, has been the radically reduced work week that would be necessary to support the average person if production were organized efficiently and the producing classes didn't have to work to support the idle in addition to themselves.

Although I can't track it down I recall reading, as a child, an essay in my father's anthology of Poor Richard's Almanack in which Franklin described how the work day could be shortened to four or five hours by eliminating waste and irrationality.

In 1913 Pyotr Kropotkin estimated the labor time necessary to produce the actual food, clothing and housing that the average working family consumed at around 150 half-days' labor a year. The average worker's additional labor-time went either to waste or directly harmful production, or to supporting parasitic consumption by the privileged classes.5

Bob Black's widely reproduced 1985 essay “The Abolition of Work” covered similar ground, arguing both for the elimination of waste production and for the combination of work wherever possible with play.

Only a small and diminishing fraction of work serves any useful purpose independent of the defense and reproduction of the work-system and its political and legal appendages. Twenty years ago, Paul and Percival Goodman estimated that just five percent of the work then being done—presumably the figure, if accurate, is lower now—would satisfy our minimal needs for food, clothing, and shelter. Theirs was only an educated guess but the main point is quite clear: directly or indirectly, most work serves the unproductive purposes of commerce or social control. Right off the bat we can liberate tens of millions of salesmen, soldiers, managers, cops, stockbrokers, clergymen, bankers, lawyers, teachers, landlords, security guards, ad-men and everyone who works for them. There is a snowball effect since every time you idle some bigshot you liberate his flunkeys and underlings also. Thus the economy implodes.6

A number of scholarly writers have dealt with the scale of waste production in the economy in recent years. Edward Wolff, in Growth, Accumulation and Unproductive Activity, classifies economic activity as either productive or unproductive. Waste output includes the portion of the economic surplus which is absorbed by the unproductive “surplus class” (essentially the rents on artificial property I write about below), and unproductive activities (activities which “use labor power but produce no directly usable output....”).7 Wolff's main shortcoming is that his entire survey of waste production is sector by sector, with entire sectors being assigned either to the “productive” or “unproductive” category. It is almost completely silent on waste in the form of suboptimal allocation of resources or waste of inputs within an industry. Many production inputs are necessary, in some quantity, for production, but are used wastefully. Wolff classifies an entire industry as “productive” if its output has use value, no matter how wastefully production is organized.

The Overburdened Economy, by Lloyd Dumas, directly addresses the area in which Wolff is most deficient: waste within industries or sectors of the economy (for example administrative overhead within a business firm). He distinguishes “contributive” from “non-contributive” activity within the production process. To be contributive, an activity must be “part of a process that results in the production of a good or service that has inherent economic value,” and must also “perform a function necessary to the efficient operation of that process.” Activities which meet the first test but not the second are “neutral” (the expansion of administrative overhead is his premier example), and eliminating the waste from them is “simply a matter of an efficiency adjustment.” On the other hand activities which fail both tests are “distractive,” and require eliminating the process itself and shifting elsewhere all resources wasted in it.8

Dumas also makes a clear connection between such waste and the externalization of cost. Wasteful spending on management featherbedding occurs, he suggests, because of “a discrepancy between the value of an activity or output to the decision maker who authorizes its purchase and its value to those who actually pay the price.”9 “...[A]s long as the value of expansion exceeds its costs from their [management's] perspective, they will continue to expand the bureaucracy.10

But while Dumas is good on Wolff's weak point of waste from internal inefficiencies within the productive process, he also neglects Wolff's strong point: unproductive consumption by the privileged classes. The enormous portion of the economy made up of artificial scarcity rents on land, capital and “intellectual property” goes largely unremarked on.

Finally, Douglas Dowd, in The Waste of Nations, elaborates on Dumas' central theme of noncontributive activity. He includes entire sectors of the economy that fall under the heading of Dumas' “distractive activities,” like the military-industrial complex. But he also focuses heavily on neutral or distractive functions in the civilian economy like all those associated with push distribution: highpressure marketing, mass advertising, planned obsolescence, brand-name markups, purely cosmetic model changes and product differentiation, etc. His examples range from the ninety percent of toothpaste price made up of marketing costs to the $800 of a 1939 Chevy's $950 market price that didn't reflect actual production costs.11 Dowd also points to the waste from lower productivity of labor, as a result of the incentive problems in a hierarchical enterprise.12 Dowd's biggest shortcoming is his overly narrow definition of “production costs” and his failure to distinguish productive from unproductive distribution costs. He lumps all the costs of “marketing and distribution” into a single category of waste, without distinguishing the waste transportation resulting from subsidies to economic centralization from the necessary transportation which would be necessary to move goods to the point of consumption in even the most efficient economy.

