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Chapter 2 - page 2

Becoming super-efficient

Whatever Professor Nordhaus might think, agriculture, forestry, fishing, quarrying and mining are primary activities which support everything else. A geography teacher I once had at school explained it roughly like this: 'At one time most people were farmers. As their knowledge and skill increased from generation to generation, they were able to produce more food and raw materials than they needed for themselves and this surplus was available to support an increasing number of people in other activities, including crafts, religion, the military and government. Gradually, a pyramid-shaped social and economic structure developed, with the broad mass of the people involved in agriculture or mining at its base, a manufacturing or crafts sector employing a smaller number of people above them, a still smaller professional, military, religious and administrative caste higher still, with the apex made up of the monarch and the nobility.'

That was where my teacher left his analysis but we can take the story on. By 1800, as a result of the increases in productivity brought about by the Industrial and Agricultural Revolutions, the British economy was no longer shaped like a pyramid. Roughly equal numbers of people were engaged in the primary, manufacturing and service sectors, making it more like a square 2.Graph 2.1: The world turned upside down Now, two hundred years later, we are back to the pyramid again, only this time it is inverted, since only a tiny number of people - just 3.2% of the working population in England, for example - is involved in primary production and the manufacturing sector itself is shrinking too: in England there was a 17.6% fall, from 28.9% to 23.8% of the employed workforce, between 1981 and 1989. The service sector will probably offer fewer jobs in the future, too, (see panel) while the number of people who are involuntarily jobless has grown.

Service sector jobs may be in decline (click for panel from original book)

The whole modern economic structure is therefore supported on a tiny primary-sector employment base. However, everyone not involved in primary production still needs food and raw materials from it to survive and, somehow or other, must acquire the right to tap into the supply line to siphon their requirements off. There are many ways they can do this. They can sell goods and services to the primary producers themselves, or to others who provide primary producers with such goods and services or to yet others who, directly or indirectly, perhaps at three or four removes, are involved in the processing or distribution chain. People who are unable to supply such goods and services because they are too young, unemployed, sick, or too old must buy their primary supplies with income transferred from people who are.

As the number of people involved in primary production shrinks because of improvements in productivity or imports from overseas, those displaced from the sector must find places for themselves further up. More and more people have to stand on the remaining primary producers' shoulders, balancing themselves and supporting others above them in ways that become increasingly complex. Each person tries to make their activity an inescapable part of some branch of the lengthening and increasingly complex food chain. As a result, the margin between the price the primary producer receives for his product and the price the ordinary consumer pays for it has to grow continually to support the increasing number of intermediaries in the system and the people who depend on them, directly and indirectly.

For example, in British agriculture, 2% of the working population produces just over half the country's food in expenditure terms, the rest being imported. If the foreign farmers have the same labour productivity as the British, this means that it takes four farmers to support 96 non-farmers, that is, the ratio of farmers to others is 1:24. Assuming that farmers earn much the same after-tax income as the rest of the population, an average of only a 24th of each non-farmer's after-tax income, that is, 4%, will find its way into the farmer's personal bank account. Since roughly a fifth of people's after-tax earnings is spent on food, this means that only around 20% (4% divided by a fifth) of the average food purchase is left with the farmer, the rest going to shopkeepers, manufacturers and other intermediaries in the food chain or to firms which supplied him or her with machinery, fertilisers and other inputs. In other words, roughly 80% of food spending goes to non-farmers to provide incomes and pay taxes so that everyone can tap into the food supply line.

Two things can be said about this. One is that the 80% estimate gives some idea of the scope for creating incomes in our communities by eliminating inputs and services provided from outside. The other is that if we force the present food production and distribution system - or any other part of the industrial economy - to become more competitive, we will destroy some of the ways in which people support themselves and others in the inverted human pyramid. Those dislodged will either find some other way to stay up there or drop off altogether by emigrating, committing suicide, or dying prematurely, as some unemployed people do , from stress and despair4. The unemployed are, of course, still up in the pyramid, supported by the rest of the community through its taxes. Analytically, they are a sub-set of the service sector which provides no paid services in return for the primary products they consume. Achieving increased competitiveness by means which increase unemployment simply shifts people from a place in the pyramid where they have an economic role to one in which they do not. Individual firms gain from the shift because the cost of supporting the people involved is moved from the companies' shoulders to those of the nation as a whole. Apart from the companies' shareholders, everyone loses out.

It is not only in primary production that the necessity to support increasing numbers of people at higher levels of the pyramid has widened the gap between what producers get for their products and the price the consumer pays. Exactly the same has happened in manufacturing. Consumer electronics and domestic appliance retailers frequently take a 100% margin while British clothing chainstores and mail order houses generally work on retail mark-ups of 150 to 200%. "Their margins have been high for as long as I've been in business" says a friend who runs his own clothing company. "In the last ten years, however, they have been sourcing from further afield, using the lower prices to increase their margins while keeping the price to the customer down."

