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Thursday, December 22, 2011

There Is No Great Stagnation: Coffee Edition

In praise of mass customization.

In a previous column I took on Tyler Cowen’s argument that the last few decades have been a period of “stagnation,” devoid of major wealth-enhancing innovations, by exploring how easy it was for me to order a part for my gas grill compared to a decade or two earlier, thanks to gains in technology and trade that have massively reduced transactions costs.  One point I made is that much of the conventional economic data overlook the gains to well-being that come from my being able to find and order that part in a few minutes and have it delivered to my door in a few days.

This week I want to return to that theme but with a different example that provides a another window on what we mean by innovation and how hard it can be to measure improvements in well-being.

My example this time is the Keurig coffeemaker my department recently purchased.  For those unfamiliar with Keurigs, they make coffee one cup at a time through an ingenious brewing system that runs the hot water right through a small container that holds the coffee, dispensing it right into your mug.  Unlike instant coffee, this is actually brewed — and quickly.  The coffee tastes pretty close to what you’d get from a typical automatic drip system.  It can also brew tea and even hot chocolate.


So what’s so great about this device?  First, it’s beautiful — and that matters.  You can see from the picture that it looks like something Apple or some other design-conscious company would make.  Second, the single-cup technology (known as K-cups) is a wonderfully consumer-friendly innovation.  If you live in a house or share an office with people who like different kinds of strengths of coffee, or, like me, prefer decaf, you are used to the problem economists call “imperfect preference satisfaction.”  Even the best solution is likely to be imperfect for most, if not all.

The Keurig system solves this problem.  One colleague can have the lighter roasts she likes; another can have tea; and I can have my French roast decaf — all without affecting the ability of others to satisfy their preferences.  Imagine a car that can change models depending on who’s driving it and how that would solve the problem couples face in finding a car they both really like.

This may seem like a little thing, but it’s part of an important trend of the last few decades, a process that some have termed “mass customization.”  Innovations in technology and production processes have increasingly enabled us to purchase products that are either created uniquely for us or that permit customization.  The most obvious example is Dell computers, which was one of the first companies to let consumers pick the components they wanted rather than take a unit “off the rack.”  At one time Burger King was able to differentiate its product by telling us to “Have it your way,” but now this is increasingly standard operating procedure across an increasing number of industries.

Missed by the Data

The ability to fine-tune a mass-produced device to one’s own preferences cannot be accounted for easily in the traditional economic data.   Our incomes aren’t any higher, nor is there an obvious net effect on GDP.  However, the ability to have a product that more precisely matches your preferences is clearly a gain in consumer well-being.

Finally, the Keurig is a really nice example of consumer sovereignty.  The wonderful thing about markets is that firms are always trying to figure out how to deliver the things consumers want.   This is also what government bureaucracies are notoriously bad at.  Compare, for example, the one-size-fits-all approach of government schools to the idea of mass customization.  Can we even imagine a machine whose central purpose is to individualize the coffee-drinking experience being produced in the former Soviet bloc?

The Keurig is not just a beautiful piece of innovative technology, it’s also a symbol of many of the things markets do so well and how our lives are better as a result, whether or not we can measure them in the usual ways.  The world of the Keurig is not a world of stagnation, but one of small changes (one might even say “marginal revolutions”) that improve our lives bit by bit, year to year.

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Happy holidays to all. To regular readers of this column, thanks for spending another year with me and for all of your kind words in the comments and email.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.