Homebrew Industrial Revolution, Chapter Two: Moloch–The Anatomy of Sloanist Mass Production (first excerpt)

[Michel Bauwens has kindly invited me to serialize excerpts from my forthcoming book The Homebrew Industrial Revolution: A Low-Overhead Manifesto. Over the next several weeks, I will post two excerpts from each chapter (one excerpt a week).]

The mass-production model carried some strong imperatives: first, it required large-batch production, running the enormously expensive product-specific machinery at full capacity, to minimize unit costs (in Amory Lovins’ words, “ever-faster once-through flow of materials from depletion to pollution” [Natural Capitalism]); and second, it required social control and predictability to ensure that the output would be consumed, lest growing inventories and glutted markets cause the wheels of industry to stop turning. Utilize capacity, utilize capacity, that is Moses and the prophets….

As described by Michael Piore and Charles Sabel [The Second Industrial Divide], the problem was that product-specific resources could not be reallocated when the market shifted; under such conditions, the cost of market unpredictability was unacceptably high. Markets for the output of mass-production industry had to be guaranteed because highly specialized machinery could not be reallocated to other uses with changes in demand. “A piece of modern machinery dedicated to the production of a single part cannot be turned to another use, no matter how low the price of that part falls, or how high the price of other goods rises.”

Mass production required large investments in highly specialized equipment and narrowly trained workers. In the language of manufacturing, these resources were “dedicated”: suited to the manufacture of a particular product—often, in fact, to just one make or model. When the market for that particular product declined, the resources had no place to go. Mass production was therefore profitable only with markets that were large enough to absorb an enormous output of a single, standardized commodity, and stable enough to keep the resources involved in the production of that commodity continuously employed. Markets of this kind… did not occur naturally. They had to be created.

* * *

….It became necessary for firms to organize the market so as to avoid fluctuations in demand and create a stable atmosphere for profitable, long-term investment.

* * *

…[There were] two consequences of the Americans’ discovery that the profitability of investment in mass-production equipment depends on the stabilization of markets. The first of these consequences was the construction, from the 1870s to the 1920s, of giant corporations, which could balance demand and supply within their industries. The second consequence was the creation, two decades later, of a Keynesian system for matching production and consumption in the national economy as a whole.

Ralph Borsodi argued that “[w]ith serial production, … man has ventured into a topsy-turvy world in which

goods that wear out rapidly or that go out of style before they have a chance to be worn out seem more desirable than goods which are durable and endurable. Goods now have to be consumed quickly or discarded quickly so that the buying of goods to take their place will keep the factory busy.
By the old system production was merely the means to an end.

By the new system production itself has become the end.

* * *

With continuous operation of [the factory’s] machinery, much larger quantities of its products must be sold to the public. The public buys normally only as fast as it consumes the product. The factory is therefore confronted by a dilemma; if it makes things well, its products will be consumed but slowly, while if it makes them poorly, its products will be consumed rapidly. [This Ugly Civilization]

Because of the imperative for overcapitalized industry to operate at full capacity, on round-the-clock shifts, in order to spread the cost of its expensive machinery over the greatest possible number of units of output, the imperative of guaranteeing consumption of the output was equally great. As Benjamin Barber puts it, capitalism manufactures needs for the goods it’s producing rather than producing goods in response to needs.

In The New Industrial State, Galbraith wrote about the connection between capital intensiveness and the “technostructure’s” need for predictability and control:

…[Machines and sophisticated technology] require… heavy investment of capital. They are designed and guided by technically sophisticated men. They involve, also, a greatly increased lapse of time between any decision to produce and the emergence of a salable product.

From these changes come the need and the opportunity for the large organization. It alone can deploy the requisite capital; it alone can mobilize the requisite skills…. The large commitment of capital and organization well in advance of result requires that there be foresight and also that all feasible steps be taken to insure that what is foreseen will transpire.

* * *

…From the time and capital that must be committed, the inflexibility of this commitment, the needs of large organization and the problems of market performance under conditions of advanced technology, comes the necessity for planning.

* * *

The need for planning… arises from the long period of time that elapses during the production process, the high investment that is involved and the inflexible commitment of that investment to the particular task.

* * *

Planning exists because [the market] process has ceased to be reliable. Technology, with its companion commitment of time and capital, means that the needs of the consumer must be anticipated–by months or years…. [I]n addition to deciding what the consumer will want and will pay, the firm must make every feasible step to see that what it decides to produce is wanted by the consumer at a remunerative price…. It must exercise control over what is sold…. It must replace the market with planning.

* * *

…The need to control consumer behavior is a requirement of planning. Planning, in turn, is made necessary by extensive use of advanced technology and capital and by the relative scale and complexity of organization. These produce goods efficiently; the result is a very large volume of production. As a further consequence, goods that are related only to elementary physical sensation–that merely prevent hunger, protect against cold, provide shelter, suppress pain–have come to comprise a small and diminishing part of all production. Most goods serve needs that are discovered to the individual not by the palpable discomfort that accompanies deprivation, but by some psychic response to their possession….