It is not my purpose, given the time and space constraints of a quarterly research paper, to examine the waste economy on the same level of details as these writers. My intent, rather, is to provide a comprehensive overview that synthesizes all their strong points, to include areas of waste production that all of them overlook, and to supply an analytical framework based on free market principles." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Notes

  • 5 Peter Kropotkin, The Conquest of Bread (New York: Vanguard Press, 1926), pp. 87-94.
  • 6 Bob Black, “The Abolition of Work” (1985) <http://www.zpub.com/notes/black-work.html>.
  • 7 Edward N. Wolff, Growth, Accumulation, and Unproductive Activity (Cambridge, London, New York, New Rochelle, Melbourne, Sydney: Cambridge University Press, 1987), p. 3.
  • 8 Lloyd Dumas, The Overburdened Economy: Uncovering the Causes of Chronic Unemployment, Inflation, and National Decline (Berkeley, Los Angeles, London: University of California Press, 1986), pp. 53-54, 57.
  • 9 Ibid., pp. 42-43.
  • 10 Ibid., pp. 66-67.
  • 11 Douglas Dowd, The Waste of Nations: Dysfunction in the World Economy (Boulder and London: Westview Press, 1989), pp. 64-65.


From the Conclusion

Kevin Carson:

"Consider the amount of the average worker's total labor that is expended not only to pay for the above-mentioned embedded costs of intellectual property and for the oligopoly markup, but to pay artificial scarcity rents to owners of land and capital. The cumulative effect of eliminating all such forms of privilege would likely equal that of eliminating subsidized waste in the production process. If, as seems plausible as a rough approximation, waste production and rents on intangible property each result in what amounts to a 100% markup, then their cumulative effect is to quadruple the number of work hours actually necessary to produce our current levels of consumption. Three quarters of our labor goes either to waste or to tribute.

Absent the unnecessary production that amounts to fixing Bastiat's broken windows, and other waste (including the deliberate choice of planned obsolescence over reparability by the state's industrial cartels), and absent the portion of commodity price that reflects embedded rents on "intellectual property" and other artificial property rights like artificially scarce land and capital, we could probably produce something like our current standard of living working an average of two days or less a week. We're working the other three days to dig holes and fill them back in again, or to pay protection money so parasitic rentiers won't use their artificial property rights to obstruct production. The main barrier to achieving this is brilliantly summed up in the email signature line of Paul Fernhout, a member of the P2P Research and Open Manufacturing email lists: "The biggest challenge of the 21st century is the irony of technologies of abundance in the hands of those thinking in terms of scarcity." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Typology

Waste from Artificial Scarcity Rents

"A major part of our labor goes to support unproductive consumption by holders of artificial property rights: "the consumption of use values by the surplus class” to which Wolff referred.

In an environment of uncoerced exchange between equals, exchanges tend to involve comparable amounts of effort or disutility on both sides. The reason is that human beings, by nature, are utility maximizers; when the effort required in exchange for someone else's product significantly exceeds the effort of producing it there will be a corresponding effect on enough “make or buy” decisions at the margin to increase the number of people competing to provide the product and thereby drive down its price. When all market transactions are free and unconstrained, there will be a shift of labor at the margins from occupations where remuneration is low relative to effort to those where it is higher.

Privilege is a way of increasing the effort or disutility required from one party in order to provide rents or unearned income to the other. When the employer of labor is a monopsonist, she can target wages to the amount needed to get workers to bring their services to market, and appropriate the surplus as a rent.

According to Wolfgang Hoeschele, scarcity generation is tied up with violence: “Throughout history, whoever controlled the means of violence could use it to create a bottleneck between people and the fruits of their own labor, making the latter scarce.” He points, as examples, to “blackmail payments collected by a mafia, and rents imposed on peasants by feudal landowners.”13 But “property as such,” he argues, “does not result of some at the expense of other” or “create scarcity.” Whether or not it does “depends vitally on the specific nature of the property rights involved.”

