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?
READER COMMENTS
Craig
Nov 18 2021 at 10:54am
The government does many things, but taking responsibility for inflation is never one of them.
Craig
Nov 18 2021 at 11:00am
Can I make an inference from this: https://www.econlib.org/the-elementary-basics-of-inflation/ ?
That the supply chain disruptions themselves are not driving a GENERAL increase in the price level but are impacting relative prices and that but for the massive creation of money, the additional amounts spent on goods in shorter supply due to the disruptions caused by the government response to the pandemic would be money not spent on other things?
Pierre Lemieux
Nov 18 2021 at 4:09pm
Craig: That’s correct.
Matthias
Nov 19 2021 at 2:24am
Well, causality always depends on your counterfactuals.
For example, in an economy where the central bank targets nominal GDP, real GDP growth automatically leads to less inflation.
Similarly, in an economy were the central bank successfully targets inflation, nothing happening to the real economy makes much of a difference to inflation.
Pierre Lemieux
Nov 19 2021 at 11:08am
Matthias: I think that if you re-read my post linked to by Craig, you will realize that your objection is implicitly heeded.
Pierre Lemieux
Nov 19 2021 at 11:10am
P.S.: And I explicitly make your counterfactual argument in another post: https://www.econlib.org/counterfactuals-what-if-clinton-had-won-in-2016/.
David Seltzer
Nov 18 2021 at 11:29am
“Protection against competition is a major function of government regulation.” Libertarians agree government regulation is an exercise in arrogance and knowledge futility. In Hayek’s words; the pretense of knowledge. It also seems some corporations exploit that arrogance with regulatory capture and rent seeking so as to limit competition. As the Irish say, “there’s a pair of them in it.”
Alan Goldhammer
Nov 18 2021 at 12:09pm
I think this is more complex than Pierre thinks and it’s not a myth as anyone who has seen pictures of cargo ships waiting at sea to unload at the Long Beach and Los Angeles ports. Stuff is stuck because the logistics to get it to distribution points is not functioning well at all. There are only a limited number of ports on the West Coast and the Los Angeles area ports handle most of it coming from China, Taiwan, Japan, etc. It’s fine to read that Wal-Mart and Target are chartering ships but that’s not the current choke point.
I can tell you from personal experience that there is a shortage of computer graphics cards and prices of new cards are 2-4 times the MSRP ‘if’ you can find them at all. Either manufacturers are not making as many as the market demands or they are holding back production to capture more profit. Neither approach is acceptable to me.
Craig
Nov 18 2021 at 12:55pm
I’d suggest we are all aware of the line of merchant vessels waiting to dock/unload at Long Beach. Indeed, there must be some kernel of truth to the assertions, but the trade numbers don’t lie, the physical dollar volume of trade in September 2021 itself does not reflect a general supply disruption.
https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
[I am unsure if we have October figures yet]
I am reminded of how inflation reared its head in planned economies as a queue for people waiting on line to buy a limited supply of price controlled products. I’d suggest inflation might be having a similar effect and then we look at the shortages as being reflective of disruptions in the supply chain when its really the inflation causing it and of course that is not to say that there aren’t legitimate disruptions to the supply chain, ultimately the question is one of degree and in this situation I’d suggest that money dominates.
robc
Nov 18 2021 at 1:00pm
I will let the economists correct me if I get this wrong, but profit maximization occurs when MR=MC. If they are holding back production to capture more profit, that is because MC > MR at higher production levels.
If they are making too few and MR > MC, they are giving away profit and allowing a competitor to step in and fill the gap.
Either way, they are giving away profit.
Jon Murphy
Nov 18 2021 at 1:15pm
Robc is correct. Mathematically, total profit is maximized where marginal revenue of the qth unit equals marginal cost (This falls out of calculus). So, if they are holding back production, then either marginal revenue fell or marginal costs increased (or some combination thereof).
Pierre Lemieux
Nov 18 2021 at 4:31pm
Jon: You and robc are right. Greedy capitalists seldom leave money on the table. Pension funds, who own a sizeable portion of American stocks, would be unhappy otherwise.
