Essays on Management: Frugality

Pay with silver, save with gold, defend yourself with steel.
Cossack saying

Individual and household wellbeing and business and economic performance involve managing scarce resources.  Therefore At the heart of good household, business and organisational management (and economy-wide productivity itself) is frugality, a psychological trait shaping how resources are allocated between consumption, savings and investment over time.

Frugality is not to be confused with selfishness or “meanness.”  Saving for others recognises the future has more rights than the present.  Frugality requires a mind-set limiting small pleasures today with a focus on a better future.  It implies an eye for micro-detail where decisions to save, conserve or consume matter.  It implies observations of both social complexity and ecological systems and how components work together.  It suggests an Occam’s razor searching for the simplest way of doing things.

At the individual and household level frugality underpins net worth and the self-determination and life choices these lead to.  At the production level it means more output for less input.  At the business level it means strong balance sheets, the ability to withstand shocks and to make longer-term and riskier investments.  It is also a business behaviour, involving using time efficiently, cancelling unnecessary meetings, or chairing them better.

Saving is a mind-set and low income people can transform their lives if they stick to it.  Modest income employees saving more than they spend can become high net worth.  This is a mind-set that makes personal self-determination (and organisational and economy-wide productivity) possible: it is not to be confused with a Dickensian platitude.

Frugality needs to translate into standard operating practice for individuals and organisations.  Frugality helps people survive hard times.  During New Zealand’s 1980s agricultural reforms farmers survived by cutting consumption and living from their vegetable gardens and on home-killed meat.  It took character and frugality to avoid surrendering to the herding behaviour and greed that led to the 1987 sharemarket crash.

External support bolsters the self-regulation to restrict consumption and build net worth.  External discipline can stifle people’s creativity, however it can strengthen people’s self-regulation and make it easier to exercise self-control.  A controlled environment and paternalism is needed for some.  If you have an alcoholic in the family, keep the liquor cabinet locked up.  Likewise if poker machines threaten the vulnerable they need to be “locked up” through bans.

At the individual and household level frugality means avoiding consumerism, rank status races and pressures to live in bigger houses or buy more fashionable clothes.  It means having a personal investment target to meet and paying yourself only the residual for consumption.  It means focusing on net worth rather than net income.

Those with the character to reject impoverishing social norms have the self-regulation to avoid drug and alcohol abuse and to not gamble.  They can scrape together a deposit on a house while their peers have a rental accommodation life sentence.

Saving is financially easier for high income people and also harder if they live in the wealthiest suburbs and up to their image and send their children to private schools.  In a consumption-based society it is easier to earn and spend a lot than to save a lot and increase net worth.  At the individual and household level, earning to spend is fatal.  Whatever your income, live below your means.

The benefits of frugality show up in net worth statistics.  Stanley and Danko’s  wonderful (though dated) book The Millionaire Next Door highlighted the importance of net worth rather than total income for people’s prosperity and economic self-determination.  It paints a word picture of US millionaires who started with nothing and became self-employed, typically in businesses such as plumbing, hairdressing, paving contracting, electrical engineering and so on.  They live in modest houses, drive old cars, send their children to public schools and buy second hand.  They ignore “keeping up with the Jones” and social pressures to spend.  They live frugally, have a savings and investment target they budget for before they spend, and they build up high net worth on quite average incomes.

Stanley and Danko observed how few of these millionaires had been born wealthy, and noted that “gift receivers are underachievers.”  These millionaires worked hard for what they had.  They were typically self-employed and allocated their time, energy and money in ways conducive to building wealth.  They believed that financial independence is more important than high social status, and that the most valuable gifts are education and determination.

Great entrepreneurs are frugal. John D. Rockerfeller was influenced by his dour  mother who told him “willful waste makes woeful want.”   Henry Ford visited car wrecking yards to identify Model T parts engineered to too high a standard than necessary.  He re-engineered them downwards to save money. Sam Walton’s search for economies gave us Wal-Mart, the world’s biggest retailer.  On a more modest scale Angus Tait drove an old car, lived in a humble house and worked long hours well past retirement age to build his business.  He created a self-sustaining business that outlives him, with much owing to his frugal mind-set.

Many Japanese companies are competitive because Japan had limited natural resources and depended on frugality to economise on them.  Japanese manufacturing was revolutionised by Joseph Juran and W. Edwards Deming whose quality and production techniques economised on scarce resources.  Their techniques took root in an island nation conscious of resource limitations and avoiding waste in everything.

‘Toyoda’ was renamed ‘Toyota’ to save a brush stroke in Japanese.  Japanese art and culture valued miniaturisation that involved both frugality and an eye for detail.  This flowed through to design competencies in companies such as Sony and other consumer electronics businesses that turned the art of miniaturisation into the science of competitive advantage.

Frugality must be an early stage value in designing how a business should operate.  Cost prevention must be designed into an organisation to avoid painful later stage cost cutting.  This philosophy also applies to public policy interventions.  Frugality in all organisations should take a whole of lifecycle view and be designed into the earliest development stage of new innovations, business developments, and policy and operational interventions.

Frugality is also a continuous process.  Peter Drucker suggested that every few years a form or procedure could be put “on trial for its life” to see if it is really needed.  One technique might be to suspend all reports for two months and then only resume those that managers and Ministers miss and start to demand.

Frugality is not as individualistically “selfish” as it appears.  At an aggregated level savings accumulate and are invested in an economy’s productive capital stock, allowing output to grow and support higher consumption levels.  Frugality and savings therefore respect the future, and far from being selfish or miserly, the future is generative and other-centred.

About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
This entry was posted in Essays on Management and tagged , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s