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arisbe ([personal profile] arisbe) wrote2004-01-06 12:04 pm

The Rising Price of Loyalty

Gary North's REALITY CHECK

Issue 307 January 6, 2004




Peter Drucker, the management guru, wrote the following words a generation ago. This passage first appeared in print in 1969. Consider his words carefully. They constituted an advanced warning in 1969, when I read them. I believed him then, and I have done my best ever since to implement his assessment in my career strategy. It has made me a lot of money and has saved me from a lot of grief.

"Lifetime employment" is no longer desirable, even in Japan. For while it protects a man as long as his company or industry is doing at least reasonably well, it makes it virtually impossible for him to move elsewhere should his company or industry fail. But the underlying principle is sound; it is the responsibility of the employer to provide job security. In a knowledge economy where skill is based on knowledge, and where technology and economy are likely to change fast, the only meaningful job security is the capacity to learn fast. The only real security in an economy and society in flux is to know enough to be able to move. ("The Age of Uncertainty," p. 305).

Today, what he described then is a well-known reality. Yet most Americans over age 40 still ignore this reality, emotionally speaking. Younger Americans cannot ignore it. They have hit it head-on.

You may think that you have job security. If so, you are living in a fool's paradise. You are living emotionally in 1955. You need to rent "Back to the Future," which recognized in 1985 that 1955 was long gone. That movie is now 19 years out of date. Later in my report, I'll show you why you need to rent it.

You want loyalty from your employer. You also want the freedom to quit your job and take a better one. These two goals are in conflict.

Whatever you want, you must pay for. The problem is, the price of loyalty is constantly rising. You had better decide now to settle for career mobility.

I would guess that only one out of 100 of you will accept emotionally what you are about to read here, but at least one out of 10 of you will accept it intellectually. I am doing my best to get these nine to move from intellectual acceptance to emotional acceptance.

Then comes the hard part: to get all 10 of these readers to move from emotional acceptance to action.

That's impossible, I know, but I will do my best.


THE PRICE OF LABOR

Under capitalism, the price of goods tends to fall in relation to the price of labor. This is why the price of loyalty keeps rising. The price of everything except labor and loyalty falls because the supply of almost everything increases. In other words, the supply of labor and loyalty decreases in relation to the supply of everything else.

Loyalty has become a luxury good. Luxury goods command a high price. They are not in high demand. They are too expensive for most people. Forget about it.

We read about the low price of labor in China and India. Compared to wages in the West, this is indeed the case. But it is not the case in China and India, where tens of millions of low-paid agricultural workers are streaming into cities to take advantage of higher wages. What the West experienced, 1750-1950, India and China are now experiencing, but in fast-motion: the shift to urbanized, specialized, high-tech, high-paid labor.

In the West, the days of wine and roses are over for millions of workers whose skills can be supplied by these newly hired millions of Asian workers. Price competition is now in full force.

European farmers experienced bankruptcy after Cyrus McCormick perfected the reaper and the railroads laid their tracks into the Midwest. Price competition for grain bankrupted Europe's grain farmers after 1870. The replacement of family farms by agribusiness, a process that was ram-rodded by food produced and sold at ever-lower prices, has been a Western phenomenon for over two centuries. Consumers demanded this transformation by refusing to buy high-priced food.

We consumers are the culprits. Blame it on us. So, if you get a pink slip from your boss, blame this on us, too.

After you get fired, you must go looking for a replacement job. You got fired because we consumers went shopping for replacement suppliers, and we found them. You were a casualty of our successful shopping. From an economic point of view, a person who gets fired must go shopping for replacement customers. An employer is only a middleman for a different group of customers.

"You're fired." "I quit." These phrases are two sides of the same coin. The coin in question is economic liberty. Where either phrase is restricted by law or by custom, the other is also restricted.

Loyalty is a customary restriction on both phrases.

Warning: customs get broken by customers.


"YOU'RE FIRED"

There are few phrases that are more feared by most men. To the extent that women today are heads of households, this phrase has become a threat to them, too. In the old days -- defined as pre-1960 -- "I want a divorce" was the phrase most feared by women.

Because "you're fired" is announced by a boss who has the authority to announce it, the phrase is assumed to be the prerogative of management. Legally, it is the prerogative of senior management to fire people. But, as with every prerogative, it must be paid for. There are no free lunches in life. There are no free firings.

Senior management is not in charge under capitalism. The consumers are. They are the people who hold the hammer: money.

Why is money the hammer? Because money is the most marketable good. He who has money to spend is the recipient of offers, moment by moment, day after day, to part with his money. We consumers are besieged with advertisements: "Buy now!" The greater our discretionary income is, the more tempting are the offers.