Fazal Majid
Nov 18 2021 at 1:12pm
Graphics cards are in short supply due to the
tulip maniacryptoponzi schemeboom.Supply cannot expand to meet the need because it is gated by cutting-edge semiconductor fabs, and those are huge $20B+ per factory investments that take a couple of years to build, and thus investment decisions are not taken lightly. Building a fab based on a supply crunch could saddle a company with an expensive and underutilized white elephant.
Only a handful of companies in the world are even able to finance those (essentially TSMC, Samsung and also-ran Intel, plus whatever company the mercantilist Chinese government happens to be financing today, e.g. SMIC). In any case, fabs require incredibly exotic equipment only one company in the world can make (ASML), and that can also not be ramped up on a dime.
Now, you could ban cryptocurrencies, and I would 100% approve of that, but the Chinese did, and even that doesn’t seem to have durably dented the hysteria.
Fazal Majid
Nov 18 2021 at 1:18pm
By the way nVidia is trying to rectify the situation by making video cards that are deliberately crippled in a way to make them unusable to mine cryptocurrencies while still being able to run games. This is not the behavior of a price-gouger.
Pierre Lemieux
Nov 18 2021 at 5:04pm
Fazal: I don’t know what you mean. That nVidia could profitably sell video cards for mining cryptocurrencies but that it does not? Then indeed it must be in the morality business–although it would be more efficient in making these additional profits and contributing more to ordinary charities. When children are dying of hunger in poor countries, moralizing in the rich world is likely not the most efficient way to do charity. Or is the company bullied by one “regulator” or the other?
Frank
Nov 18 2021 at 6:42pm
“By the way nVidia is trying to rectify the situation by making video cards that are deliberately crippled in a way to make them unusable to mine cryptocurrencies while still being able to run games. This is not the behavior of a price-gouger.”
This is merely an example of price discrimination. It makes sense when crippling a bit of one’s own product is cheap to produce, such as the video card itself. The firm is indeed not a gouger, it’s a profit maximizer.
Pierre Lemieux
Nov 18 2021 at 4:38pm
Fazil Majid: Do you mean that if I am willing to pay $1 million for a graphic card, I won’t find anybody on the market (where the short-run supply is nearly totally inelastic, and the very short run [tomorrow] totally inelastic) to sell one to me? That there is nobody who owns one graphic card, or who expects one to be delivered today, and who would be happy to sell it for that price? If the answer is that nobody would be willing to pay this price, observe that nobody is willing to pay a price higher than the market price for anything, which is why quantity supplied and quantity demanded is not higher than it is now.
Matthias
Nov 19 2021 at 3:33am
You can make some aspects of cryptocurrencies harder, but they are basically impossible to ban completely.
Pierre Lemieux
Nov 18 2021 at 4:23pm
Alan: On your first point, if a port were a free enterprise, its docking (etc.) fees would increase to ration demand until there is no shortage and the most valued shipments can dock. Why don’t they do this? Part of the answer: Note that the Los Angeles port is a municipal government corporation. I suspect that the fees of Long Beach Port, a private corporation, are capped by some government. It would be interesting to check that. And where do Walmart and Home Depot’s ships dock?
On your second point, note that there is also a “shortage” of Ferraris and pearl necklaces, and virtually everything else: their prices are too high for a lot of people; the proof is that those who go without don’t bid up the prices higher. Would you say that “Either manufacturers are not making as many as the market demands or they are holding back production to capture more profit”? Are “they” leaving money on the table? Are they all part of a cartel?
Craig
Nov 18 2021 at 5:08pm
Well, I suppose they could impose an additional fee at the port? However, isn’t this why the containers cost (I’ve heard) 20k to ship now? In other words, right now, today, if you want to ship a container from Shenzhen to Long Beach, you have to do everything you did before and NOW you also have to wait for the other 100 MVs in front of you to unload. So the shipper knows ahead of time, I will have to wait x number of days, each day is $y in operating costs and $z in opportunity cost of NOT shipping other stuff to other places. And if you want to pay all of that, well, ok, then pay it, otherwise the container isn’t going to move, no?
