Well, it’s that magical season again. No, I don’t mean the holidays. I’m referring to election season, where politicians promise the magic of lowering taxes while expanding government services. Years of such pandering has bred an infantile expectation among citizens who see nothing contradictory about wanting to keep more of their paycheck and demanding that government solve all of their problems at the same time. Reasonable people can disagree on the appropriate level of taxes and government services. Reasonable people cannot disagree that some linkage must exist between the two. All things have a cost.

Many economists have properly warned about the long-term consequences of embracing the false premise of expecting more while paying less, but another interesting angle to ponder is how the premise alters consumer psychology and purchasing behavior. Ironically, in the realm of consumer goods, people have been able to achieve that unreasonable expectation.

Whether you begin with the invention of the plow or the loom, history is full of examples where the magic of technology fueled great leaps in human productivity, lowering the cost of goods relative to the amount of labor needed to acquire them. Aside from the occasional wars, famines, and depressions, progress over time has steadily allowed more people to own more things. Debates are often kindled when a presidential candidate asks whether people are better off now than four years ago, but there is little debate as to whether we are better off than we were 40, 400, or 4,000 years ago.

Surges in productivity have resulted not only from technology shifts, such as from craft to machine, or water mill to steam power, but also from organizational paradigm shifts, such as Ford’s concept of the assembly line. The electronics revolution begat not only more sophisticated automation, but also the computer that streamlined the various human processes and logistics upon which manufacturing depends. Beyond technology, practices such as design for manufacturability and outsourcing some production to lower-cost labor markets have also constrained the cost of goods.

But some wonder if the magic carpet ride may soon end, snagged by the law of diminishing returns. At some point, the climbing direct cost of sophisticated automation, along with its rising indirect costs of staff training and debugging downtime, decreases the value of obtaining it. At some point, the soaring cost of transportation due to higher fuel prices lessens the advantage of outsourcing. At some point, the skyrocketing cost of materials shrinks the proportional labor cost to where further gains in productivity have a dwindling effect upon end-product cost.

In that situation, manufacturers will be faced with the need to raise prices while confronted with constraints against doing so. For one, they are often locked into co-dependent relationships with large distributors or retailers that transform even modest attempts at price increases into intense negotiations. Getting past that hurdle then requires retraining consumers to pay more after they have been conditioned – for centuries now – to get more for less.

Manufacturers might be tempted to escape that dilemma by designing degraded products whose flashy facade of value masks a cheapened functional core. That will be a bad choice, because facades never last for long. Reality strips them down, and people end up paying the price one way or another, with more bucks or more aggravation.

An optimist might suggest that such worries are premature, and that technology will again ride to the rescue. For example, maybe nanotech engineers will figure out how to magically transform waste into amazing materials that cost little and do much, and then the ride begins anew. Let’s hope the optimists are right, and that, like politicians, we always have one more trick up our sleeve.

Richard Babyak, Editor
E-mail: babyakr@bnpmedia.com