Lean Economics

The conventional ideal of the perfect competitive market can be summarised in seven conditions. In order for it to exist, there must be . . .L27

1. no local intervention (such as government regulation to set standards)—and no discrimination except on grounds of price against another producer;

2. standardised products—so that all products compete on price rather than on differences in specification;

3. a large number of sellers and buyers, and all of roughly the same size—so that none of them can influence prices;

4. free entry and exit—sellers and buyers can come and go as they wish;

5. profit maximisation—sellers do not have any agenda other than making money; buyers are irresistibly drawn to the best deal;

6. perfect mobility of the factors of production—so that labour, capital and land are distributed according to price: they are free from other entanglements and strings; and

7. perfect knowledge—so that buyers can perfectly evaluate the quality of all products on the market.

Under these conditions, prices are set and resources are used with smooth efficiency, unsullied by human error, by economic boundaries or by principles and agreements of any kind other than those of comparative advantage and competition. This does the theoretically useful job of opening the way to the greatest possible efficiency. There is no slack; there is “Pareto Efficiency”: it would not be possible to make better use of the economy’s resources and assets: any gain made in one place would be at the cost of loss in another.L28

Economists do not claim that this ideal of perfect competition ever happens in real life, nor that the rigorously-defined equilibrium enabled by it can exist. As a leading authority in the matter, Frank Hahn, remarks, “The economy cannot be in this state.”L29 Nor do they even believe that, in practice, the existence of perfect competition is really desirable. For a start, it would rule out the existence of large companies; differences between brands of the same product would have to be banned, as would natural monopolies such as railway and electricity networks, however competitively they were structured.

Nonetheless, it is the ideal baseline against which distortions, disequilibria, rigidities and the market failures which are suspected of causing unemployment are identified and defined. “Perfection” in the market consists in being competitive and taut, with every available resource used as efficiently as it can be.L30

The Lean Economy, being the opposite of this, affirms a critical role for intentionally imperfect competition, for “organisational slack”.L31 In fact, building slack into a system as an instrument of protection and stabilisation is already an accepted, though not universal, practice in management.L32 Instead of insisting that price competition should pre-empt and trump every other criterion of decision, such slack allows space for choice and for committed long-term relationships with business partners and suppliers—for what Milton Friedman described disapprovingly as “cumbrous political channels”, an untidy jostling of argument, policy, judgment and long-term vision.L33

This is not the contradiction of lean thinking that it might seem, since lean organisation makes good use of strategic slack. It may, for example, be prepared to work painstakingly with suppliers when they get into trouble, rather than rigidly buying at the lowest price from someone else, and it may earn loyalty in return. It may take time out to think. And yet, the settled lean order of the future will take slack a long way further than any current enterprise would contemplate.

 

A Seven Point Protocol for Lean Economics

The stabilised local economy—the economics of the Wheel of Life—will violate all seven of the conditions listed above. All economies do so to some extent, but in the Lean Economy the impediments to perfect competition will be greater than ever, and this will be intentional. The ideal conditions of the post-market economy—those of intelligent imperfect competition—are summarised in this alternative seven point protocol:

 

1. Local Intervention: Intervention to protect the local economy, and to build trust

Protection. All the seven points of this Protocol for Lean Economics are implicitly or explicitly about the task of protecting local economies.

In a taut, competitive, growing market, it is true that protectionism is not a good idea. It reinforces inefficiencies and reduces the incentives for improvements in quality, economies of scale and reductions in price. It discourages the development of technical advances and specialist skills, and it freezes flows of trade and capital, setting up conditions for national and global unemployment.

But there are other circumstances in which free, unprotected trade is not what an economy needs. One of them occurs where an undeveloped, thus-far uncompetitive economy needs time to get its industries established before exposing them to international competition. In the early years, a developing region with an industry which is still too new to have developed competitive levels of efficiency is unlikely to survive without some advantage, such as a weak currency or tariff protection.L34

Another case where unprotected trade is not what is needed is the Lean Economy, whose sharing out of work makes it inefficient by design, so that it would quickly be destroyed unless protected from the competitive rigours suited to profoundly different conditions. The Lean Economy will be inherently uncompetitive in two main ways. First, full-time work as standard practice will be obsolete, and much of the work that is done will take the form of participation in the informal economy. Secondly, its range of technologies will include labour-intensive production methods which would be priced out of existence in a competitive market. These two characteristics are discussed further at the end of this entry.