As an aside, obviously we have seen the MVs outside of Long Beach, but I wonder, why not just go to other ports. I mean, it must not be that simple otherwise they would be doing it, yet I hear NOTHING about lines outside of Port Newark, the Port of South Louisiana or even other ports. At least from what I am seeing I don’t see lines about these places.
Pierre Lemieux
Nov 18 2021 at 6:49pm
Good observations and questions, Craig! As you say, queues have their own costs. Rationing is done by the queue instead of by prices. (It took 10 years of waiting after you ordered and, I think paid for, a car in the former Soviet Union.) The simple fact that some are willing to bid up the prices, if permitted, instead of waiting in the queue or paying other related costs, demonstrates that the queue is more expensive for them. Sometimes, people choose to wait in queues instead of paying the current price, like when you wait until just before or just after Christmas to buy a brand-new car of the previous year. (The sales manager just told the salesmen to clear the lot for the new models.) A command system does not allow this sort of choice, which a free market does.
I am not sure, but I think the higher price of containers does not include a delivery guarantee. If it does, it would reinforce my argument. Your question about other ports is a good question; perhaps this is what Walmart and Home Depot do, at a supplementary cost, to avoid the queue. It would just amount to bidding up the price of getting your widgets to American distributors before Christmas. Again, this would reinforce my argument about the supply-chain vacuity.
David S
Nov 22 2021 at 5:24pm
I had thought this was widely know: The reason for the hold-up in offloading container ships in LA was a local law making it illegal to stack containers more than 2 high.
They are of course designed to be stacked much higher, and are stacked much higher on the ships, but my understanding is that a local politician thought it looked bad so he made a law against it.
Once this was pointed out and the politicians were being mocked in the local press, they lifted the law for a few months.
https://thezvi.wordpress.com/2021/10/28/an-unexpected-victory-container-stacking-at-the-port-of-los-angeles/
Steve
Nov 18 2021 at 12:31pm
I thought of this when I saw the Fox News headline that “appliance prices have risen under Biden”. Didn’t we place huge tariffs on them during the Trump years?
Pierre Lemieux
Nov 18 2021 at 4:55pm
Yes, and the Trump tariffs rapidly translated in higher prices for American consumers (see my June 17, 2019 Econlog post “The Poverty of Protectionism and the Impact of Tariffs.” If prices have further increased recently, it must be for other causes.
John hare
Nov 18 2021 at 12:56pm
Lumber supply went down and prices up locally. Sometimes triple. Supply came back and prices are trending towards normal.
Craig
Nov 18 2021 at 1:02pm
Well known example of course, many were aware of the price of lumber skyrocketing. But here’s the thing, the prices did come back down, but their post spike peak was itself elevated and since then the prices have climbed back up again and I think would be at 25 year highs but for the most recent spike.
Jon Leonard
Nov 18 2021 at 8:25pm
This feels like it undervalues the efforts of the people doing supply-chain management; it’s not only prices. (In contrast to popular accounts which deeply undervalue the price component.) Much of the point of a supply chain is that whatever is needed has a significant time lag, and isn’t just purchased on a spot market. Sometimes that works through something like a futures market, but often it’s communication outside of just pricing; stuff like hinting to your supplier that you expect demand to be higher next year, so they can manage their pipeline. You can, of course, view the efforts of people involved as transmitting prices backwards in time. (Prices remain critical.)
Pierre Lemieux
Nov 19 2021 at 11:19am
Jon: Let me reformulate my argument: If, at the level of the firm, you don’t get your supplies even bidding up the price, you can blame the supply manager (or the forecasts of your economist). If, at the level of the whole economy, you can’t bid up prices to get your stuff, don’t blame the supply chain–except if the government is the supply chain manager.
Jose Pablo
Nov 18 2021 at 9:03pm
“Biden Asks FTC to Examine Oil, Gas Companies’ Role in High Gasoline Prices,” Wall Street Journal, November 17, 2021
And this is the same President Biden that is going to use carbon taxes to curb energy consumption thru higher energy (i.e., gasoline) prices.