Customers under capitalism today are decreasingly loyal to brands. This means that other offers besides brand loyalty have become decisive: lower price, better service, greater speed of delivery, greater ease of ordering, a money-back guarantee.

Information on product quality also gets cheaper. People who once used a company's brand name as a way to save on information costs now go on the World Wide Web and read reviews by independent reviewers. Then they click through, link by link, to companies that sell this model at different prices. They buy at the lowest price.

When I was a boy, men were loyal to brands of gasoline. They got a gasoline company credit card -- the first widely used credit cards -- that was good only at a specific chain of gas stations. Ads tried to persuade buyers that one brand of gasoline was better, despite the fact that every brand of gasoline had to work in every brand of car. Ads also sold service. I can remember Texaco's TV jingle: "You can trust your car to the man who wears the star . . . the big, white Texaco star." Today, the Texaco star is red, unlike the Soviet star, which is gone. The man who wore the Texaco star disappeared decades before the Soviet star did. Texaco remains, but the man wearing the star is forgotten.

There is a scene in "Back to the Future" that sticks in my mind. The hero, now returned to 1955, sees a service station -- yes, that's what they were called -- where a person drives in and several men in uniforms rush out to service the car. It looks just like an old Texaco ad. Service was never really that good, except on TV ads, but that's what my generation remembers.

My generation also remembers Chuck Berry's song, "Too Much Monkey Business." (This, I do from memory -- 48 years later.)

Working at the filling station Too many tasks. Check the tires, check the water, check the oil, A dollar gas.

Too much monkey business, Too much monkey business, Too much monkey business For me to be involved with.

In the contest between Texaco's jingle and Chuck Berry's lyrics, Chuck won. In the 1960's, self-serve gasoline pumps appeared. The gasoline was cheaper if you pumped it yourself. It was price competition vs. service. Slowly, price competition spread its domain.

What won the war against full-service gas stations was Nixon's declaration of price controls on August 15, 1971. There was a gasoline price war going on around the country that month. Oil companies were competing by price to pull away competitors' customers. They were selling gasoline at a loss. Nixon's price controls locked in loss-leading gasoline prices for two years. The survivors were those "gasoline-service-filling" stations that had convenience stores attached: the 7-11 model. The money they lost on gasoline sales they made up for in sales of milk, high-fat snacks, and other sundries that had a high profit margin per sale. The pure service stations steadily went under. They did not revive after controls were lifted.

In the state of Oregon, it is illegal to pump your own gas. The lobbying arm of the old-time service stations got the legislature to pass a law against price-competitive self-service stations. But, everywhere else, gasoline is cheaper because we consumers prefer to save a few cents per gallon and pump our own gas. Mercy? None. Loyalty? None.

We consumers fire companies without mercy. Brand loyalty means less and less to us. Low prices mean more and more. We consumers keep asking sellers, "What have you done for me lately?" Wal-Mart has an answer: "Low prices, always. Always." Sears doesn't even try to offer an answer on TV these days. What Sears did to Montgomery Ward, Wal-Mart is doing to Sears.

Wal-Mart is merely an economic agent for consumers. Consumers are doing it to Sears, day by day.

When you boss says "You're fired," it's really we consumers who are saying it. When he out-sources your job to a company in India, it's really our decision as consumers. Your boss is acting on our behalf. Blame us.

As the cost of telecommunications declines, anything that can be done by mainly computer and phones will be done by low-salary foreigners. There are few departments in any company today that cannot be out-sourced. So, in order to stay ahead of "you're fired," an employee had better become a forecaster. He had better be able to see what senior management will do. He had better see what consumers will tell senior management to do.

If you are working in a multi-layer corporate structure, you had better foresee what consumer shopping will do to your division. Your immediate boss may not see what's coming. He may still be living in the mental world of his youth, where corporate loyalty meant something. In a phrase, "This is not your father's Oldsmobile." For that matter, neither is Oldsmobile. That division of General Motors is about to go the way of DeSoto, Packard, and Hudson. General Motors announced the phase-out in 2000. The oldest American car brand -- 1897 -- can no longer compete. Brand loyalty has faded to almost zero. On http://www.oldsmobile.com, there is a box: "Have you considered other GM brands? Check them out here." Oldsmobile is checking out.

My advice: get to know your boss's customer, i.e., your customer. If you can see that your customer is shopping around, get ready to hear the words, "You're fired." If you spot the trend now, you can then head these words off at the pass with your own words. . . .


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"I QUIT"

You possess skills that are flexible. Unlike a commodity, which can be mass produced, people are in relatively fixed supply. Unlike a machine, which can be used for only a few tasks -- maybe only one task -- you can re-train yourself. You can follow the customer. Better yet, position yourself now where your customer will go.