Labour intensification for its own sake is not advocated. It would make more sense to get the job done quickly and to spend any spare time smelling the roses. But the benefits of labour-intensive methods apply widely, and they include reduced energy-dependence, simple equipment, suitability for the small, local scale, greater eco-efficiency, better food and improved soil, and a higher quality of craftsmanship.

In summary, the Lean Economy will be slack, producing less per working man and woman than it could produce it if were able, like the industrial economy had been, to keep the majority of the working population at work full-time and with competitive efficiency.

Sustainable slack will be an immense achievement, more significant in its way than the Industrial Revolution’s invention of unsustainable work. But that brings us back to the key problem. Slack economies are vulnerable to taut economies—a version of Gresham’s Law, which says that bad money drives out good money.L35 And slack economies, once destroyed, do not become taut economies. They become broken economies. They will need protection.

 

Trust. Money will have much reduced significance in a local Lean Economy. Prices don’t work well in a slack economy because (if everything were priced) slack would mean high prices, and there is always the temptation to give in to buyers’ pressure to reduce the price, especially if the buyer is outside the community.L36 In the local Lean Economy—a culture of cooperation and reciprocityexchange involving money is not the rule, but the backup. The significance of such a change is hard to overstate. The market economy’s money exchange is impersonal: until they get into the bigger, longer-term transactions, such as rents or employment, the two sides of a money transaction don’t have to trust each other, and even then there are ways of dealing with the situation if things go wrong.

In contrast with this, the informal economy of the neighbourhood will consist substantially of reciprocities which do not involve money, and would break down immediately in the absence of trust. The central collaborative task of the local Lean Economy and of the politics beyond it will be to build that trust. And yet, trust cannot be made; it is a slowly-growing outcome of getting other things right first—like lichen, that grows on a wall if you leave it undisturbed for long enough. It requires permanence, with people being in the same place for a long time. Deep trust, able to survive stresses, to support substantial cooperation, and to sustain intense deliberation, requires the foundation of a common culture and identity.

The task of supporting that culture is itself a form of sustained intervention in the way in which people interact with each other. In other words, the community will protect its culture as the foundation for trust, which in turn will be the key enabling property of its economy.

 

2. Product Diversity: no product is quite what it seems

A local shop provides a subtle mix of services—gossip, help for old people, surveillance of the street, accessibility—along with the groceries. These extras have to be paid for in higher prices (see “Loyalty” sidebar below). It is not only the disadvantage of being unable to buy in bulk that makes the corner shop supposedly inefficient and expensive; it is the labour-intensive presence of the shopkeeper and all the intangible services he supplies: they are a public good from which you benefit whether you buy from him or not.

LOYALTY
Getting more than you bargain for

When the Thanatopsis Club hit its centennial in 1982 and Mrs. Hallberg wrote to the White House and asked for an essay from the President on small-town life, she got one, two paragraphs that extolled Lake Wobegon as a model of free enterprise and individualism, which was displayed in the library under glass, although the truth is that Lake Wobegon survives to the extent that it does on a form of voluntary socialism with elements of Deism, fatalism and nepotism. Free enterprise runs on self-interest. This is socialism, and it runs on loyalty. You need a toaster, you buy it at Co-op Hardware even though you can get a deluxe model with all the toaster attachments for less money at K-Mart in St. Cloud. You buy it at Co-op because you know Otto. Glasses you will find at Clifford’s which also sells shoes and ties and some gloves. (It is trying to be the department store it used to be when it was The Mercantile, which it is still called by most people because the old sign is so clear on the brick facade, clearer than the “Clifford’s” in the window.) Though you might rather shop for glasses in a strange place where they’ll encourage your vanity, though Clifford’s selection of frames is clearly based on Scripture (“Take no thought for what you shall wear . . .”) and you might put a hideous piece of junk on your face and Clifford would say, “I think you’ll like those” as if you’re a person who looks like you don’t care what you look like—nevertheless you should think twice before you get the Calvin Klein glasses from Vanity Vision in St. Cloud Mall. Calvin Klein isn’t going to come with the Rescue Squad and he isn’t going to teach your children about redemption by grace. You couldn’t find Calvin Klein to save your life.

