Corporate Profits

Steve Sailer is wondering why corporate profits are so high now compared to a generation ago.

I'm guessing from all this that the CEO's compensation as a % of corporate profits went up from about 3% in the 1970s to about 4% these days. So, there's no apparent economy of scale in CEO pay. That change from 3 to 4% is not insignificant, but the big change since the 1970s seems to me to be the huge growth in corporate profits.

And that seems kind of odd. I paid a lot of attention to the business world from, say, 1979 into the early to mid 1990s, but the size of corporate profits these days seems hard to reconcile with economic theory. Adam Smith 101 says that more perfect competition will lead to lower profits.

If I had to guess, the biggest change has been the widespread adoption of lean manufacturing and operational excellence [OPEX] tools in American manufacturing. The story of lean manufacturing is an interesting one. W. Edwards Deming initiated a statistical revolution in business and manufacturing metrics in the 1950s, but he didn't find a willing audience in the US, so he went to Japan. The Japanese adopted his ideas quickly, and rapidly improved the quality of their exports.

30 years later, Deming's methods started to spread in the US once people started to ask why the Japanese where doing so well in the 1980s. Ford was one of the first corporations to invite Deming to consult. There is some irony in this, Henry Ford understood some of Deming's ideas quite well. For example, Ford created the lean idea of Just in Time [JIT] manufacturing, delivering a part to the assembly line only when you need it instead of storing it. The Japanese just perfected his idea.

Over the past 30 years, lean manufacturing has spread throughout the US manufacturing sector. The basic ideas aren't that hard to implement, and in a short time can cause a step change in profits. The reason for this is the nature of lean manufacturing. You don't have to invent a new product, or sell more widgets, or create some slick new ad campaign. You just do what you are doing now more efficiently, and every cent you save that way goes straight to profits, because you are already selling stuff.

There are definitely diminishing returns on lean manufacturing implementations, but the concepts actually work for just about any process. You can even apply lean ideas to the design process itself, shortening time to market.  US workers are pretty competitive in the global market today, and I would guess this is the reason.