Under capitalism, the value of labor rises while the value of commodities falls. People can switch jobs. They can improve their skills. They can shop around for better opportunities. Workers cannot be mass-produced on demand.

The reason why you may be facing accelerating labor competition is because of decisions made by Chinese and Indian couples two or three decades ago. Then, without warning, there was a political transformation at the top in each nation. In 1979, Deng Xiao-ping scrapped much of Mao's Marxism. In 1991-93, India scrapped much of Nehru's Fabianism. It's not clear yet whether India or China will become the dominant producer of goods and services for the world in 2050, but it is clear that neither of them could have gotten into the race had the old bureaucratic systems prevailed over capitalism.

My guess: China will provide more of the goods; India will provide more of the services. In a phrase: "Chinese computers will run free Linux software, and Indian technicians will show the rest of us how to make the two work together, if we do exactly what their manual says, from which they never deviate."

If a job can be done on a computer, it can be done in India by someone who speaks English. Millions do. If it can be done there, it will be done there, either by your company or the company that takes over your company. Out-sourcing now means off-shoring. If you can't live on $400 a month, you're in jeopardy.

Note: to receive my instant-reply free report on an India-proof, high-income career, send an e-mail to:

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Because you have the legal right to quit your job, you have career flexibility. In Japan a generation ago, people did not have career flexibility. A person worked for the same company that hired him until he retired. There was only one socially acceptable reason for quitting: to take over your father's business. This tradition has slowly changed, but only because of competition from the rest of Asia. Today, the Japanese economy is stagnant. Its industrial labor force has not been able to compete with Chinese and Southeast Asian workers. Japanese capital is flowing into mainland Asia. Japanese jobs are being exported, mainly by attrition at home and replacement abroad.

In America, more than anywhere else on Earth, a worker has job flexibility. He can move. He can shop around in search of a better job. He is not expected to have loyalty to his employer beyond a 2-week's notice. It has been like this for decades -- really, for centuries.

This has reduced the level of loyalty by employers, because there are always new workers applying for jobs. This means greater opportunity for employers to hire workers for the lowest wage. For an employer to refuse to hire these people means bearing an economic loss. This raises the price of his loyalty. As economics teaches, as the price of something rises, less of it is demanded.

The price of gaining loyalty from the top is the sacrifice of flexibility at the bottom. Loyalty is a two-way street. Quoting Pearl Bailey (1955), "it takes two to tango." (My mental categories have been shaped by the movies of my youth and the lyrics of my youth -- except for "Louie, Louie" -- which is true of most Americans.) If you want to retain your ability to move out, you must accept the legal right of your employer to move you out.

If you are not prepared to say "I quit," then you are not prepared to hear "You're fired."

Most workers are not prepared to say "I quit." So, they are vulnerable. They know this. They won't ask for a raise because they are afraid of the consequences: "Sorry; you're fired." Employers use this fear to keep people employed at below-market wages. They get workers to pay for their own job security. Most workers purchase fake loyalty by offering to work at below-market rates. Everyone must pay for his own fear. "My boss would never fire me," he thinks, but then he achieves this "loyalty" by selling his services at a below-market price.


BETTER KNOWLEDGE OF PRICES

Today, on-line employment data banks such as Monster.com are reducing the ignorance of employers and employees. Everyone can go shopping for better career opportunities. Search costs are falling like stones. This means that the match-up between wages and output is becoming more accurate.

This means that the cushion that overpriced sellers have enjoyed is disappearing. This is what the loss of brand loyalty is all about: better information on lower-priced products. The Web is wiping out the pricing cushion. People are going to be paid what they are worth, i.e., what they produce. The customer will decide.

This process is relentless. If you have been hiding behind consumer ignorance, your protective covering is being stripped away. The Web is like digital Agent Orange. It is wiping out the foliage that has long hidden people from market forces. "You get what you pay for" is becoming ever-more true. People are not paying more for whatever it is that they get.

I liked the movie "You've Got Mail" for reasons that did not make the movie a blockbuster. I liked Dabney Coleman's character. He was the man who owned the chain of book stores that was bankrupting small, local book stores. Well, I didn't really like Coleman. I liked what he stood for: serving the demands of consumers by offering low prices and large supplies. But in Coleman's character, we also see that other crucial loss of loyalty. He had married wife after wife. He did not remember that he had married his son's nanny. He was now living on a boat docked in the East River -- the ultimate emblem of a lack of roots.

This loss of loyalty has affected our entire society. Opportunities that were once illegal and considered a breach of moral trust are now common. The divorce rate is up, all over the West. Francis Fukuyama has written three inter-related books -- which are not seen as inter-related -- "Trust" (declining in the West), "The Great Disruption" (the social result of declining trust), and "The End of History" (a prediction that democratic capitalism cannot be stopped). Unless democratic capitalism finds a way to restore trust, yet also preserve price competition and our freedom to move, there will be an even greater disruption. We cannot be productive without trust. We cannot live without some degree of loyalty.

