The Bug in 'Just-in-Time' Economics

Those who brought us the Financial Implosion have set the stage for another, potentially even worse calamity. We must act to prevent a similar disaster in the Real Economy — that could affect manufacturing, commerce and possibly survival — exacerbated by a dangerous over-reliance on "just in time" economics.

I refer to a brittle weakness, courtesy of the same smartaleck caste of MBAs who brought us derivatives and hyper-leveraged finance. A frailty that could, potentially, turn some short-term crisis into full-scale disaster — and all because of a good theory that's been taken way too far. Another trick of "optimization."

For decades, we've been told — by the same fellows who brought us "efficient finance" — that manufacturing and commerce should be fine-tuned to squeeze every penny of profit, by trimming away all "fat." Industries that hew close to the teachings of W. Edwards Deming and Toyota's Taichi Ohno require that their suppliers deliver parts and raw materials at the precise moment when they are needed. Under this principle, any reserves that are kept on-premises will only encourage sloppy management and incur unnecessary storage costs — a calculation that has long been exacerbated by shortsighted tax policies that punish warehousing and inventory-keeping.

This approach, called "Just In Time" is based upon the very same postulate that led the business-major types to bet our economic farm on arcane financial instruments, leading to catastrophic failure in 2007 and 2008, in a wholly unjustified wager that the economy and its supporting systems will always remain stable and never experience disruption.

Of course, this was just another expression of the basic concept underlying America's vaunted way-of-life — thinking only for today, spending all we had, with the lowest savings rate in the industrial world, while assuming tomorrow will always be kind. The freighters will keep bustling into our ports while foreigners continue to buy our debts. Trucks and trains will keep delivering everything where it needs to go, with perfect, computer-controlled precision.

Our ancestors' age-old wisdom of putting a little aside for just-in-case robustness has been replaced by a delusion of just-in-time efficiency, based on a belief in perfectly reliable global interdependence. But, in real life, animals — even efficient ones — carry fat reserves. Surprises and disruptions happen. And when they do, we worry less about tweaking widgets-per-second and more about survival.

For the record, and lest anyone misconstrue, I actually have a great deal of respect for W. Edwards Deming and the first-order effects that his teachings had on industrial practice, not only in 1950s Japan, where he was pivotal in rebuilding that shattered nation into a prosperous economic powerhouse, but everywhere that Just in Time and related notions had positive effects, introducing tight discipline into management. For example, when Toyota eliminated on-site parts overstocks, they exposed countless inefficiencies in production that would have been overlooked, if employees could just reach over and grab replacements from a big pile. I'll be the last to deny the benefits that spartan efficiency have brought to industry and commerce. Nor does my praise of the warehouse overlook the fact that inventories do incur an inherent cost.

Nevertheless, any good thing can be taken obsessively too far, especially when a conflict arises between corporate profit and the common good. It is the job of the state to ensure that robustness and resiliency are desiderata that are included in the mix. Rules and market forces can be tweaked that encourage a balance.

Earlier, I said that Just In Time was transformed from a sensible approach to enhancing quality and efficiency into something similar — at root — to the manic excesses of leveraged gambling that have wreaked ruin in the world of finance. Deming-style industrial practices, when followed obsessively, fall into what's called "success dependent planning" — or fine tuning everything based upon an assumption that all eventualities have already been taken into account. As Nobelist F. Hayek clearly demonstrated — and as the current financial meltdown demonstrates — that notion can be carried over a cliff into pure (and self-destructive) delusion.

NASA got into a lot of trouble trying to use success-dependent planning. Boeing's current troubles delivering their 787 Dreamliner — two years behind schedule because of failures in parts delivery, can be attributed in no small measure to this philosophy. And when success-based assumptions are made by armed forces (as today's U.S. military shows many signs of doing), there is a sequence of events that will follow, as inevitable as sunset follows sunrise: Surprise, dismay and finally defeat.

James Fallows of The Atlantic has been pondering similar thoughts about how efficiency can be the enemy of resiliency, and quoted the following bullet point from the recent Boyd 2008 conference:

The search for efficiency and the urge to consume has set us all up like a row of dominoes — there is no buffer, no resiliency. As one problem rises it causes another. As one solution is tried it drives another problem. We all pull back and the consumer economy stalls. The auto industry and credit firms feeds the media (40% of conventional advertising). Papers and TV and Radio networks, many subject to LBO's, will have to fail as per the Tribune. Every sector will be laying people off. Sales of all things fall off a cliff — driving more business failures and layoffs. Cities and states that depend on sales tax and property tax and the credit markets can rely on none of these. So they too will have to lay off millions — thus making all the problems worse. National governments will be asked to save us all and of course cannot. As States and Cities get squeezed and cannot borrow, they will too lay off millions — teachers, firemen police. No one will be safe.

The theme of robustness and resiliency extends far beyond either manufacturing or finance. It is inherent also in areas like Homeland Security, wherein the emphasis of several hundred billions of dollars has been to expensively equip a vast Professional Protector Caste and prepare them to staunch threats. What threats? Why, the ones they anticipate, of course. Oh. In other words, precisely the sort of "we know what we're doing" thinking that was extant before 9/11, before Katrina, before the brainiacs in the financial sector were proved to be self-deceiving morons.

Look, I have nothing against the professionals. But they live imbued in a kind of madness, believing for even a minute that they can protect us by anticipating every contingency. And meanwhile, barely a hundredth of a cent on the dollar has been spent on citizen and community-level resiliency. The one thing that worked on 9/11. The one thing that was thwarted during Katrina. The one thing that might someday save us.

Let's go back to the example of tax laws that punish warehousing and inventory keeping. These are nothing less than inducements for fragility. If such disincentives were removed, even reversed, good managers might feel more ready to stockpile a little. Perhaps even enough supplies to keep their enterprises going for a while, say, during an unexpected ice storm, or if terrorists toppled a few of our vulnerable, chokepoint bridges. Or if any of ten thousand other things broke down, in our humming national and international grid.

Moreover — and here's a little bonus that's highly relevant during a recession — in the short term, just filling such expanded inventories could add to national demand, providing a little more economic stimulus at a critical time. By rewarding companies for investing in inventory, we might also foster a self-fulfilling expectation that good times will return.

Or take this from a slightly different point of view: in a recession inventory buildups occur anyway, so why should hard-pressed companies stuck with overstocks be hammered with a punitive tax? Either way you look at it, this is not wise policy. This, alone, might justify innovating ways to ease back from just in-time thinking. The Obama Administration should make a relaxation of the inventory tax part of any business-oriented tax relief package.

Even more convincing is the robustness argument. A modicum of warehoused supplies could someday make a crucial difference. And this applies not only to industrial supplies, but to the food and other vital consumables that the people of a city might need, if they found themselves cut off for a while. The ancient Egyptians knew this. The puritans did too. Anybody with a gram of wisdom does, especially if they accept that we still live in dangerous times.

Above all, this is the opposite of what the MBA caste wants us to do. And, nowadays, what better sign could there be, that an idea is worth looking-at?

THE END