Is a deflationary economy a bad thing? Not from a lean perspective
The United States has created levels of wealth well beyond any other civilization in history. Yet, much further potential is sitting right under our nose. This potential lies in lean thinking; that is, the lean business model. Applying the lean business model across the board would lead to immense productivity improvements and create an environment of deflation (a deflationary economy) and very significant wealth creation. This situation would replicate the near-zero inflationary period the United States benefited from during its first 135 years.
From a historic view in the United States, inflation was and remained very small throughout the first century of our country’s existence - even up until around 1910. During this same time, income increased substantially as the country industrialized from both an agricultural and manufacturing standpoint. Much of this was driven during the Industrial Revolution, which significantly increased manufacturing output, but also greatly improved agriculture output and efficiencies due to much improved distribution networks and the ongoing mechanization of the agriculture industry.
During this part of our country’s history, we benefited from what I term quasi-deflation; that is, while prices did not necessarily decrease, they did increase at a dramatically low level over the course of many years (in fact, decades), while income that Americans earned increased substantially.
While deflation is typically viewed in trepidation, deflation has in our past - and can be in our future - a truly beneficial function. Another view of deflation can be terming it as price stability, enhanced buying power and value-adding.
Deflation can be defined two ways. The first definition is a decrease in the overall price of goods and services. The second definition, considered classical economics, refers to a decrease in the money supply and credit. For this discussion, the context of the first definition, a decrease in the overall price of goods and services, will be used.
Applying lean is about removing waste from the system; and by removing waste, work-in-process decreases, productivity increases, lead times decrease, quality improves, and on and on.
To summarize, lean reduces the cost of any product or service by eliminating waste in the development, production and distribution of these products or services - that is; it reduces cost (notwithstanding the cultural impact and change that must go hand-in-hand with the cost improvement aspect). So with all things equal, if costs of all products and services decrease via the lean business model, that would, in turn, drive prices down over time as well.
We currently have many products and services that actually do follow this model from a deflationary standpoint. For example, electronics are in a constant state of price decrease; all the while, their performance, features and quality are improving. Think of the price of iPods, HD TVs, cell phones and the like. The prices on these products, in many cases, drop on a monthly - sometimes weekly - basis. Obviously, improved technology is what drives price reduction in this case combined with free-market competition. But could not any product have the same pattern if lean is applied - perhaps not as drastic of a reduction in price or over such a short timeframe - but there is no reason that eliminating waste (costs) over time in a competitive free-market could not have the same effect.
And, as mentioned above, our own history has shown that it can and has happened. Anyone who has been involved with a deep implementation of a lean business model understands the magnitude of waste that infects all business - be it manufacturing, service, government, design or distribution. For as much as we, as a nation, have yet to create, we near equally have yet to improve.
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Filed Under: Featured, Lean Manufacturing | Tags: business management, change management, Lean Manufacturing, quality
