THE BLOG
03/08/2013 03:38 pm ET | Updated May 08, 2013

The Hidden Flaw in Our Economy: Why Didn't Our Economic Policies Work?

Revitalizing the economy is now the most important national issue facing not only the United States, but all the G-20 nations, including Japan, Korea and many Euro zone countries. Even though each country has tried almost every possible policy and investment to revitalize their respective economies, most of these have not been effective.

Why have existing policies not been effective? Why did this situation happen in the first place? Even though many experts are studying this issue, none has found clear answers, let alone a solution. Could they be looking in the wrong place? Or have they missed something crucial in their thinking about the economy?

By way of explanation, I would suggest considering the economic impact of newly developed virtual supply-chain systems in the last three decades of the Modern Information Age.

Conventional Systems in the Supply Chain

Let's think of the manufacturing and supply chain network -- from product manufacturer to distributor to retailer and finally to the consumer. There were the narrow and curved countryside roads to drive, the mountains to pass, and the rivers to cross between suppliers and customers. As usual, to increase delivery speed and efficiency, we have constructed highways for the countryside roads, tunnels for the mountains, and bridges for the rivers.

In this case, however, let's imagine that the highways, tunnels and bridges were all privately developed and owned. Moreover, the owners weren't interested in opening these transportation facilities to the public -- not even to collect tolls. They simply wanted the highway-tunnel-bridge system for their own, private use because of its monopolistic advantage.

What would have happened next in our economy and society?

The most likely development would have been that, due to the superior position of big companies in efficiency, the businesses of small- and medium-size companies would have weakened and eventually failed, and accordingly many jobs in these companies would also have disappeared. Job creation in the market as a whole would have suffered as demand fell. In addition, while the profitability of the general service industry fell precipitously, we would have experienced a vicious deflationary cycle with rapid reduction of total consumption. Correspondingly, the expanding gap between poor and rich would have become inevitable... Our society could have experienced increasing social and political unrest...

In this scenario, what actions would national governments have had to take? First of all, they would have adopted a series of powerful expansionary monetary and fiscal policies aimed at preventing depression due to reduced total consumption, and activated deregulation to revive the overall market. Moreover, in order to calm social unrest, the implementation of generous welfare policies would have been unavoidable. As a result, many national fiscal statuses would have continued to worsen after a lag, pushing weaker national economies toward default.

This looks uncannily like the situation that the world economy including the U.S. has experienced over the last several years.

Fortunately, however, rationally run countries actually have never allowed this hypothetical case to happen. That is, they built transportation infrastructural facilities for the public.

But such rational development has not been the hallmark of the Modern Information Age.

New Virtual Supply Chain Systems in the Modern Information Age

Many companies (mostly big ones) have developed virtual supply chain networks by integrating logistics and similar collaborative functions. The aim was to reduce the number of transactions in supply chains and to improve the efficiency of collaborative functions.

Zara's case is an example. Zara, the largest clothing company in the world, developed an information-based supply chain network by vertically and horizontally integrating its logistics and collaborative functions through IT and networking technology and now needs just two weeks to develop a new product and get it to stores, compared with a six-month industry average. This enables Zara to launch around 10,000 new designs each year, far outdistancing its competition.

But what happened to others in the industry? Most of Zara's collaborators -- small designers, manufacturers, and stores -- became much less competitive than Zara, which absorbed only a few of them. As we might expect, the employment situation for middle- and lower-income workers in this industry has relentlessly worsened. Zara's imitators are now legion.

A Serious Flaw in Rational Economies

Without being aware of the larger economic implications, our rationally run countries have accepted privately owned information-based supply chains as an economic necessity without calculating the consequences of such a decision. As a matter of course, most of these networks have been developed by large companies only for their own benefit. Moreover, even if it is hard to believe, no similar public infrastructure has emerged at all--not a single one in the whole world. This is just as if all physical transportation facilities were privately owned and used only for the owner's profit!

I believe this has become the hidden driver of the current economic crisis. It elevates the barrier price of entry for new businesses. It perpetrates bloated costs of competing in distorted markets. It accounts for current distortions in demand and in labor.

What Should We Do for Our Distorted Economy?

We must repair this flaw by constructing a new public information-based supply chain infrastructure for modern IT-based markets in tradeable goods and services. This would be a real revolution originating in IT -- comparable, for example, to the electrification of industry in the early 20th century.

Unfair conditions for small- and medium-size companies and necessarily also for middle- and lower-income workers now permeate the markets that make up the economy as a whole. They are the source of the enormous amounts of capital required to feed the oligopolies that emerged from the electronic make-over of private supply chains.

I believe it possible to ensure fair conditions in the market and restore a rationally-run economy along the lines of absolute competition. This alternative to our current distorted markets will be relatively painless to implement, and over time will eliminate the fruitless economic policies of the recent past by making them unnecessary.