If people were to live by comparison shopping, the town would go bust. It cannot compete with other places item by item. Nothing in town is quite as good as it appears to be somewhere else. If you live there, you have to take it as a whole. That’s loyalty.

Garrison Keillor, Lake Wobegon Days, 1985.L40

The problem is that customers, though aware of these things as local facts of life, appreciate what they are getting only when they are no longer getting it, and the local retailer is able to sustain them only because he is a mini-monopolist in his area; his freedom to charge a higher price to cover the cost of the extras would wane or cease if a super-cheap superstore opened up which could not provide them.L37 Those subtle enlargements—strings attached to the goods provided by the local shopkeeper—are seen through the spectacles of neoclassical economics as impediments to the ideal of perfect competition; such “diffusion of goodwill and mutual consideration” (writes the sociologist Ronald Dore) is feared as “creeping malevolence, [an] abuse of monopoly power”.L38 However, in the local Lean Economy, the attachment of such strings to products and services will be seen as desirable; that is to say, there is no standardisation: the product’s identity acquires just the sort of blurred borderlines that perfect competition cannot abide.

Economics’ word for the other things you get, whether you want them or not, along with the economic output that you pay for, is “externalities”—that is, goods and bads that are external to the price system. Carbon emissions are an undesired externality; the friendliness of the local deli who will keep your keys for your daughter when you are out is a desired one. Much of environmental economics is about finding ways of “internalising externalities”—giving prices to externalities—so that better prices, which represent the reality more accurately, lead to better decisions. But even if externalities are priced, it is still the market that makes the decisions, as buyers search for the low prices which suit them.L39

Lean economics, in contrast with this, deals with externalities directly. There is full awareness that products and services come encumbered with strings, and they may be exactly what the community wants—such as the advantage of richly-encumbered enterprise keeping local traders and the local economy solvent. In local lean economies, consumers know that there is more to be said about the product than what it says on the tin.

 

3. A Small Number of Sellers and Buyers: with a lot of influence over the local market

In its essence, the Lean Economy will take the form of a radical transformation away from the market economy’s division of purpose between producers and consumers (each of us is, after all, both). The divide between supply and demand loses its focus and to a large extent breaks down. Here we have a human ecology that does not consume: it lives; it behaves; it quickens.

And yet, there will also be craftsmanship and specialisation, and a market will be needed to link them up. But the local Lean Economy’s markets will be small markets, with small numbers of sellers and buyers. Just a few of them could influence prices or some other aspect of supply and demand. Many trading relationships will be specifically organised as reciprocal arrangements between (say) a producer and a small group of households; terms will be agreed on a case-by-case basis with little reference to prices elsewhere. For instance, local people (in their role as producers) may take a position on reduced working time, or on carefully-maintained closed-loop systems, while (in their role as consumers) accepting the costs of this, as well as the necessity for it. All this is in contrast with the “price-taking” idealised in the model of perfect competition, where nobody has any influence on prices.

In the large and impersonal market, the only economic behaviour that makes sense is an abstract pursuit of wealth (chrematistics [Greek: chremata money], to use Aristotle’s word for this). In the short-range, local economy, by contrast, the intention is to promote the interests of the household and community in practical ways (in line with the roots of our word “economy”: oikonomia [Greek: oîkos house + nómos managing]). Any money you make out of it is at most secondary: money is not the point of the exercise, and much of what you do—everything you do for your family, for instance—is for no money at all. For oikonomia, price is often irrelevant. Economics in this core sense is beyond the reach of the parsimonious summaries of mathematics; it depends on judgment.L41

 

4. Barriers to Entry and Exit: a helping hand for loyalty

There are two types of relationship between customers and suppliers. First, there is “exit”—to get out at the first sign of bother. This is how the market economy is meant to work. Secondly, there is “voice”—to argue for change, to influence matters by getting involved rather than by walking away, to stay loyal. Such loyalty is a vital asset in the Lean Economy.L42