Sure thing.
steve
Nov 18 2021 at 9:20pm
WalMart’s report is coincident with the reports that the port backlog is clearing. Sounds like WalMart got their stuff first.
https://www.theguardian.com/business/2021/nov/17/container-ship-traffic-jam-port-los-angeles-ease
Steve
Pierre Lemieux
Nov 19 2021 at 11:25am
Thanks, Steve. Useful story. It seems that the Port of Los Angeles is finally doing what any free-market supplier would do: charge what the market will bear; if you can’t supply all your customers (except very temporarily), it means that your price is too low.
rsm
Nov 19 2021 at 1:09am
Did Hayek not understand that supply chains are just payment chains in reverse?
Thus why not treat inflation as just another payment problem, and solve it by supplying liquidity as needed? Isn’t that how the Fed ended repo hyperinflation in September 2019?
Jon Murphy
Nov 19 2021 at 7:47am
What do you mean by “payment chains in reverse”?
If inflation was caused by a lack of currency, then that might be wise. But nothing suggests that the current problem is due to a lack of liquidity (just the opposite, in fact).
Craig
Nov 19 2021 at 9:37am
To be fair, it DID solve the toilet paper problem in Zimbabwe.
Jon Murphy
Nov 19 2021 at 10:21am
Touché
rsm
Nov 21 2021 at 6:38pm
《nothing suggests that the current problem is due to a lack of liquidity》
If gas is going up in price, don’t poor consumers have a liquidity issue? Why shouldn’t the Fed help us consumers directly when price setters try to pull the inflation power play?
《it DID solve the toilet paper problem in Zimbabwe》
What if the Fed distributed a dollar-denominated basic income in Zimbabwe? Wasn’t their hyperinflation and subsequent deflation due to a scarcity of dollars? Do individual Zimbabweans have a dollar liquidity problem, and one way (worse than the individual dollar-denominated basic income solution) the Fed could solve it is by buying their currency (like the Fed paid cash for trash in both 2008 and 2020)?
Jon Murphy
Nov 22 2021 at 7:45am
Nope. They’re plenty liquid (the poor have few, if any, illiquid assets). They may have a budget issue, sure, but certainly not a liquidity issue.
Michael Rulle
Nov 19 2021 at 8:28am
When I saw the Walmart essay, I had a similar suspicion. But how would I or any normal person—-even economists——know if we really have a supply chain problem? I have no idea. I do have an idea about how some stories were written. One WSJ writer was taken on a boat tour of the LA Port and was shown all the ships and how crowded the port looked——my first thought was “how does he know what the port looks like when there is not a supply chain problem”?
But can we have false narratives that are not conspiracy driven? Of course we can. I fortunately can only observe my own supply chain problem. I can buy anything I want——not ANYTHING——some products are not available on Amazon. But that has always been true. Their sales (and Walmart) seem high. So why is this a “thing”? It would imply—wouldn’t it—that our economy’s growth is being held back. But is it? Who is saying that?
Like the over supply of absurd opinions due to platforms like Twitter—-perhaps we have an over supply of “analytical” news—-by young people—and older people——who are in over their heads.
Pierre Lemieux
Nov 19 2021 at 11:42am
Michael: All valid questions. That is why theory–economic theory in this case–is useful: to untangle the infinity of imaginable causes. That’s a reason for reading Econlog!
This not saying that the world can be nirvana; economic theory also shows that! You might find that they are out of croissants at your preferred bakery; but the next one still has some. Or, if you were willing to pay and you need a croissant before tomorrow morning, you can hop on a plane for Paris (depending on your time zone).
And don’t forget rational ignorance. If one is not going to gain anything useful for him (including the joy of knowledge if he is into that) by knowing the “normal” waiting line in the Port of Los Angeles, one is not going to invest the resources to learn.
Michael Rulle
Nov 20 2021 at 11:27am
Thanks for your comments—-and it is why I do read Econlib—-(to try and learn!). You are the first I saw state in a title that the Supply Chain idea is a myth—it drew me like a moth to flame. Have always loved the Soviet story of “who is in charge of Bread/food”—-so applying the logic of “The Price of Everything” to supply chains make sense. But I will not pretend I know—-but it fits my bias that “any concept out of the ordinary” is something one always should be skeptical about.
Roger Sparks
Nov 19 2021 at 12:20pm
“Did Hayek not understand that supply chains are just payment chains in reverse?”
