…[take] the human being out of the market entirely, then we should have a proper, effective and efficient market…?
So might go the refrain of Neo-liberal economics, or at least a slightly different take on the Neo-liberal ideal of ‘every interaction should be a market transaction‘.
That Neo-liberal economic refrain is part of the inspiration behind the creation of the ‘Soul of the Market’ or rather theMarketSoul and this site.
With this last post of 2013, we thought a bit of reflection and a reminder of our inspiration and founding philosophy might be in order.
In order for a market to be effective, there has to be a few ripples in the ebbs and flows of the transactions and interactions making up the market processes. Therefore, we have to be able to tolerate human frailties and flaws, or else the market becomes too mechanistic and dare we say it preordained. This can naturally not be an effective outcome for any market. Human failings and market failure are two sides of the same coin. However, we should work together in order to limit the inevitable damage and negative consequences of both human and market failure. This does not necessarily translate into more regulation, might we add at this juncture.
Let us never forget this and celebrate process frailty, failure, learn to develop and embrace tolerance, persistence and perseverance; basic elements of human nature…
We should never forget our inspiration, put it to aspiration and strive to achieve our own unique and specific dreams.
The problem of getting too distracted by constantly fire-fighting in business settings
We might have heard it referred to as phrases such as “blinkered vision, short-term thinking”, possibly even “tunnel vision” or something similar; however the challenges of Immediacy is (1) the hidden cost and (2) damage it does to our organisations and culture within those organisations.
This is a behavioural consequence of a much more deep rooted problem. It could possibly be insecurity or ‘over’ control, mistrust or some other behavioural issue.
However, we would like to make a bold statement that the problem is one of an over commented emotional connection to what we do. Too much passion and care in other words. This is not a bad thing in itself, but it must be tempered and balanced by its opposite twin, namely logic and deliberation.
As it has been our most read article, we thought we might continue to build on the theme of Economic Friction Cost.
Williamson (1993) published some work on Transaction Cost Economics (TCE) in a book entitled The Economic Institutions of Capitalism’. TCE is an equilibrium theory and looked more closely at the firm level or micro-level analysis and at behavioural aspects of ‘rational choices’. Up until that point most economists had only considered production cost as part of profit maximisation assumptions, and not at transaction costs within the firm.
Transaction Cost Economics focuses predominantly on the governance of ongoing contractual relations (Williamson, 2007).
But what exactly, in practical terms are Friction Costs?
As stated in our previous article there is a large element of hidden costs implicit in Friction Costs. Friction Costs can be highlighted by analysing the end to end or life cycle costs of any product or service. A general rule of thumb that is applied to life-cycle costing is to take the visible ‘advertised’ cost and double it up. That exercise generally gets you very close to the full life-cycle cost of any product of service. This rule of thumb works with large capital projects, as well as estimating the full employment costs of hiring people.
But friction costs go further than this. You might call it the fourth dimension of costs as it incorporates time value and opportunity cost elements.
Time value has two specific meanings for us here:
Time value due to down time, loss of productivity, etc. This is more accurately referred to a value of time
Time value in terms of the diminishing purchasing power of money, due to factors like inflation and opportunity costs when money is not put to beneficial uses. This is the general use of the term Time Value of Money and ustilises Present Value techniques via a discount rate to work out the equivalent value of money in today’s purchasing power terms, whether we look into the past or into the future.
Thus, the two areas we have to focus on during the expansion of the Friction Cost exploration in the next article will be time value and opportunity cost elements, as part of our enquiry into delving into a better understanding of Friction Costs.