Sunday, November 11, 2007

The Value of Adding Value

As mechanisation has been a staple reality world over for the last couple of centuries, it has shaped our societies and cultures.

In honour of the industrial revolution, engineering became one of the most sought after professions that only the most brilliant could aspire to. Courses in civil and mechanical engineering initially held pride of place, but then gave way to electronics and electrical engineering, and now even these have become less popular than communications and software 'engineering' - courses that are now even found in the ubiquitous 'Arts College'. The professions have tried to keep pace with cultural developments.

The agricultural revolution and rapid advances in medicine have also combined to make the world's huge population explosion just barely manageable. Of course, out of 6.6 billion people only 1 billion live well. Of the rest, around 25% are in abject poverty and in danger of starving (that's about 1.65 billion people). In absolute terms compared to a century ago, the percentage of poor has declined by half but the absolute number of the very very poor has gone up by about 40 million!

It is argued quite successfully (on paper) that the way to deal with poverty is not to give handouts but to give a hand-up. In other words, bring the poor of the world into the mainstream of production, and poverty will be licked. Is this realistic? Is it even possible? What jobs can we envision creating for the billions of poor?

In 2006, it was calculated that if a real U.S. dollar value were to be placed on the per person share of the entire world's economy (per capita on the world's GDP), it would work out to about $6,600 each. Such figures are heavily disputed by economists, mostly depending on where the economist hails from and what turf they are seeking to protect, so I take this as merely illustrative. The plain fact is that this is well below what an American or a European would consider the barest minimum subsistence level. In other words, if one were to pay an American $6,600 a year, they would starve to death. The poverty level cutoff in the U.S. last year was over $13,000 per annum. On the other hand, in India or China or in Africa six and a half thousand dollars would support a whole family of four at a 'middle class' level for a whole year.

Another little illustration that might illustrate the difference is that a good Medical Transcriptionist (MT) in the U.S. would earn about 65 cents a line. An average MT may pull in about 45 cents a line. The same work, when outsourced to the Philippines or India will earn the MT there, anywhere from 2 cents to 3 cents a line. In both types of economies this would constitute a middle class occupation.

The difference lies in the ways in which "value" has been added to products and services in these developed economies. People eat, they wear clothes, pay rent, they go to and from work, their kids get educated... all over the world. But in the 'developed economies', it costs a heck of a lot more to live even in this basic-needs sort of way.

Marketing and management have become the most honoured professions. The highest paid of all professionals in the world are the managers of large corporations. Now knowledge is the key to money and power. The knowledge that is most valued is the alchemical secret of value addition. It has to be done insidiously and so effectively that the consumer will consume both the product and the mythical value and feel pleased. Now, that's MAGIC !

Is it all worth it? The corporations think so and to tell the truth the answer is that without the layers upon layers of value addition, these developed economies would collapse.

Big business absolutely relies on the inflationary effects of exploitable, value addition, in order to pump profit margins up to a level where there remains little connection between what a goods or service costs to perform/produce and what the end user ends up paying for it. The value addition is self justifying also because it is the primary means of distributing "wealth" or more accurately earnings in the strictly trickle down economy.

Now, these economies want the developing world also to faithfully follow the same route. Everyone should buy-in to the concept of breaking the connection between the real value and what we collectively end up paying for anything after value addition.


Anonymous said...

Paul Samuelson's "Economics" would be a good read!

Unknown said...

Mahil, I read Samuelson about 30 years back and it's mostly forgotten now, not to mention the changes in between! It was a good read then too.

Is there anything specific that you had in mind vis my vague ruminations on value addition?

Anonymous said...

Considering both your previous blog and this one - there is a link between social hierarchy within a professional field and 'value addition'. There is a perception that aristocrats are lazy and do not contribute much in terms of work and merely consume a lot. In fact, they are ‘valued’ individuals just because they can add more value to a particular field. A good example is Sir David Attenborough. While at the top of the pyramid and at the bottom of the pyramid the logic is different in the middle layers, in the global economy, status is achieved and is not ascribed as in traditional societies. It is their remarkable contribution and dedicated hard work that is the basis of their superior technical competence that provides the empirical and structural basis for a legitimized hierarchy. (Though children of well to do people like doctors and lawyers become well established in their lifetime because of their strategic, competitive advantage is also a reality that cannot be denied).