Where scarcity is natural and property rights reflect that state of affairs, they may be a source of mutual benefit rather than zero-sum relations. For example, an unregulated open access regime, by failing to tie the price of consumption to the cost of regenerating resources, may lead to depletion. Both regulated commons and private property tied to actual use are ways of assigning economic costs to resource extraction and equitably distributing the highest possible sustainable yield. Private property in arable land, in the form of family farms, can minimize scarcity by fully internalizing both costs and output—while ownership “by a large collective organization (a cooperative, commune, state farm, or corporation)” can result in serious inefficiencies."


Waste from Guard Labor

"Murray Bookchin argued, in the Introduction to Post-Scarcity Anarchism, that the management of scarcity, the control of access to scarce resources, was the “historic rationale” for most forms of hierarchy and authoritarianism.

That really stands to reason. Most of the authoritarian institutions in our society, and most positions of authority within their hierarchies, ultimately derive their power from the threat “Do as I say if you want to get fed and keep a roof over your head.”

In addition, the power of hierarchies results from the fact that exercising power is the primary occupation (and often avocation as well) of those running them, while those on the outside can participate in decision-making only during what little time they are able to extract from their limited leisure after working at their jobs and attending to family concerns and recreation. Comparative scarcity entails a greater amount of labor time required to procure the necessities of life, and a resulting shift in comparative advantage to those administering the hierarchies when it comes to time, energy and attention for making decisions about how things could be done.

Most of the hierarchical institutions in our world, and the people running them, exist only for the sake of rationing scarce goods. The management at your workplace, and the sense of identity they get from their jobs, all revolve around the fact of scarcity and your dependence on them to keep paying the rent and grocery bill. In a world where they no longer get status from control over other people’s livelihoods, they’d be strangers in a strange land. A world in which all the hierarchical institutions formerly required to regulate scarcity become redundant and irrelevant — in which every single person was the equal of Gates and Rockefeller in wealth and power, and could tell them to go to hell with impunity — would be intolerable for them. What fun would it to live like a king, if everyone was a king?

What's more, a major part of the resources expended by authoritarian structures goes to the costs of enforcing property rights in scarce resources. When that scarcity is natural the costs of enforcing the property system may be rational. When, for example, it takes significant effort to create material goods, and the comparative effort of producing versus stealing makes theft an attractive alternative, then the costs of protecting the producer's possession of his labor product against theft may be necessary.

But when the scarcity is artificial, the cost of enforcing it is a dead loss to society. When state intervention artificially increases the effort or capital outlay entailed in producing a given unit of consumption goods, the comparative ease of producing without artificial levels of effort might make the effort of circumventing such restrictions an attractive proposition. For example, when the marginal cost of reproducing digital information is zero, and the price of digital information obtained from the content “owner” is significant, the cost difference can only be upheld by a costly apparatus like the Digital Millennium Copyright Act and all the industry and Justice Department machinery required to enforce it.

We have experienced a major shift, in recent decades, from a situation in which most scarcity was natural to one in which most scarcity is artificial. That's not to say that property rights to scarce goods weren't artificial in most cases, but simply that they really were scarce in the sense that they required significant effort to produce. The primary effect of artificial property rights, in the old days, was to shift the necessary effort of production to someone other than the beneficiary. The primary effect of artificial property rights today, in most cases, is instead to impose effort where there is no material reason for effort on anyone's part, so that the privileged can collect rents from the artificially mandated effort. The primary focus of socialism in the nineteenth century was to ensure that the effort required to produce consumption goods was equitably allocated, and that the product was distributed commensurate with contributions to the production process. Today, in contrast, our focus should be on making sure that there are no limits on the free reproduction of non-scarce goods and that there is no effort required for consumption where it does not by nature exist. A growing share of total consumption goods consists of what Carl Menger called “non-economic goods,” whose natural market price absent artificial scarcity rents is zero. As Bookchin put it: “A century ago, scarcity had to be endured; today, it has to be enforced—hence the importance of the state in the present era.”

Samuel Bowles and Arjun Jayadev coined the term “guard labor” for economic activity whose primary purpose is “the perpetuation of social relationships of domination and subordination”—what we saw Edward Wolff describe above as economic activity meant to secure an unproductive class's control of surplus output. They argued that the higher the degree of inequality in wealth and power, the larger the share of economic activity that goes to guard labor.

...

