Thursday, October 25, 2007

Two Solutions

No matter how sleepy or distracted the professor, when my son John Calvin told them he had spent the summer interning in China, the economists all sat up with light in their eyes. The country is in a tremendous transition from command economy to market capitalism, on a scale never before seen in a single nation, and it is fascinating to watch.

Forbes reports on one situation, two divergent views. What do economists think will address recent product quality issues in China?

Option 1: Regulation

Jeff Rosensweig, a professor of finance and Director of the Global Perspectives Program at Emory University's Goizueta Business School ... believes that much of the quality control issues can be attributed to the difficulty of regulating the vast number of people in China, which is four times the population of the U.S., and in spite of economic growth and changes, most of the country is still decentralized.

Option 2: Markets

Professor Marshall Meyer of the University of Pennsylvania's Wharton Business School ... believes that consumer interests will self regulate for liability, causing manufacturing quality to improve. "The Chinese government can try to enforce safety regulations, but the markets will do this more effectively."

Read the whole article for other interesting comments. I only note a couple of things -- one, that there is a lower limit to what the market will bear, even in overseas economies. There is truly a point where an item is simply too cheap. Some American retailers have already broken that floor, and they are finding the crawl space is not a comfortable place to be. This is a new angle on caveat emptor -- along the lines of "you get what you pay for".

The other observation is that, while the result of similar problems in American manufacturing was the Pure Food and Drug Act, the Consumer Product Safety Commission, and other such regulatory creations, at the time Upton Sinclair wrote The Jungle, the tolerance for low quality in consumer goods was very widespread -- the standard had not been raised yet. Now, though, I think there is a wider awareness of quality, whether in terms of wholesomeness, effectiveness, or consistency of workmanship, and with the globalized economy, there are more alternatives available. If one Asian manufacturer produces defective goods, there are dozens more who are willing to aim higher and capture his customers -- if, of course, the customers are not beating them down through the floorboards as well.

For my part, I side with Professor Meyer. The market is going to take care of it in Asia; it's up to us, though, to be sure we are willing to pay for the quality we expect.

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