lobster_steamed2.jpgUnderstanding Systems and How to Make them Better

Maine lobsters have plunged in price from $10 a pound a few years ago to less than $2.25 a pound plus restaurant demand for the “king of crustaceans” is off more than 30% nationwide due to the recession. So everyone would think that prices on the menu have obeyed the most fundamental law of economics, that of supply and demand?

According to the New York Post (August 19, 2009, p.39) prices of restaurant lobster on your dinner plate in Manhattan are averaging $21 to $28 a pound, $75.85 for a three-pound lobster at Grand Central Oyster Bar. While menu prices are down 5% to 10% from prior years, Water Club restaurant owner Buzzy O’Keeffe says his wholesale costs have not dropped much: to $7.65 a pound from $8.95 in 2008 and $9.85 in 2007. High volume restaurants (the big guys) can get pricing as low as $6.95 to $7.50 a pound, low volume restaurants can pay up to $8 per pound.

From $2.25 a pound for the fisherman to $7.65 a pound for the small business restaurant owner? That is almost a 350% increase in cost! Why? “’By the time they (the lobsters) get to us, they’ve changed hands three or four times,’ says restaurateur Ben Benson. Chef/owner Ed Brown echoed the same sentiments: ‘Most of us buy from a third set of hands. The lobstermen sell to a big mover through a broker. Then the mover sells them to purveyor X and we buy from the purveyor.’”

Hey! I’m pretty much a vegetarian. Why am I writing about lobsters? Because it is an excellent illustration of a system that supports the world we live in and a not very efficient system at that. Efficient systems create value, inefficient systems destroy value. Henry Ford popularized the assembly line (an efficient system) and when the number of work hours required to assemble a car dropped drastically (productivity improved), the Model T became affordable to the middle class American. Red tape, bureaucracy, monopolies, the dead hand of locked-in vested interests, too broad patents that stifle innovation, big pharmaceuticals that harass generic drug manufacturers with nuisance law suits: all these are examples of inefficiencies in our economic system that destroy value.

There are two basic ways to make money: you can create value or you can transfer value. When you find a way to do something better or faster with greater economy, you have created value. Transferring value occurs when you simply find a way to take money out of someone else’s pocket without necessarily leaving them better off: think Wall Streeters who create toxic investments, pay big bucks to get them rated AAA, and then quickly sell them before they go bad, or the CEO who packs the board with his buddies who vote him stock options ad infinitum. The difference is important because much of the debate that goes on at the national level seems to miss the distinction.

True long term prosperity can only be achieved and sustained as we—as individuals and as a country—find ways to truly, fundamentally do things better. And when we insure that economic incentives and rewards flow to the CREATORS of value, not those silver-tongued individuals who specialize in transferring value without creating value equal or greater to the costs they impose.

Caveat Emptor!