Douglas Dowd pointed to the lower productivity of labor and higher unit costs resulting from low morale and other incentive problems in the standard capitalist enterprise.43 For example, the workerowned plywood co-ops in the Pacific Northwest typically have a quarter the supervisory personnel of a capitalist-owned plywood factory, because of the completely different structure of incentives in a worker-owned and -managed firm. Dowd compared the 10.8% of the U.S. labor force in managerial and clerical positions in 1980, compared to 3% in Germany and 4.4% in Japan." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Radical Monopoly

The concept of radical monopoly overlaps heavily with that of privilege or artificial property rights.

Radical monopoly, by subsidizing more costly ways of doing things and penalizing or imposing costs on cheaper alternatives, compels the individual to consume goods and services that are more costly to produce in terms of effort and disutility, when (had not such alternatives been artificially suppressed) she might have preferred less effort- and disutility-intensive alternatives. It should be clear, therefore, that radical monopoly is closely related to the basic operating principle of privilege: requiring individuals to exert effort over and above what is required to produce a given consumption good.

The state and its affiliated corporate system, by mandating minimum levels of overhead for supplying all human wants, create what Ivan Illich called “radical monopolies.”

= I speak about radical monopoly when one industrial production process exercises an exclusive control over the satisfaction of a pressing need, and excludes nonindustrial activities from competition.... Radical monopoly exists where a major tool rules out natural competence. Radical monopoly imposes compulsory consumption and thereby restricts personal autonomy. It constitutes a special kind of social control because it is enforced by means of the imposed consumption of a standard product that only large institutions can provide. ... Radical monopoly is first established by a rearrangement of society for the benefit of those who have access to the larger quanta; then it is enforced by compelling all to consume the minimum quantum in which the output is currently produced....

The goods supplied by a radical monopoly can only be obtained at comparably high expense, requiring the sale of wage labor to pay for them, rather than direct use of one's own labor to supply one's own needs. The effect of radical monopoly is that capital-, credential- and tech-intensive ways of doing things crowd out cheaper and more user-friendly, more libertarian and decentralist, technologies.

The individual becomes increasingly dependent on credentialed professionals, and on unnecessarily complex and expensive gadgets, for all the needs of daily life. She experiences an increased cost of subsistence, owing to the barriers that mandatory credentialing erects against transforming one's labor directly into use-value (Illich's "convivial" production), and the increasing tolls levied by the licensing cartels and other gatekeeper groups.

- The establishment of a radical monopoly happens when people give up their native ability to do what they can do for themselves and each other, in exchange for something "better" that can be done for them only by a major tool. Radical monopoly reflects the industrial institutionalization of values.... It introduces new classes of scarcity and a new device to classify people according to the level of their consumption. This redefinition raises the unit cost of valuable services, differentially rations privileges, restricts access to resources, and makes people dependent.

The result is an increased cost of subsistence. Leopold Kohr observed that “what has actually risen under the impact of the enormously increased production of our time is not so much the standard of living as the level of subsistence.”50 Or as Paul Goodman put it, "decent poverty is almost impossible.”

Expenditures which are not actually necessary for a given standard of living, have nevertheless been rendered artificially necessary by the effect of state policies which promote the crowding out of less expensive by more expensive ways of doing things.

...

Radical monopoly is associated with a crowding-out process, as standard practices gravitate toward where the rents are."


Waste from Subsidized Inputs

"In addition to artificial scarcity rents on unequal exchange, by which workers and consumers pay tribute to the holders of artificial scarcity rents, corporate capitalism also creates inefficiency by allowing firms to waste subsidized production inputs at public expense. This includes the supply of transportation, energy, education, and other production inputs to privileged enterprises below their market costs.

Murray Rothbard described the effects of such subsidies:

- The resources needed to supply the free governmental service are extracted from the rest of production. Payment is made, however, not by users on the basis of their voluntary purchases, but by a coerced levy on the taxpayers. A basic split is thus effected between payment and receipt of service. This split is inherent in all government operations. Many grave consequences follow from the split and from the “free” service as well. As in all cases where price is below the free-market price, an enormous and excessive demand is stimulated for the good, far beyond the supply of service available. Consequently, there will always be “shortages” of the free good, constant complaints of insufficiency, overcrowding, etc.... Free supply not only subsidizes the users at the expense of non-using taxpayers; it also misallocates resources by failing to supply the service where it is most needed. The same is true, to a lesser extent, wherever the price is under the free-market price. On the free market, consumers can dictate the pricing and thereby assure the best allocation of productive resources to supply their wants. In a government enterprise, this cannot be done. Let us take again the case of the free service. Since there is no pricing, and therefore no exclusion of submarginal uses, there is no way that the government, even if it wanted to, could allocate its services to their most important uses and to the most eager buyers. All buyers, all uses, are artificially kept on the same plane. As a result, the most important uses will be slighted. The government is faced with insuperable allocation problems, which it cannot solve even to its own satisfaction. Thus, the government will be confronted with the problem: Should we build a road in place A or place B? There is no rational way whatever by which it can make this decision. It cannot aid the private consumers of the road in the best way. It can decide only according to the whim of the ruling government official, i.e., only if the government officials do the “consuming,” and not the public. If the government wishes to do what is best for the public, it is faced with an impossible task.

