The global economy is being transformed by technology and the use of those technologies by firms to rationalize the process by which goods and services are produced and delivered to consumers. Most economists no little about the way firms really work or the transformations that are underway. Michael Spence is a Nobel economist who is an exception to that rule. This article provides an overview of the transformations that are taking place. Technology has enabled firms to relocate production to take advantage of low cost labor. Technology was also used to create supply chains that move intermediate products, from a variety of locations, to the source of final assembly. That has allowed developing countries to grow by providing the unskilled labor for manufacturing the intermediate products, and the final assembly. Consequently, developing countries have also become a source for final demand. Technology is now making it possible to locate production wherever the demand exists. Moreover, less labor will required to satisfy the demand. Retail systems will also become more tightly coupled with productions systems.
I spent several years in the computer industry. Part of that time was devoted to rationalizing the production system. The production system depended upon forecasts from the marketing organizations. Since forecasts are an imperfect indication of final demand, the production organization would make its own forecasts for final demand. That usually led to inventory build up because it was less painful for production to carry excessive inventory than to it was to run short of the products that were sold by the sales force. The only solution for this problem was to become less dependent upon forecasts. That required us to cut the lead time required by production to produce the products that were actually sold. That proved to be very difficult. However, it is a mistake to believe that manufacturing is based upon large numbers of unskilled workers. There are lots of highly skilled workers doing production engineering, production management, inventory management, plant management etc. etc. When manufacturing plants relocate, a lot of high skilled jobs are also relocated.
A good example of what is happening today in too look at the publishing industry. The traditional system requires publishers to forecast demand, and sell their printed books to retailers for resale. The publishers and the retailers have to bear the cost of inventory, and the cost of lost sales when the right products are not in stock. Today it is possible for a customer to go to the Amazon web site and order an electronic copy of the book. Of course, Amazon also sells print copies of the books but selling electronic copies of books eliminates inventory costs, and no sales are lost because a book is out of stock. Customers get faster deliver, and they pay a lower price for the product. In the process a lot of jobs are eliminated or transformed by the coupling of demand with production, and by electronic delivery to any location where demand exists. Spence argues that new technologies are changing the way in which products are manufactured. It will be easier to produce the finished product wherever the demand exists and it will require less unskilled labor to do so. Much of the skilled labor will also be provided by new technologies. The rationalization of the process will increase productivity and cut the demand for many forms of labor. New skills will be required to make the system work, but the net result is a lower demand for labor. Small businesses, as well as large multinationals, are moving in the same direction.