And it is given a powerful helping hand by barriers to exit—where conditions exist which make it hard to get out. One barrier which has shown itself to be effective in many cases in the market economy is geographical remoteness.L43 The decline and fall of the small-island economy of Inishbofin, off the west coast of Ireland, illustrates this. With local economic self-sufficiency in virtually all their needs, the islanders maintained a millennium or two of resilience until the coming of the market economy. Inishbofin’s low-tech fishing boats were no match for the trawlers; its farmers, who needed to sell at least some of their output in mainland Ireland in order to buy the goods they needed, were no match for industrial agriculture. And as the islanders, as consumers, became aware of the market’s products and prices, they had, as producers, less and less to offer. They resisted for a time, since the island’s remoteness provided a big incentive to rely on what it could produce for itself, but when the lower prices, the wider range of goods, and the convenience of the market in mainland Ireland was made more accessible by a massive EU-funded pier, that was the end.L44

Not that it could have been avoided. The people of Inishbofin could not conceivably have access to modern consumer goods and services from their own resources except with the help of imports and subsistence payments—and without those, the islanders could reasonably be expected simply to leave. Life on the island formerly was hard, beyond the expectations of our own time. And yet, unemployment and dole-dependency is hard too. When the subsistence payments can no longer cover the costs of living, or when they stop altogether, life on the island will be harder still.

Decisions which have profound long-term consequences are often made on the strength of short-term opportunities which, with hindsight, people would not have chosen. And barriers to entry and exit—such as the inconvenience of living on an island without a modern pier, or of living in a remote area without a modern road—mean that the temptation to take the actions which will destroy the local economy does not arise. This matters, because when that chance of giving in to temptation comes along, it is grasped with both hands.

The momentum of small, seemingly harmless choices is powerful and virtually unstoppable, and the final result has to be accepted without a murmur. Alfred Kahn called it “the tyranny of small decisions”, where people make decisions on the basis of the easy options now, without making the connection with the consequences to which those innocent choices will eventually lead. Massive, long-term consequences, such as the tearing-down of the trade barriers which have protected a local economy for centuries, come along as unforeseen implications of little decisions about how you and the dog want to spend the afternoon.L45

ITALIAN GAMES
Enjoying Being an Insider

Barriers to entry and exit have the effect of creating “insiders”47—people who belong to a group and who have an incentive to stay there. Enjoying being an insider can improve matters even more. In the Tuscan city of Siena, membership of one of the seventeen contrade means being strongly identified with the locality, and belonging to a culture of intense loyalty. Loyalty cultivates benevolence, and in Siena it is built into the local communities—held in place with the help of the exuberant ritual of the Sienese horse-race, the palio, and by the fantastically cumbrous political channels that surround it. The palio is unquestionably a barrier to entry and exit—for instance, you need to be born in a contrada to be able to claim to belong to it and you need to participate in palio politics for your belonging to mean anything; the rivalry between contrade is an expression of play, part of an actual texture of loyalties both within contrade and between them.L48


Editor’s note: I couldn’t resist adding this spectacular 3 min taste of the palio.

“Barriers to entry and exit” (aka sustainable protectionism) are restrictive of freedom, but only in that they prevent people from walking into the trap of the small decisions by which they would destroy what they value. One good barrier to exit from the locality is that members should want to stay inside it (see “Italian Games” sidebar above). The Lean Economy will have barriers to entry and exit thrust upon it: localities will be hard-pressed to provide for their people, especially in the early years, and would quickly fail if overwhelmed by numbers. If you are already in a functioning local lean economy, you are likely to need and want to stay there.

“Loyalty”, writes the economist Albert Hirschman, “can be compared to such barriers as protective tariffs.”L46 There you have it. Loyalty means having the good sense to hang on despite short-term disadvantage, not taking too much notice of price signals—a deliberate inverse of perfect competition.L49 It implies an economy where price does not have the final say; “protection” recovers its proper sense of stewardship.

Local lean economies will depend on it.L50

 

5. Multiple Aims: beyond profit maximisation

There has for a long time been the presumption that, as representatives of the shareholders, managements have no right to pursue objectives other than that of maximising profit. And yet, that simplification is well out of date, since other obligations—to the “triple bottom line” (economics, environment and social justice), for instance—are already recognised. The idea that a producer in the Lean Economy should work in the interests of the locality and its complex needs is therefore an evolution of current management principles rather than a contradiction; many businesses are already providing local services, productively encumbered with complex local aims—community supported agriculture is one example.

In the Lean Economy, the distinction between producer and consumer will be weak; as the household and neighbourhoods build their competence, the two functions will merge. Profit in this context has little meaning.