Subsidized inputs are closely related to the phenomenon of radical monopoly. They are tied together by Ivan Illich's concept of “counterproductivity.” Illich distinguished the “first watershed” of adopting a technology, in which it has net social benefits, from the “second watershed” beyond which it has negative benefits to society. Beyond the second watershed, the technology becomes counterproductive; society is brought into service to the technology rather than vice versa, and the technology imposes its logic on society".56 Society becomes dominated by radical monopolies.

...

A major part of the economy consists of things which are paid for but produce no value, the moral equivalent of digging holes and filling them in again. Decision makers aim at maximizing net utility, not to society as a whole, but to themselves personally. If their power enables them to shift marginal cost downward relative to benefits, they will consume an input beyond its point of diminishing social utility. The same is true of business firms which decide on the amount of production inputs to consume based on their taxpayer-subsidized cost, rather than their real market cost.

...

Government subsidies to highways and airports, by distorting the cost feedback to users, destroy the link between the amount provided and the amount demanded. The result is an Interstate Highway System that generations congestion faster than it can expand the system to accommodate the congestion. Demand for new roads, expansion of existing roads, and maintenance of already built infrastructure, outstrips the revenue available for those functions. Although highway money is a top priority for the federal and state governments, it remains bottlenecked at any given time. The cost of repairing the most urgent deteriorating roadbeds and bridges is several times greater than the money being appropriated for that purpose.

...

The cumulative effect of subsidized inputs is that massive amounts of waste are built into the basic structure of the economy.

Subsidies to less efficient, input-intensive ways of doing things contribute heavily to radical monopoly. For example, our whole model of urban sprawl and monoculture development is a side effect of subsidized energy and transportation inputs.

...

In a society where transportation and energy were not artificially cheap, new urban development would likely take the form of the pre-automobile railroad suburbs: compact, self-contained new communities with their own commercial centers." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Waste From Mandated Capital Outlays and Overhead

Kevin Carson:

"In addition to crowding out lower-cost alternatives by rendering high-cost means artificially competitive through input subsidies, the state also promotes radical monopoly by mandating capital outlays and overhead costs over and above what is technically required for undertaking production. Laws imposing artificially high capital outlays for market entry have exactly the same effect as making capital artificially scarce and expensive.

At the local level, one of the central functions of so-called "health" and "safety" codes, and occupational licensing, is to prevent people from using idle capacity (or "spare cycles") of tools they already own, and thereby transforming them into capital goods for productive use. Such regulations mandate minimum levels of overhead (for example, by outlawing a restaurant run out of one's own home, and requiring the use of industrial-sized ovens, refrigerators, dishwashers, etc.), so that the only way to service the overhead and remain in business is to engage in large batch production.

You can't do just a few thousand dollars worth of business a year, because the state mandates capital equipment on the scale required for a large-scale business if you engage in the business at all.

- In the absence of licensure, zoning, and other regulations, how many people would start a restaurant today if all they needed was their living room and their kitchen? How many people would start a beauty salon today if all they needed was a chair and some scissors, combs, gels, and so on? How many people would start a taxi service today if all they needed was a car and a cell phone? How many people would start a day care service today if a bunch of working parents could simply get together and pool their resources to pay a few of their number to take care of the children of the rest? These are not the sorts of small businesses that receive SBIR awards; they are the sorts of small businesses that get hammered down by the full strength of the state whenever they dare to make an appearance without threading the lengthy and costly maze of the state’s permission process.

Zoning laws, likewise, criminalize low-overhead enterprise by compelling the microentrepreneur to pay expensive rents on a free-standing building in the commercial district instead of operating out of her home. The rent, like capital outlays for mandated industrial-sized equipment, can only be amortized by large batch production.

