In the late 1700s, the world was changing. The Industrial Revolution was just in its infancy. Steam engines were starting to power all sorts of enterprises. New manufacturing techniques drove down prices of production. A new source of wealth was being created.

European economics was invented by a group of French Enlightenment philosophers who called themselves the Physiocrats (which means “rule by Nature”). The Physiocrats took Issac Newton’s idea that the universe was mechanistic and applied this mechanistic world view to the social production and distribution of goods and services. They examined the phenomenon of mercantile economics–mercantilism is the distribution of goods with the calculated goal of achieving profit–and argued that the distribution of goods operated under the same mechanistic and natural laws that the rest of the universe operated under. (…)

Just as industrialists were new in the late 1700s, there is now a new model developing. GaveKal calls this new model “platform companies.”

The old model was to design or find something, manufacture it, market it and sell it. (Think Ford, Caterpillar, 3M, oil, mining.) The new model keeps just the high value added parts and ditches the rest. The new model focuses on research and development, treasury, marketing, and the business process and out sources as much of the low margin work as possible. Think Dell, Wal-Mart, IKEA, Li and Fung. Most hotel chains now do not own their properties.

The new model is to “produce nowhere but to sell everywhere… Platform companies know where the clients are and what they want and where the producers are. Platform companies then simply organize the ordering by the clients and the delivery by the producers (and the placing of their logo on the product just before delivery).”

Production is the least profitable of all the processes. It ties up capital, means a lot of volatile (and costly) inventory, it is labor intensive (and subject to all sorts of problems when there is a slowdown (unproductive labor costs) or a quick need for more product and overtime costs). The market does not give manufacturing companies the same investment multiple as they do the platform companies. Platform companies have more stable incomes and profits.

Who would you rather be? The Chinese and other Asian companies that make the Ipod at a 2-3% margin or Apple who sells it at a 40% margin?

But this process means manufacturing jobs leave the developed world (The US, Canada, Old Europe, Australia, New Zealand and Japan) and move to the developing world, primarily Asia and Eastern Europe. (…)

Yes, that does result in some workers losing jobs, but in a fluid and free economy, they find others. While some find jobs with less income, incomes on average are up. And yes, we have fewer manufacturing jobs, but we are manufacturing more “stuff” than ever. We have become more efficient, as technology has made our manufacturing processes in the developed world more productive.

John Mauldin’s newsletter on Our Brave New World, GaveKal Research (2005) { This Time It’s Different, Part One } + { Our Brave New World, Part Two }

Illustrations { Designers Republic, Work, Buy, Consume, Die } + { Icon Factory’s icons }

READ MORE >> economics | February 15th, 2007