 

6. Barriers to Mobility: of the factors of production

The three factors of production in economics are labour, capital and land. They will all be scarce:

There will be plenty of people around, but labour that brings the skills and the trust that local lean economies will need will be prized, and efforts will be made to keep it in the community. At the same time, communities will not be able to assimilate new arrivals which would raise their numbers beyond what they can sustain: the first principle of an enduring commons is closed access. That does not mean a closed-minded lack of hospitality and encounter: relationships bridging between communities and forming a network of learning and mutual support will be fundamental to the evolution of the Lean Economy. What it does mean is that the community recognises that a feasible and effective commons requires control of boundaries, restricting access and scale to numbers that the resource can support, with participants that accept the obligations that this requires.

The six forms of capital in lean economics are: natural, scientific/cultural, human, social, material and financial. One of these (scientific/cultural) has the property that it can travel to another place without leaving the place it started from (like love, you can give it and still have it; or commas, whose supply knows no limit), and it will be important to the network of local lean economies that they should, with ease, share ideas, information and culture. Apart from that, capital in the Lean Economy is subtractable (if you give some away, you have less of it), and it will tend to be immobile.

The idea that capital should be mobile is not recent but it became routine, rather than the exception, following the influence of the economist David Ricardo (1772–1823), who made the case for “comparative advantage”—that is, for the production of each kind of good and service to be concentrated in the places where it can be done most efficiently and cheaply. According to this principle, the efficient nation will make things for its own use only if there is nothing else (either for home consumption or export) that it could produce more efficiently.L51

Such dislocated economics is a natural feature of large-scale civic societies. Located economics is a central principle of the Lean Economy. Capital, in its various forms, recovering from the breathless globe-trotting recommended by Ricardo, will come home and underpin resilient communities.

Land, in economics, stands for the whole set of miracles and services which comprise the planet. As John Stuart Mill summarised, labour can do no more than move things around: “the properties of matter, the laws of nature, do the rest”. However, this vast, but vulnerable, endowment has been taken for granted, summarised as “land”, and reduced to a residual which (in the models and equations) can be left to look after itself. And, as “land”, of course, it can be owned and inserted into a business plan somewhere, so that, in this sense, land in economics is mobile.L52

In the Lean Economy, land will stay in one place.

 

7. Imperfect Knowledge: making a virtue out of ignorance

Perfect competition requires perfect information about all the products on the market and how they are sold; the local Lean Economy, by contrast, will be largely ignorant of the goods that other consumers can buy in other places. Passive consumer-awareness of out-of-season strawberries will be replaced by intense knowledge of the range of goods, food and skills that the place they live in can supply. And at a time of substantial uncertainty, knowledge will be rare, relative to inference. Knowledge, in a sense, is the final product, packaged and ready for use, and local lean economies would be stuck without some of that. But economies and lives, alike, will depend (as the Duke of Wellington described it) on working out “what you don’t know by what you do; . . . guessing what [is] at the other side of the hill”. The first steps towards self-reliance will be to explore and infer at a time when certain knowledge is scarce, and when the idea that you can “perfectly evaluate the quality of all products in the market” is a relic from another age.L53

And there is something to be said for not knowing how big an almost-impossibly-big project is going to be. If you knew, you probably wouldn’t start.

 

Imagine that you are at home in your small town or parish in the years after the energy peak. International trade has substantially failed, taking the financial institutions with it. There is very high unemployment. The government cannot sustain unemployment benefits and can fund virtually nothing. Tax revenues have crashed. This is a society with—by the standards of the affluent market—no money. Local economies depend, not on what they can buy, but on what they can do.

If their response follows the seven point Protocol for Lean Economics described above, local economies will be working to principles which are, in a sense, the inverse of those of the market.

Now for a bit of reductionism in the positive sense: forget, for a moment, all the other problems that would arise in such a situation, and concentrate on how to get the local economy moving as a system that can support life and community. There are two structural supports: the first one is reciprocal exchange. The second is the cultural setting which gives the community an identity, and around which reciprocities and cooperation can form. There may also, for the larger scale of the parish, be a local currency. These are described under their own entries. What we need to consider now is the economics underlying this.