You see the problem. The problem is, no one has yet seen the solution, or at least has not been able to persuade the rest of us. Even if we were all persuaded, this would not mean that we would do the right thing as a civilization.


CONCLUSION

You had better go job shopping soon. You had better find out what your services are worth to consumers. If you have priced yourself too low, you are paying for your own ignorance or fear. If you have priced yourself too high, your boss will find out soon enough. There are replacements, possibly 12,000 miles away, banging at his door, trying to get his attention. "Hire me! I'll work cheaper!"

You can pretend, as most Americans pretend, that the consumers' reduced search costs will not result in your employer's discovering that you are overpriced. He will probably not ask you to take less money. He will either fire you or see to it that you never get another raise.

Alternatively, you can pretend, as most of the remaining Americans pretend, that if they price themselves too low, they will buy a little job security. What they are buying is reduced income, meaning reduced savings, meaning reduced capital, meaning a reduced lifestyle after retirement, if any.

Like Goldilocks in search of the right bowl of porridge, you had better price yourself just right. Also, you had better work for an employer who has priced the company's product just right. You had better be ready to move when consumers' tastes change, as they surely will. You would be wise to move even before consumers' tastes change. Get out while the getting is good.

As for loyalty, don't count on it.

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[[livejournal.com profile] arisbe comments:] As I often say, my employers aren't outsourcing. Can they help it if the clearing house they bought just happens to own a software factory in Madras?

In a way this is very good for those of us who write the business requirements and functional specifications for software projects. It was easier to forget about these when the guy from the business unit who needs something and the programmer who can give it to him work in the same building.

Also, as a forty hour a week part-timer, I have been off the layoff radar.

But everybody else is on edge. My supervisor nearly took it as a disloyal act when I attended the Christmas party. She wanted senior management to get the message that we are not one happy family any more. If we ever were.

Interesting times.

[identity profile] scythrop.livejournal.com 2004-01-06 09:29 am (UTC)(link)
Interesting indeed. Lots to think about, although my first thought was to be glad I work with unique items that cannot leave the building!

[identity profile] kibbles.livejournal.com 2004-01-06 09:30 am (UTC)(link)
This may not be what anyone would want to hear, but let me tell you, so far my brief experiences (guessing by accents alone) with tech support in another country have been wonderful.

Calling a firm with an American accent got me an attitude like I was a complete moron for having called tech support, and I was even told things like "why do you have a mac? Can't you use a PC?" Not something I wanted to hear from the person who was supposed to support PCs! So often I was treated like a brain damaged idiot, possibly because of the female voice (happens in person at computer stores as well -- ignore me, talk to my computer illiterate husband), possibly because people I have known who have worked tech support had such snotty attitudes.

But the few times I called and got an accent (But I still understood) I was treated politely, and efficiently.

I don't care where the call went to, as long as they solve my problem and treat me with dignity when they do it.

Things seem to be picking up a bit for the trades, and that is good for us. (Us meaning my household.)

[identity profile] arisbe.livejournal.com 2004-01-06 11:20 am (UTC)(link)
Yes, India provides good customer support, and some schools there are even teaching a New York accent.

But the information technology industry here, which had enormous growth, is going to take a hit as programming jobs go the way of heavy industry.

[identity profile] nandan.livejournal.com 2004-01-06 11:37 am (UTC)(link)
Then let's hope we don't simplify our tax and court system, or the professional class too will be completely gone.

[identity profile] godista.livejournal.com 2004-01-06 11:05 am (UTC)(link)
China is well on its way to being the dominant world economy, all other currencies are rising against the US dollar right now as well. I really hope, for the American's sake, that Bush is not re-elected for office again--how much more ruin can he create to your economy? It's abysmal.

[identity profile] arisbe.livejournal.com 2004-01-06 11:12 am (UTC)(link)
I wish it all started with GWB and will end with his removal.

I'm not always a careful reader but...

[identity profile] nandan.livejournal.com 2004-01-06 11:36 am (UTC)(link)
I don't get the reference to "couples" at the beginning of your post. When I read it, I thought you were going to talk about childbearing habits, instead, the post speaks to the demise of socialism?

Did I miss something.

Re: I'm not always a careful reader but...

[identity profile] arisbe.livejournal.com 2004-01-06 11:41 am (UTC)(link)
Me neither.

(By the way, that was Mr. North speaking; I am just the forwarder, except for the brief comments at the end.)

I got a little confused precisely where you did. I think he was speaking of the decisions to have the children who grew up to compete with ours, then he went on to the flight from socialism.