For Galbraith, the “accepted sequence” of consumer sovereignty…, in which consumer demand determines what is produced, was replaced by a “revised sequence” in which oligopoly corporations determine what is produced and then dispose of it by managing consumer behavior. In contemporary terms, the demand-pull economy is replaced by a supply-push model.

Alfred Chandler, like Galbraith, was thoroughly sold on the greater efficiencies of the large corporation [The Visible Hand]. He argued that the modern multi-unit enterprise arose when administrative coordination “permitted” greater efficiencies….

By linking the administration of producing units with buying and distributing units, costs for information on markets and sources of supply were reduced. Of much greater significance, the internalization of many units permitted the flow of goods from one unit to another to be administratively coordinated. More effective scheduling of flows achieved a more intensive use of facilities and personnel employed in the processes of production and so increased productivity and reduced costs.

* * *

Organizationally, output was expanded through improved design of manufacturing or processing plants and by innovations in managerial practices and procedures required to synchronize flaws and supervise the work force. Increases in productivity also depend on the skills and abilities of the managers and the workers and the continuing improvement of their skills over time. Each of these factors or any combination of them helped to increase the speed and volume of the flow, or what some processors call the “throughput,” of materials within a single plant or works….

* * *

Integration of mass production with mass distribution afforded an opportunity for manufacturers to lower costs and increase productivity through more effective administration of the processes of production and distribution and coordination of the flow of goods through them. Yet the first industrialists to integrate the two basic sets of processes did not do so to exploit such economies. They did so because existing marketers were unable to sell and distribute products in the volume they were produced.

The mass-production factory achieved “economies of speed” from “greatly increasing the daily use of equipment and personnel.”

What Chandler meant by “economies of speed” was entirely different from lean production’s understanding of flow. Chandler’s meaning is suggested by his celebration of the new corporate managers who “developed techniques to purchase, store, and move huge stocks of raw and semifinished materials. In order to maintain a more certain flow of goods, they often operated fleets of railroad cars and transportation equipment.” In other words, both the standard Sloanist model of enormous buffer stocks of unfinished goods, and warehouses full of finished goods awaiting orders—and the faux “lean” model in which inventory is swept under the rug and moved into warehouses on wheels and in container-ships….

In Sloanist management accounting, inventory is counted as an asset “with the same liquidity as cash.” Regardless of whether a current output is needed to fill an order, the producing department sends it to inventory and is credited for it. Under the practice of “overhead absorption,” all production costs are fully incorporated into the price of goods “sold” to inventory, at which point they count as an asset on the balance sheet.

With inventory declared to be an asset with the same liquidity as cash, it did not really matter whether the next ‘cost center,’ department, plant, or division actually needed the output right away in order to consummate one of these paper sales. The producing department put the output into inventory and took credit.

* * *

…Expenses go down…, while inventory goes up, simply by moving a skid full of material a few operations down the stream. In fact, expenses can go down and ROI can improve even when the plant pays an overtime premium to work on material that is not needed; or if the plant uses defective material in production and a large percentage of the output from production must be scrapped. [William Waddell and Norman Bodek, The Rebirth of American Industry]

In other words, by the Sloanist accounting principles predominant in American industry, the expenditure of money on inputs is by definition the creation of value. As Waddell described it at his blog,

companies can make a bunch of stuff, assign huge buckets of fixed overhead to it and move those overheads over to the balance sheet, making themselves look more profitable.

…Paul Goodman’s idea of the culture of cost-plus [People or Personnel]… sums it up perfectly….

American factories [Waddell and Bodek continue] 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….

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. 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.”….

The lean approach has its own “economies of speed,” but they are the direct opposite of the Sloanist approach. The Sloanist approach focuses on maximizing economies of speed in terms of the unit cost of a particular machine, without regard to the inventories of unfinished goods that must accumulate as buffer stocks as a result, and all the other enormous eddies in the flow of production. As the authors of Natural Capitalism put it, it attempts to optimize each step of the production process in isolation, “thereby pessimizing the entire system.” 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…. Under the Sloan accounting system [Waddell and Bodek continue], producing a steering wheel—even in isolation, and regardless of what was done with it or whether there was an order for the car it was a part of—was a money-making proposition. “Credit for that work—it looks like a payment on the manufacturing budget—is given for performing that simple task because it moves money from expenses to assets.

“Selling to inventory,” under standard management accounting rules, is equivalent to the incentive systems for production under a Five-Year Plan: there is no incentive to produce goods that will actually work or be consumed. Hence the carloads of refrigerators, for which Soviet factories were credited toward their 5YP quotas, thrown off trains with no regard to whether they were damaged beyond repair in the process.

The lean approach, in contrast, gears production flow to orders, and then sizes individual machines and steps in the production process to the volume of overall flow. Under lean thinking, it’s better to have a less specialized machine with a lower rate of output, in order to avoid an individual step out of proportion to the overall production flow. This is what the Toyota Production System calls takt: pacing the output of each stage of production to meet the needs of the next stage, and pacing the overall flow of all the stages in accordance with current orders. In a Sloan factory, the management would select machinery to produce the entire production run “as fast as they humanly could, then sort out the pieces and put things together later.”

