The Supply-Chain Myth
When people don’t understand something, they often try to find a simple cause either hard and physical, or ethereal and spiritual. The “supply chain” is a good example: it seems it is often viewed as a few big pipes that bring toys from China, semiconductors from Taiwan, automobiles from South Korea, and meat from the Midwest. When something hard hits and damages a pipe, the goods get stuck inside. Alternatively, when the government does not brandish its wand, the ethereal supply chain fails and stuff disappears.
Despite two centuries and a half of economic analysis, supply-chain talk typically ignores the crucial role of prices on the open market. Prices are bid up here and bid down there, continuously adjusting quantity supplied and quantity demanded, reconciling scarce resources and nearly infinite human desires. (See Hayek, “The Use of Knowledge in Society,” American Economic Review, 1945.) Except when governments cap prices like during the first year and a half of the pandemic, or when the mob descends in a witch-hunt against “speculators,” “profiteers,” and “price-gougers,” goods keep moving in response to price signals and disruptions don’t last.
As I was writing this, President Joe Biden, playing deus ex machina, asked the Federal Trade Commission to investigate oil-and-gas companies for illegal behavior (see Andrew Restuccia and Katy Stech Ferek, “Biden Asks FTC to Examine Oil, Gas Companies’ Role in High Gasoline Prices,” Wall Street Journal, November 17, 2021). This move to stealthily cap prices and create shortages is not very economically astute. Hadn’t Biden promised to “follow the science”?
Now, consider the latest quarterly report of Walmart. It illustrates the vacuity of supply-chain incantations by revealing the company’s large inventories, higher sales, higher costs, and higher profits by some measures. The Wall Street Journal writes (Sarah Nassauer, “Walmart Raises Forecast and Says Shelves Are Stocked for Holiday Shoppers,” November 16, 2021)):
Walmart said it had more products flowing through its supply chain this quarter than the same period last year when pandemic demand for some products strained supply. U.S. inventory rose 11.5% in the quarter as “preparation for an expected strong holiday season,” the company said.
Weren’t we told that the mythical supply chain is clogged? The reality is that demand is increasing relative to supply, thereby pushing up prices and suppliers’ costs. But if it is profitable for a supplier to bring the goods to his customers, he will bid up the prices and pay the cost. Writes the WSJ:
Walmart’s results highlighted the uneven impact of supply-chain snarls, as large companies with deep pockets continue to show they can work around disruptions that are hobbling their smaller competitors. Some of the biggest U.S. retailers, including Walmart, Home Depot Inc., and Target Corp., have chartered their own cargo ships to sidestep congestion at U.S. ports.
What do you do if you don’t have “deep pockets”? Well, you go and borrow money or get capital from people who have deeper pockets than you. If you are unable to persuade anybody to put more money in your business or if your customers are not likely to keep patronizing you, it is a sign that you are not as efficient as your competitors. Perhaps that is why you have shallow pockets. Scale is not a decisive factor; otherwise, IBM would still be the largest computer company and Sears Roebuck the largest retailer. And everybody has access to freight brokers.
Another factor must be kept in mind, though: our stifling level of regulation is certainly more stifling for small businesses than for large incumbents. Protection against competition is a major function of government regulation.
It is true that a supply chain means something non-mythical for a company’s supply manager or a small businessman: on his assumptions or guess about future demand, he must line up suppliers (or buy commodities on exchanges), organize shipping if necessary, decide if it is economical to pay higher prices (formal or informal—as in “premium service” or fast delivery), arrange storage, and so forth. Indeed, it is as a management concept that the online edition of the New Palgrave Dictionary of Economics defines supply chains (the entry did not even appear in my 1987 print edition):
Supply chains are all the resource and processes required to fulfill the demand for products.
To understand how a relatively free economy works—how the general environment of free producers and free consumers functions—the priceless supply chain remains a myth. It would be more useful in a command economy where a central planning bureau managed the allocation of resources, goods, and people. In this context, the question a Russian official asked British economist Paul Seabright takes all its supply-chain meaning (cited by Philip Coggan, More [The Economist, 2020], p. 357):
Who is in charge of the supply of bread to the population of London?