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The United States has created levels of wealth well beyond any other civilization in history, yet much further potential is sitting right under our noses. 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, 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 better distribution networks and the ongoing mechanization of the agricultural industry.
During this part of our country’s history, we benefited from what I call quasi-deflation; that is, though prices did not necessarily decrease, they increased at a dramatically low level over the course of many years (in fact, decades), while income that Americans earned increased substantially.
Although deflation is typically viewed in trepidation, in the past it has been— and can be in our future — a truly beneficial function. It may be viewed as price stability, enhanced buying power and value-adding.
Deflation can be defined in two ways: as a decrease in the overall price of goods and services, or as a decrease in the money supply and credit. While the second definition is considered classical economics, this discussion will use the first definition.
Applying lean is about removing waste from the system. 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. In other words, it reduces cost (notwithstanding the cultural impact and change that must go hand in hand with the cost-improvement aspect). So with all things being 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.
Many products and services actually follow this model from a deflationary standpoint. For example, electronics are in a constant state of price decrease while their performance, features and quality are improving. Think of the price of iPads, HD TVs, cell phones and the like. The prices on these products can drop on a monthly or weekly basis. Obviously, improved technology is what drives price reduction in this case, combined with free-market competition. But couldn’t any product have the same pattern if lean was applied? Maybe it would not be as drastic of a price reduction or over such a short timeframe, but there is no reason why eliminating waste (costs) over time in a competitive free market could not have the same effect.
As mentioned above, our country’s 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.