Another example is the building codes, which criminalize self-built housing using cheap alternative construction techniques and the use of vernacular materials (earthships, papercrete, cob houses, rammed earth, etc.). Perhaps more importantly, they insulate incumbent contractors from competition by such techniques, and remove the competitive pressure to adopt lower cost methods. The effect is to inflate the cost of subsistence and create an overhead cost of daily living that can only be amortized by a large revenue stream—creating, it follows, a strong pressure for increased wage labor.

In the building trades, according to Illich the entry barrier enjoyed by licensed contractors "reduces and cancels opportunities for the otherwise much more efficient self-builder." Construction codes prevent most self-building, and drive the cost of professionally built housing to excessive levels.66 Socalled "safety" regulations prohibit simpler and more user-friendly technologies that might be safely managed by an intelligent layman, instead mandating more complex technologies that can only be safely handled by licensed professionals. The system selects against simple technologies that can be safely controlled, and in favor of complex technologies that can only be safely wielded by a priesthood. For example, self-built housing in Massachusetts fell from around a third of all singlefamily houses to 11%, between 1945 and 1970. But by 1970 the feasible self-building technologies could have been far safer and more user-friendly than in 1940, had not the building trades actively suppressed them.

Illich elaborated in greater detail on both the potentially feasible convivial building technologies, and the measures taken to suppress them, in the case of the "vast tracts of self-built favelas, barriadas, or poblaciones" surrounding major Latin American cities." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Accounting Systems and Broken Windows

Kevin Carson:

"A large share of what's conventionally counted as “output” consists of waste production. Many areas of our national life are governed by accounting systems that count the consumption of inputs as an output.

For example, economists' calculation of the Gross Domestic Product is a textbook illustration of the "broken window fallacy." That fallacy, according to Frédéric Bastiat, is the belief that a broke window is good because it creates work and revenue for the glaziers. True, said Bastiat, it employ glaziers. But that does not mean that the breaking of windows is a good thing; the owner of the broke window simply spends money to wind up in the same state that he would have been for free had the window not been broken at all. "Society loses the value of objects unnecessarily destroyed....”

As the authors of Natural Capitalism point out, anything that involves an expenditure of money adds to the GDP.

Jonathan Rowe writes:

The GDP is simply a gross measure of market activity, of money changing hands. It makes no distinction whatsoever between the desirable and the undesirable, or costs and gain. On top of that, it looks only at the portion of reality that economists choose to acknowledge—the part involved in monetary transactions. The crucial economic functions performed in the household and volunteer sectors go entirely unreckoned. As a result the GDP not only masks the breakdown of the social structure and the natural habitats upon which the economy—and life itself—ultimately depend; worse, it portrays such breakdown as economic gain.

...

The internal accounting mechanism of the large corporation is similar to that entailed in calculating GDP, in that it counts expenditure on inputs as the creation of wealth. Given the pervasiveness of stat cartelization, a major share of the economy is made up of oligopoly markets dominated by a handful o firms. Because oligopoly firms tend to be “price-givers” rather than “price-takers,” and to be able t pass their costs on as a markup to the consumer via administered pricing, they are largely insulated from competitive pressure for minimizing costs.

The dominant firms in an oligopoly market usually have similar internal cultures in most regards, and are likely to follow the same “best practices.” Many such aspects of their business models aren't matters for competition, because they are based on the same set of unquestioned assumptions common to the institutional culture of the entire industry.

Large corporations are also frequently isolated from pressures to minimize costs because of the superfluity of capital available for investment. Large corporations are rarely dependent either on new stock issues or capital markets to finance new investment, choosing instead to finance expansion of capacity or upgrades of plant and equipment through retained earnings. But as Martin Hellwig pointed out, far from serving as a constraint or imposing the need to ration investment, the value of retained earnings often exceeds the total value of opportunities for rational investment.Under such circumstances, the firm may well overinvest or be prodigal in the use of its funds for the sake of internal empire-building, rather than issue the surplus as dividends.

As with GDP calculations, Robin Marris wrote, the bureaucratic culture of the corporation is likely to divert emphasis from the character of the goods and services produced to the skill with which these activities are organized.... The concept of consumer need disappears, and the only question of interest... is whether a sufficient number of consumers, irrespective of their "real need" can be persuaded to buy [a proposed new product]."

The result, as in the calculational chaos of the old Soviet Union, is not that technical progress stop or that production of a kind takes place, but that enormous sums are spent on capital outlays with n reliable way of knowing whether the expenditure was worth it. The large corporation is riddled with the same irrationality and uneven development that plagued the USSR.