These large and increasing margins in highly competitive markets mean that the industrial system's long and elaborate distribution network is forced to charge as much or more for getting products to the consumer than those products cost to make. These distribution networks are the reason I referred to the reputed efficiency of the modern economic system as a grotesque myth. They are the industrial system's weak spot and a key area for attack in any effort to increase local self-reliance. If a local firm or farm has higher production costs than an external one but can short circuit the normal methods of distribution by selling more directly to local consumers, the savings it should be able to make by avoiding the network's 150% mark-ups ought to be more than enough to enable it to survive. However, if local producers distribute their products over a wide area through normal channels, they will acquire their external competitors' cost structure and, if they lack any other advantage, almost certainly fail. Short circuiting as much as possible of the external pyramid by selling direct is therefore the key way to open up a wider range of profitable local production possibilities.

Cutting labour costs

The two other ways by which small, local producers can come to compete on price with larger outside firms are almost as powerful as selling direct. They involve the community stepping in to lower the labour and capital costs of community firms. Let's look at labour costs first.

Workers all over the world are being asked to accept lower wages as an alternative to losing their jobs: can we ask people in our communities to accept lower wages in order to create them? The first thing which we need to recognise is that there is an important difference between the two situations. If workers accept less pay from a firm which is selling internationally, there is a very real danger that their sacrifice will compel workers elsewhere to accept lower wages too and thus initiate a world-wide bout of competitive wage-cutting which impoverishes employees and leaves only those consumers whose incomes have not been cut as beneficiaries.

For example, in 1992, Waterford Crystal made some of its workers redundant, forced the remainder to take a 25% wage cut and began importing cheaper cut glass items from eastern Europe. This left its smaller Irish rivals with no option but to cut wages too. "Prices in the market have reduced and if you reduce prices you have to reduce your costs. We must maintain our relative position in the market place" the managing director of Cavan Crystal, Brian Williams, told The Irish Times , explaining why the company was seeking a 15% wage cut after its best trading year for some time. "Galway Crystal's workers have accepted a wage cut of 20%" Mr. Williams added. A fourth firm, Tipperary Crystal, was also said to be negotiating cuts5.

From an economic point of view, all that this type of wage-cutting does is to shift the world supply curve for the particular product upwards, making more available at any given price while shifting the demand curve down because of the consumption effects of the lower wages. These consumption effects are often ignored: during the debate in the US on the North American Free Trade Agreement (NAFTA) and the Uruguay GATT round, pro-free-trade commentators frequently argued that poor Americans would suffer badly if imports of cheap shoes and clothing were restricted in order to protect domestic manufacturers. What the campaigners failed to ask themselves, however, was who made the clothes and footwear in the American factories and how their purchasing power would be affected if their jobs disappeared.

If a firm sells internationally, the purchasing power the workers give up by agreeing to take less pay gets distributed to consumers across the globe and there is no way of ensuring that any of it will return to the communities from which it came. By contrast, if a group of unemployed people decides to set up a co-op producing goods for sale in their community and pays themselves less than the normal rate, all the benefits of their decision stay within the area. No wealth has been lost. Instead, it has been created to the extent that goods or services are being produced where none were produced before. Moreover, there is no risk of setting off a chain of mutually-destructive wage cuts across the world. Lower wages should therefore be resisted as a method of creating or preserving jobs unless all the goods or services to be produced by the enterprise will be sold within the area where it is located.

But if we agree to accept less than the going rate from a local company whose market is entirely local, we should seek more satisfying work in return. All of us already quote different wage rates on something approaching a local-versus-international basis. For example, when we paint a bedroom at home, we don't charge the family for doing so: we get our reward in other ways. It is the same when we make up costumes for a local dramatic society play - we do it, not for money (in fact, the chances are we'll end up out of pocket) - but because we like being involved. On the other hand, we would never dream of accepting a consultancy contract from an international bank for anything less than the maximum we could negotiate for it.

Both the house painting and the theatrical costume-making represent one end of a money-to-satisfaction continuum on which most of us operate: they provide absolutely no cash but a great deal of the two forms of satisfaction every normal person craves, one of which stems from successfully tackling an interesting and worthwhile project and the other from being appreciated. The bank job represents the other end of the continuum, delivering a lot of cash and a limited amount of either form of satisfaction because no-one outside the bank (and probably within it) will show any gratitude if one fulfils the contract successfully and there is a fair chance that the high income it brings will arouse envy amongst one's friends.

This trade-off between wages and satisfaction is highly complex, particularly as money can be the least important thing that people get from a job. Indeed, being paid for doing something can sometimes damage the satisfaction the activity brings. In a goldmine of a book, The Market Experience6 , Professor Emeritus Robert E Lane of Yale University describes an experiment in which students were paid to do a boring task and got more pleasure from it than a control group which was unpaid. However, when another batch of students was paid to do interesting work, they found it less rewarding than those who had done the same task for nothing. In fact, the paid group doing the interesting job got even less enjoyment than those who had been happy to do the boring task unpaid because they thought it was useful. In another test, unpaid volunteers showed more commitment than paid workers: they were more likely to continue with their tasks when their supervisors left the room.

