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Sustainability: Moving from Common Sense to Common Practice
2016 International Conference
Leesburg, VA - National Conference Center

September 18th - 21st

Development Economics From a Theory of Constraints Point of View

David Villalobos - PhD Candidate of Management & Economics at the Catholic University of Louvain in Belgium

The goal of this paper is to challenge the common practice of using Theory of Constraints (TOC) in an organizational or firm system level by proposing a TOC application to a wider system level: the economic system.

An economic system, configured as a global macroeconomic network within a country or group of countries, is recognized as Complex Adaptive System (CAS). The complexity within Economics is built from the proposition that the economy is not necessarily in equilibrium: economic agents (firms, consumers, governments, investors, etc.) constantly change their actions and strategies in response to their created outcome (Arthur, 2013). A new economical thinking approach is needed to drive Economics into a purposeful new future. Of course this will take time because we know –thanks Eli Goldratt- that "people will do almost anything before they will shift their paradigm”. Nevertheless, Economics could be an interesting field in which to extend the power of TOC, given the high complexity of the economic system, the potential impact in the quality of people’s life and the sustainability of the economic systems regarding social and ecological issues.

Governments as public organizations have taken particular advantage by the powerful and simple TOC solutions. These solutions have been focused mainly on the improvement of the public service supply. However, it seems that governments have not applied TOC at a wider system level: to promote the development – or continuous improvement- of their economic systems.

For instance, it is interesting to notice that the debate regarding to the goal of the Economics is far from over and this debate is not widely diffused. Nonetheless, there is an extensive discussion about what is the main indicator to measure the success in our economies (Stiglitz et al., 2009). Orthodox authors promote the GDP (gross domestic product) per capita as the main indicator of national improvement or development. Other authors encourage the inclusion of complementary measurements as education and health indicators to understand the development process (Sen, 1999). Finally, other authors criticise the traditional measurements and suggest a new set of indicators based on the happiness index, the social progress index or the GDH (gross domestic happiness).

Regarding this debate about the goals and measurements of the Economics, I think that TOC could significantly support to this discussion. Paraphrasing Lisa Scheinkopf: "the simple message of The Goal was: clarify the organization’s purpose, determine measures that are aligned with that purpose, and improve by managing those few things that limit theorganization’s higher performance relative to that purpose” (Scheinkopf, 1999). We could do the same at the economic system level as "The Goal” did at the firm one. Therefore, the first step could be to recognize that every system was built for a purpose (Goldratt, 1990) and thus, to define the system and its purpose. I would like to propose, under an Economics point of view, that the economic system goal is to increase the income of all people, now and in the future, without exhausting the human and natural resources. In other words, the income growth –or efficiency- matters such as the income distribution –or equality- (IMF, 2014). This goal description faces the "Big Trade Off” between efficiency and equality that has been widely discussed in Economics (Okun, 1975), and it could be presented with an evaporating cloud tool:

Figure 1. Evaporating cloud: The "Big Trade Off” of the Economics At this point the Boy-Scout analogy of the The Goal could be enlightening: the goal of the group was not that only one arrives faster but the whole group arrives faster (Goldratt & Cox, 1984).

This goal is directly related as well with the economic sustainability dilemma to promote now and in the future income for all people, by avoiding stagnation and/or inequality imbalances across the time. Moreover, this economic sustainability affects deeply the social and ecological systems and their sustainability. Thus, the goal is considering them when describes the sentence: "without exhausting the human and natural resources”.

The second step -logically derived from the first one- is to determine the system’s fundamental measurements. Here, I suggest a "Throughput” measurement, given the goal proposed before. If the goal is to increase the income of all people, it is necessary to have an indicator that could describe –at the same time- the statistical position and distribution of the measurement according to the goal.

Faraway of measurements such as the GDP per capita, computed as a roughly average about the income position of the inhabitants, the statistic science could provide us a technical andsimple indicator of the position and the distribution of the wealth of the population: the median1 income. Statistically speaking, the median is often a better representation of the central value of a data set than the mean, especially under skewed distributions and the presence of outliers (Chiripanhura, 2011 & Levy, 1997). These are two typical characteristics of the national income distributions.

The median income is increasing its academic relevance as a superior measure of living standards in comparison with GDP per capita. For instance, a group of members of the wellknown Organisation for Economic Co-operation and Development (OECD) Economics Department proposed the median household income as a measurement that "better reflects the actual material living standards of a typical household” (Causa et al., 2014)2. Given these goal and measurement3, Economic History and Public Policy could be analysed from a new, simple and powerful TOC perspective. For example, the implicit or explicit government implementations of the Process Of the OnGoing Improvement (POOGI), the big dilemmas or trade-offs that policy makers faced, or how the successful economies have been answered the relevant questions about what to change, to what to change and how to cause the change to improve or to develop their economic systems.

One important application could be to understand the improvement or development process of a limited group of nations (as Japan, South Korea and Taiwan) that have increased exponentially their income of all people, moving from low income to high income country status in just forty years (Studwell, 2013). Complex systems have a history. They evolve and their past is co-responsible for their present behavior. This historical path dependency could be analyzed and visualized with a Current-Reality-Tree (CRT).

These countries seem to have focused strongly to resolve the core conflicts in their economies with win-win solutions, thus moving their nations to increasing levels of success and wealth and by promoting sustainability across the time and across other systems (social and ecological). It could be interesting to comprehend how common sense national solutions must become common national practices, and how they could be replicated in other economic systems.

The complexity and the dilemmas inside the economic systems are particularly high in comparison with one business or supply chain system. However, under this highly complex scenario the power of the solutions could be potentially capitalized based on the logic of the inherent simplicity principle explained extensively by Eli (Goldratt, 2008).

  1. The median is the number separating the higher half of a data sample, a population, or a probability distribution, from the lower half. The median is less affected by outliers and skewed data. It is widely used in consumption and income surveys as a better measure of central tendency to describe the population attributes.
  2. Moreover, this report also suggests focusing in the lower levels of the income distribution –as Alex Rogo did with Herby in The Goal-, as an ethical and an effective way to improve the whole economy performance.
  3. Other similar measurements as the Inventory and Operational Expenses in the Throughput Accounting should be analysed later in a kind of new Economics or Development Accounting.
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David Villalobos - Ecuadorian (1982) and Economist, is currently a PhD Candidate of Management & Economics at the Catholic University of Louvain in Belgium. He has more than 10 years as strategy and supply chain consultant in Europe and Latin America leading and supporting implementations in multinational and non-profit organizations. He knew Theory of Constraints almost ten years ago, and he met Eli Goldratt in 2010. His thinking and books have been deeply impacted his ideas, consultant work and academic research.

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