The dominant corporate accounting model results, to a large extent, from the imperatives of mass production. The mass production industrial model is based on using extremely expensive, product specific capital equipment, which in turn requires large batch production to run the machinery at full speed and spread capital amortization costs out over as many units as possible. This means that production is undertaken for the primary purpose of fully utilizing productive capacity and achieving economies of speed, without regard to spontaneous, preexisting demand. The accounting system used within the typical large corporation reflects this requirement." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


Internal Waste in the Production Process

"The internal culture of cost-plus markup and lack of cost-minimizing incentives in the typical corporation results in pathological levels of waste production. The Sloanist approach, “batch-and queue thinking,” entails (as the authors of Natural Capitalism put it) optimizing each step of the production process in isolation, “thereby pessimizing the entire system.”

The normal Sloanist approach is to adopt the highest-speed, most specialized form of machinery at each individual step of the production process, and then minimize the unit costs of that step by running the machinery at full speed regardless of whether there's a need for it at the next step, and then fill up the warehouse with finished goods without regard to whether there are orders for them. Under the Sloan system, if a machine can be run at a certain speed, it must be run at that speed to maximize efficiency. And the only way to increase efficiency is to increase the speed at which individual machines can be run.

American factories frequently have warehouses filled with millions of dollars worth of obsolete inventory, which is still there “to avoid having to reduce profits this quarter by writing it off.” When the corporation finally does have to adjust to reality, the result is costly write-downs of inventory.

- It did not take much of a mathematician to figure out that, if all you really care about is the cost of performing one operation to a part, and you were allowed to make money by doing that single operation as cheaply as possible and then calling the partially complete product an asset, it would be cheaper to make them a bunch at a time. .. It stood to reason that spreading set-up costs over many parts was cheaper than having to set-up for just a few even if it meant making more parts than you needed for a long time. It also made sense, if you could make enough parts all at once, to just make them cheaply, and then sort out the bad ones later. Across the board, batches became the norm because the direct cost of batches was cheap and they could be immediately turned into money—at least as far as Mr. DuPont was concerned—by classifying them as work-in-process inventory.

The Sloan system focuses, exclusively, on labor savings "perceived to be attainable only through faster machines. Never mind that faster machines build inventory faster, as well." A machine can reduce the labor cost of one step by running at enormous speeds, and yet be out of sync with the overall process.

Large batch operations are completely out of scale to the production process as a whole, and the process isn't geared to actual demand.

The large corporation exists in an external economic environment of restricted competition, with reduced pressures for efficiency. Its internal incentive structure is governed primarily by bureaucratic empire-building and managerial self-dealing rather than traditional market standards of efficiency. To the extent that there are pressures for cost cutting at all, they are skewed by a management accounting system that (as we saw above) exempts senior management salaries and new capital expenditures from the category of costs, and an incentive structure that encourages hollowing out long-term productivity for the sake of making the short-term numbers.

Coupled with an insulation from competitive pressure to minimize costs, the general environment of centralization, irrationality and stove-piping results in an enormous waste of inputs from poor product and systems design.

One example is the lack of whole-systems thinking” in product design, as well as the design of production processes. Sloanist management accounting tends to cost components in isolation and maximize the efficiency of each stage of production in isolation, even when the effect of the separate “cheaper” components and processes working in combination is an increase in overall costs. Optimizing components in isolation tends to pessimize the whole system—and hence the bottom line. You can actually make a system less efficient while making each of its parts more efficient, simply by not properly linking up those components. If they're not designed to work with one another, they'll tend to work against one another.

Stovepiped corporate bureaucracies are apt to follow a design process where each part of a system is designed in isolation by someone whose relation to the whole is mediated by a bureaucratic hierarchy. In building design, this is the process in which each design specialist “tosses the drawings over the transom” to the next specialist, and all the individual specialists' designs are eventually “integrated, sometimes simply by using a stapler.”

This approach inevitably results in higher costs, because increased efficiencies of a single step taken in isolation generally are governed by a law of increased costs and diminishing returns. Thicker insulation, better windows, etc., cost more than their conventional counterparts. Lighter materials and more efficient engines for a car, similarly, cost more than conventional components. So optimizing the efficiency of each step in isolation follows a rising cost curve, with each marginal improvement in efficiency of the step costing more than the last.

...