Lane quotes from a study by F. Thomas Juster which shows that, almost regardless of the nature of their work or their social class, people prefer their jobs to most of their leisure activities. Lane continues:

People do not work for 'nothing' but what they do work for is often not just the pay they receive..... They may work because meeting the challenges of work increases their sense of personal control, or out of a sense of duty, or because of a pressing need to achieve some high standard of excellence. [Whatever] their motives may be, people evade the market's focus on exchange, for these motives are satisfied by internal rewards that do not depend upon exchanging money for work.

In my view, the internal rewards Lane mentions are best provided by firms owned and controlled by those working in them which see their role as serving their communities and work not only a source of income but one of the main ways people fulfil themselves. I also think that unless we can construct environments which foster such firms, cut-throat international competition will ensure that in a few years' time, highly-paid jobs will be available only to a fortunate few and that the choice for many of the rest of us will be between unemployment and a low-paid job in a large, highly-pressurised firm scrambling for its place in the world market, a firm to which we can rarely make an individual contribution and matter as people not at all.

If I am right, taking a lower cash wage to work in a peasant-economy firm may turn out in the end not to involve any sacrifice at all. Indeed, in spite of all I have said, these firms may well be able to survive and prosper without paying lower wages than international ones particularly if the worker/shareholders accept part of their pay in a local currency. This is a possibility we will explore in a later chapter.

Cutting capital costs

Local firms can also be helped to match external competitors on price if they have access to capital at low interest rates, or, better yet, no interest at all. This is easier to arrange than it might seem: it is largely a matter of enabling firms to avoid borrowing from the high-street banks using techniques explored in detail in Chapters Three and Four. One method involves the community creating its own currency which it can lend to companies at very low cost to spend instead of national currency within the local area. This is already being done in Switzerland where, for the past sixty years, small and medium-sized firms have been able to avoid borrowing large sums of working capital from their banks by creating it amongst themselves. They pay no interest, just a small service charge to keep their mutually-owned system running. Their system is explained in a panel in Chapter 3.

Even when a firm has to have a national currency loan, it should not have to come from a non-local bank. This is because the difference between the rate of interest national or international banking groups offer community savers and the rate they charge community borrowers is often excessive and always drains resources from the area. In 1994, for example, Irish savers received between 0.25% and 0.75% interest on deposits of less than 5,000 at a time when small businesses were paying up to 10.95% for their overdrafts. Much of this margin of over 10% could have been eliminated if local savings had been channelled to local enterprises through community savings and loan institutions especially if, as in many credit unions, a large part of the work involved was done on an unpaid, volunteer basis.

In fact, community bank interest rates can be very low indeed as many people are happy to waive their interest altogether in order to help local projects and, as a result, businesspeople in Denmark have been able to obtain interest-free loans from local co-operative banks for an annual 2% service charge. Details of this are described in a panel in Chapter 4.

Our key production processes need to be run entirely without inputs from the world system.

If we are trying to build a local economy because we can no longer rely on the world system, our new economy needs to be independent of the world system at every step. For example, it makes little sense to replace external food supplies by using agricultural techniques which lead to crop failure if fertilisers or sprays cannot be brought in from outside. That is just exchanging one form of dependence for another and Murphy's Law predicts that, if we took such a route, the price of agrochemicals would go through the roof. Airliners are built with at least one completely independent back-up to every important system and our economies should be the same.

In the recent past local economies had back-up because, as transport systems improved, it became increasingly possible for communities to turn to the outside world whenever their crops failed or some other disaster happened. Localised famines became much less frequent. Now, however, the easy availability of goods from outside has all but eliminated local production for local use and the back-up has become not just the main system but, effectively, the only one. Worse, this sole system now has very little back up within itself because the giant corporations which control so much of world trade deliberately eliminated spare capacity and duplications whenever they took over firms which had built up the trade.

Not all the components of the world system are equally unreliable, of course, but since they are interlinked, a failure in one is bound to have knock-on effects on the others, distorting their price or affecting their availability. There is therefore no alternative to eventually duplicating them all. Nevertheless, it obviously makes sense to give priority to building alternatives to those parts of the world system where the risks are highest. This is undoubtedly the financial system which could break down completely at any time, as the panel explains.

Japanese banks could cause financial meltdown (Click for panel from original book)

A community wishing to minimise the hardships it would suffer if the world financial system collapsed should obviously make monetary independence its first priority. A currency and banking system which can continue to serve a particular area regardless of whatever financial convulsions take place outside that area is fundamental to the construction of a self-reliant local economy, particularly as it also creates an environment within which other aspects of self-reliance can be achieved more readily. Chapters Three and Four describe how such community currency and banking systems can be built.

Page 3 of Chapter 2

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Short Circuit by Richard Douthwaite: links within this site

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
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