The demise of the market economy will affect the demand for labour. The effect will work in two directions. Factors which will tend to reduce the demand will include:

• the reduced supply of energy and materials. Labour is complementary with (i.e., depends on) materials and resources. If the supply of these were reduced, there would be less for labour to do. The consequence could be a large-scale closedown of the industry and services on which the economy depends.

• the small scale of the local Lean Economy, and its minimal infrastructure (i.e., its elegance). The drastically reduced scale of intermediate economy is the key to the feasibility of life after oil, but it has the corollary that the bulk of work currently required to sustain the intermediate infrastructures of the market economy will not be needed.

On the other hand, there will be factors which tend to increase the demand for labour. They include:

• the reduced supply of energy and materials. Labour is also a substitute for materials and resources. If the supply of these were reduced, there would be more for labour to do: labour will do, by hand, work which was previously done by energy-driven equipment. The scale of this effect is not predictable. It is plausible to suppose that at least some of the electrical apparatus on which we rely—such as hand tools and saws—will have power supplies from local renewable resources, but no assumptions can be made about the availability of good equipment and spare parts. Other kinds of work, such as farming, lacking abundant flows of oil and gas as fuel and feedstocks (raw materials for fertilisers and biocides)—are also likely to be more labour-intensive than they are at present.

• the task of energy-provision and -conservation itself. Much of this will consist of building the equipment and installations needed for the zero-carbon economy, which will call for a lot of labour, although this will tend to be less when the task becomes essentially one of maintenance.L54

The net outcome of these effects in terms of labour demand can be debated, and it will undoubtedly vary, depending on timing and circumstances. Indeed the whole question of “reducing unemployment” in an economy by increasing the demand for labour takes on a different and ill-defined meaning where there is free movement of labour with other economies ten times, or even a hundred times, its size. Lean Logic’s position is that, in the settled form of the Lean Economy, the factors which reduce the demand for labour will dominate, by a large margin.

It is the essence of development that, as technology and labour productivity advance and infrastructure grows (i.e., as the economy intensifies), the demand for labour increases. This effect is not merely a change in one of the parameters—it is an absolute transformation in the way labour and the other factors of production are used. A developing economy is voracious for labour, capital and land (Regrettable Necessities). In the de-development (or “deintensification”) that lies ahead, this effect will be reversed. The small-scale elegance of the Lean Economy will lead to a collapse in the amount of work needed/available per capita. There will be hyperunemployment.

The Lean Economy will never be able to provide full-time work for the whole of its workforce. It will be a slack economy, and it will have to adapt to this. One way to do so is by sharing out the work with restrictions on working time (as was required through the medieval period). Another is to absorb spare labour with standards of practice—such as organic production—which combine labour-intensive methods with other benefits such as high quality and low environmental impact (such methods may also be the natural outcome of scarcities of energy and equipment). A variant of this second response is to supply goods for the purpose of destroying them, or to produce goods of monumental extravagance (pyramids, cathedrals, carnival). Means of supporting surplus labour, and preventing the accumulation of capital, become in this way both dependent on the common culture and supportive of it (Intentional Waste).

Lean economics is the means of maintaining the stability of an economy which does not grow. Its institutions are designed as essential means to manage and protect its small scale. It will do that by sharing out the available work, absorbing spare labour/time in activities which do not contribute to growth, preventing the accumulation of growth capital (capital which, if employed, would lead to growth) and underpinning a culture and social order which can maintain reciprocity and freedom in conditions of slack, and in the absence of well-defined competitive pricing.

 

Related entries:

Slack and Taut, Leisure, Economics, Economism, Elegance, Green Economics, Lean Defence, Success.

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David Fleming
Dr David Fleming (2 January 1940 – 29 November 2010) was an economist, historian and writer, based in London. He was among the first to reveal the possibility of peak oil's approach and invented the influential TEQs scheme, designed to address this and climate change. He was also a significant figure in the development of the UK Green Party, the Transition Towns movement and the New Economics Foundation, as well as a Chairman of the Soil Association. His wide-ranging independent analysis culminated in two critically acclaimed books, Lean Logic and Surviving the Future. A film about his perspective and legacy - The Sequel: What Will Follow Our Troubled Civilisation? - was released in 2019, directed by BAFTA-winning director Peter Armstrong. For more information, including on Lean Logic, click the little globe below!

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