The organizational style of cost-plus permeates not only the whole range of large organizations, but comes to contaminate even smaller organizations. Never mind that “status salaries and expense accounts are equally prevalent, excessive administration and overhead are often more prevalent, and there is less pressure to trim costs”123 in GM or in the Red Cross and United Way. Even a local credit union or a natural foods co-op with a few dozen employees is apt to have a Mission Statement, a complex of rules second-guessing the judgment (and hence hampering the productivity) of those actually engaged in the work, and a comparatively high-salaried CEO whose resume is padded with a long list of the previous credit unions or co-ops where she busily absorbed the conventional organizational culture before she arrived with carpetbags at her present position." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)


External Waste from Marketing and Planned Obsolescence

Kevin Carson:

"The imperative of running machinery at full speed, without regard to demand, results in all kinds of waste within the production process. Maximizing the output of each individual machine without regard to downstream demand results in enormous stocks of in-process inventory. Maximizing the output of the factory as a whole, by undertaking production that's not driven by orders, results in warehouses full of inventory. And the Sloanist accounting system, by counting the consumption of inputs as the creation of imaginary “value” to be sold to inventory, provides the same perverse cost-maximizing incentives that prevail among Pentagon contractors and public utilities.

But the same imperative also results in enormous wastes in society at large. Undertaking production to maximize the utilization of capacity, without regard to preexisting demand, requires the costly exertion of power over external society to guarantee a market for what is produced. The result is a “supply-push” distribution model, in which the costs of distribution and marketing rise astronomically compared to the costs of production.

Ralph Borsodi's book The Distribution Age was an elaboration of the fact that, as he stated in the Preface, production costs fell by perhaps a fifth between 1870 and 1920, even as the cost of marketing and distribution nearly tripled.124 The modest reduction in unit production cost was more than offset by the increased costs of distribution and high-pressure marketing.

...

Supply-push distribution and high-pressure marketing carry enormous costs. According to Borsodi, over a couple of decades around the turn of the 20th century the majority of groceries bought by consumers shifted from bulk commodities to packaged brand-name goods. Before the change, almost all flour, oatmeal, and the like were generic; production was driven by retailers' orders, as they depleted their storage bins in response to spontaneous customer demand.126 The only real marketing cost, by the producers of bulk commodities, was in convincing grocers that they sold a better grade of the commodity than their competitors. There was no direct marketing to the consumer, as with brand-name goods; the customer simply decided how much flour she needed and asked the grocer for it.

Under the new "push" system, the producers appealed directly to the consumer through brand-name advertising, and relied on pressure on the grocer to create demand for what they chose to produce. Brand loyalty helps to stabilize demand for a particular manufacturer's product, and eliminate the fluctuation of demand that accompanies price competition in pure commodities.

...

For those whose low overhead permits them to produce in response to consumer demand, marketing is relatively cheap. Rather than expending enormous effort to make people buy their product, they can just fill the orders that come in. When demand for the product must be created, the effort (to repeat Borsodi's metaphor) is comparable to that of making water run uphill. Mass advertising is only a small part of it. Even more costly is direct mail advertising and door-to-door canvassing by salesmen to pressure grocers in a new market to stock one's goods, and canvassing of grocers themselves by sales reps. The costs of advertising, packaging, brand differentiation, etc., are all costs of overcoming sales resistance that only exist because production is divorced from demand rather than driven by it.

Douglas Dowd, chronicling (as we saw above) the expenditure of resources on distribution and marketing since Borsodi's time, points to an immensity of accumulated waste. This is especially true of the wastes associated with push distribution: planned obsolescence, excessive marketing costs, brand-name markups, etc ...

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Planned obsolescence often severely shortens product lifetime with no appreciable reduction in product cost. Products are deliberately designed to thwart repair and encourage re placement, often relying on "intellectual property" to restrict access to replacement parts.

The amount of wasted resources and crystallized labor embodied in the mushrooming cost of marketing, the “warehouses on wheels,” and the mountains of discarded goods in the landfills that could have been repaired for a tiny fraction of the cost of replacing them, easily outweigh the savings in unit costs from mass production itself. The cost savings from mass production are more than offset by the costs of mass distribution." (http://c4ss.org/wp-content/uploads/2010/12/Political-Economy-of-Waste.pdf)

More Information

  1. Artificial Property Rights
  2. Counterproductivity
  3. Credentialism as a Radical Monopoly
  4. Cost Plus