To quote the authors of Natural Capitalism again: “The essence of the lean approach is that in almost all modern manufacturing,

the combined and often synergistic benefits of the lower capital investment, greater flexibility, often higher reliability, lower inventory cost, and lower shipping cost of much smaller and more localized production equipment will far outweigh any modest decreases in its narrowly defined “efficiency” per process step. It’s more efficient overall, in resources and time and money, to scale production properly, using flexible machines that can quickly shift between products. By doing so, all the different processing steps can be carred out immediately adjacent to one another with the product kept in continuous flow. The goal is to have no stops, no delays, no backflows, no inventories, no expediting, no bottlenecks, no buffer stocks, and no muda [waste].

* * *

Their [Womack and Jones, in Lean Thinking] basic conclusion, from scores of practical case studies, is that specialized, large-scale, high-speed, highly production departments and equipment are the key to inefficiency and uncompetitiveness, and that maximizing the utilization of productive capacity, the pride of MBAs, is nearly always a mistake.

Rather, it’s better to scale productive capacity to demand….

…The amount of wasted resources and crystallized labor embodied in the enormous warehouses of Sloanist factories and the enormous stocks of goods in process, 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. As Michael Parenti put it, the essence of corporate capitalism is “the transformation of living nature into mountains of commodities and commodities into heaps of dead capital.” The cost savings from mass production are more than offset by the costs of mass distribution.

….If the costs of idle capacity are so great as to elevate unit costs above those of less specialized machinery, at the levels of spontaneous demand occurring without push marketing, and if the market area required for full utilization of capacity results in distribution costs greater than the unit cost savings from specialized machinery, then the expensive product-specific machinery is, in fact, less efficient. The basic principle was stated by F. M. Scherer [Industrial Market Structure and Economic Performance]:

Ball bearing manufacturing provides a good illustration of several product-specific economies. If only a few bearings are to be custom-made, the ring machining will be done on general-purpose lathes by a skilled operator who hand-positions the stock and tools and makes measurements for each cut…. If a sizable batch is to be produced, a more specialized automatic screw machine will be used instead…. A substantial saving of machine running and operator attendance time per unit is achieved, but setting up the screw machine to perform these operations takes about eight hours. If only one hundred bearing rings are to be made, setup time greatly exceeds total running time, and it may be cheaper to do the job on an ordinary lathe.

The Sloanist approach is to choose the specialized automatic machine and find a way to make people buy more bearing rings….

But if we approach things from the opposite direction, we can see that flexible manufacturing with easily redeployable assets makes it feasible to shift quickly from product to product in the face of changing demand, and thus eliminates the imperative of controlling the market. As Barry Stein said [Size, Efficiency and Community Enterprise],

if firms could respond to local conditions, they would not need to control them. If they must control markets, then it is a reflection of their lack of ability to be adequately responsive.

* * *

…Consumer needs, if they are to be supplied efficiently, call increasingly for organizations that are more flexibly arranged and in more direct contact with those customers. The essence of planning, under conditions of increasing uncertainty, is to seek better ways for those who have the needs to influence or control the productive apparatus more effectively, not less.
Under conditions of rapid environmental change, implementing such planning is possible only if the “distance” between those supplied and the locus of decision-making on the part of those producing is reduced…. But it can be shown easily in information theory that the feedback—information linking the environment and the organization attempting to service that environment—necessarily becomes less accurate or less complete as the rate of change of data increases, or as the number of steps in the information transfer process continues.

Stein suggested that Galbraith’s solution was to suppress the turbulence: “to control the changes, in kind and extent, that the society will undergo.” But far better, he argues, would be “a value shift that integrates the organization and the environment it serves.”

This problem is to be solved not by the hope of better planning on a large scale…, but by the better integration of productive enterprises with the elements of society needing that production.
Under conditions of rapid change in an affluent and complex society, the only means available for meeting differentiated and fluid needs is an array of producing units small enough to be in close contact with their customers, flexible enough to produce for their demands, and able to do so in a relatively short time…. It is a contradiction in terms to speak of the necessity for units large enough to control their environment, but producing products which in fact no one may want!

* * *

As to the problem of planning—large firms are said to be needed here because the requirements of sophisticated technology and increasingly specialized knowledge call for long lead times to develop, design, and produce products. Firms must therefore have enough control over the market to assure that the demand needed to justify that time-consuming and costly investment will exist. This argument rests on a foundation of sand; first, because the needs of society should precede, not follow, decisions about what to produce, and second, because the data do not substantiate the need for large production organizations except in rare and unusual instances, like space flight. On the contrary, planning for social needs requires organizations and decision-making capabilities in which the feedback and interplay between productive enterprises and the market in question is accurate and timely—conditions more consistent with smaller organizations than large ones.

1 Comment Homebrew Industrial Revolution, Chapter Two: Moloch–The Anatomy of Sloanist Mass Production (first excerpt)

  1. AvatarUncle Yarra

    Can you imagine Sloan at the dinner table with his kids?
    “You’ll eat it and you’ll LIKE IT”

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