Second, mass production based on skill specialization and division of labour does produce products that are affordable by many - consider what a dollar can buy - a smart chip - how much technical expertise and years of experience has gone into its production. If someone were to make such a thing from scratch it would probably cost a few million dollars!

Unknown said...

The global economy indeed does recognise achievement, or at least it rewards big contributions of skill and hard work too, but as the system now stands it is skewed towards (favoring) those with the capital and the brains, and the guts to exploit global inequalities and inequities.

I am not for damping down any real incentives, (including passing wealth, prestige and influence to the next gen - if that's what turns you on) neither am I saying that an open market free market approach is necessarily wrong.

I wanted to try to look at things from the wrong end a bit and it struck me that while in absolute terms we may think that the developing world is in dire straits actually the reverse may well be true.

Highly 'developed' economies seem to have entrapped themselves into cycles of completely unnecessary consumption of goods and services that are so far removed from basic needs as to be ridiculous.

One of my questions is, do we too want to go down this route? Can't we find something ultimately more productive to do with our selves?

I also admit that these are highly complex issues in macroeconomics and it's stuff that I have no expertise in at all, just lots and lots of questions!

john doyle said...

In the global economy capital can freely cross international frontiers but workers cannot. Mexican workers can make more money in the US, but the dollars they earn have more buying power in Mexico. So there's a net inflow of labor and a net outflow of money across the border. Now, under the guise of homeland security, the US builds a wall between the two countries. The Mexican workers must stay in Mexico. But now the American corporations can build more factories etc. in Mexico, pay the low Mexican wage, and not worry that the wage rates will go up under competitive pressure from worker mobility into the higher-paying jobs in the States. And then of course the corporations export the goods to the States where the prices are higher.

So in the States the corporations want a net outflow of labor and a net inflow of imports. As long as they own a major percentage of the foreign companies producing the work they can't lose. But among the working class the propaganda is "security" and "American jobs for American workers," tinged with racist fears. It's overdetermined, as they say.

Unknown said...


Too true. For the next steps, U.S. conservative governments often look to Israel for inspiration. There is no doubt that this has been true in the MOSSAD style "war on terror" and it will probably follow through too in the new 'war on immigration'.

I can just imagine the checkposts where people are let in and out on temporary permits very much like Palestinians who wish to work in Israel. Perhaps soon they may even be asked to prominently sport a green star so that they can always be easily identified.

The workers have no other go as there are no jobs in their homeland. So, the U.S. farmers will get their cheap labour, and the government can carefully control the tempigrant worker population to its own advantage and without risk...

One key 'necessary' factor will be to exempt these tempigrants from the protections of the U.S. constitution and bill or rights...

john doyle said...

Your post has prompted me to look into this Mexican situation a bit more. Unemployment rate in Mexico is only about 3%, which is better than the US (5% or so). But the average annual wage in Mexico is only about $11K, versus $46K in the States. The average illegal Mexican worker in the US makes about $16K/year -- very low by American standards, but a significant improvement over opportunities at home.

The more educated sectors of Mexican society having higher unemployment rates and serious underemployment. It'll be interesting to see what the political ramifications will be in response to the blatant protectionism of the US building the wall. Will there be a significant move to ally with Venezuela, along with nationalizing the factories built by the international corporations? Will the US stand for it?

Unknown said...

It's fascinating that Mexico has such a low unemployment rate. Very commendable! Still the disparity is real and as most of our East Indian expats have demonstrated all over the world, as long as you don't try too hard to integrate with the host culture, your standard of living can remain modest leaving that much more to send home.

It seems to be a very retrograde step to be so obvious about closing off the border and I think it will give Chavez something of a toehold, and as you say that's a consequence that's positively scary!


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