We can take Hayek out of the question and still find an interesting juxtaposition of thoughts.
Now I see the supply chain as a system to accomplish the task of building something. Each unique product has it’s own supply chain; An economy, then, is the totality of supply chains.
Now a payment chain, to me, is something quite different. Payment occurs in money, a single product. Time is involved, because money is exchanged for precursor products long before the final product is exchanged for money. So not only does the exchanged money product remain unchanged, it defines the final value of the end product long before the end product is even in existence!
I guess we might have a hint of why this question is such an interesting juxtaposition of words. Payment chains are typically viewed as instant echoes of product prices. In other words, the final price is filtered and distributed back to precursor producers. In reality, payment for precursor producers occurs long before final sale for most products.
Precursor producers take payment in money because they have faith in the future value of money being representative of their share in the eventual final sale price.
Thanks rsm for the choice choice of words.
rsm
Nov 21 2021 at 7:07pm
Roger, was it Zoltan Poszar, or perhaps his friend Perry Mehrling, who first came up with the phrase about supply chains being payment chains in reverse?
《Precursor producers take payment in money because they have faith in the future value of money being representative of their share in the eventual final sale price.》
If suppliers irrationally expect inflation to accelerate (perhaps influenced by daily Zerohedge inflation-mongering articles?), will they raise prices now independently of inventory, supply and demand, or other pedestrian, mainstream economic considerations?
And aren’t such irrational inflation expectations as silly as repo market makers arbitrarily deciding to hyperinflate repo in September 2019, which the Fed responded to by supplying arbitrary liquidity to end the hyperinflation?
So, why can’t the Fed treat consumer price inflation as just another breakdown in the payment chain (poor consumers can’t get any money to buy inflating gas, say), and supply liquidity to the consumer endpoint (the best policy would be an inflation-proofed basic income)?
Roger Sparks
Nov 21 2021 at 11:23pm
rsm,
I am not sure how to think about “irrational expectations”.
Is consumer price inflation a breakdown in the payment chain or is it a redistribution of unevenly injected newly created money?
It seems to me that the covid disruption had a distinct effect on specific economic sectors. The Fed response had a different but still distinct effect on different specific sectors. A government fiscal response has a third distribution of distinct effects. The supply chain is integrating all three events and we had better add the effects of drought in the western states, crude oil dynamics, strikes at a major machinery producer, and more.
I don’t see how an inflation-proofed basic income could possibly rebalance supply chain imbalances. Isn’t the concept flawed in that it would be a disruptor of supply chains by its own unique effect?
rsm
Nov 22 2021 at 12:19am
《Isn’t the concept flawed in that it would be a disruptor of supply chains by its own unique effect?》
Probably not, because if you supply enough money, won’t supply follow?
Quotation from a chip fab analyst reported in today’s slashdot:
《”Moore’s Law is not going to end when we can’t build smaller transistors. It’s going to end when somebody says I don’t want to pay for smaller transistors.”》
Can I relate this to our blogger’s comment above? “The reality is that demand is increasing relative to supply, thereby pushing up prices and suppliers’ costs.”
But is oil supply determined by arbitrary, fickle policies on OPEC’s part? Is supply easily throttled as a power play for political reasons?
Is there really a demand problem, when supply is out there waiting on ships? Or are there psychological power plays throttling that supply (this might come from government bureaucracy as well as private sector agents using that as an excuse to create an illusion of scarcity that benefits their bottom line)?
To try to address your question again, may I question whether too much money can actually disrupt a supply chain? If suppliers get more money, why can’t they build out supply, unless they simply want to impose a political sanction, like OPEC did in the 1970s?
Is the only real scarcity knowledge (the US had bountiful unknown oil reserves in the 70s)? Would a basic income increase knowledge by freeing engineers to develop and share freely standalone, individualized production that firms don’t invest in because they think they can profit more by selling subscriptions to centralized production that they control (and can thus throttle at a whim)?
Roger Sparks
Nov 22 2021 at 10:30am
rsm
I think I can find a common thread running through your questions: “Can the presence of more money in the hands of spenders increase the supply of products?”
It seems to me that with more money in the hands of spenders, we would indeed see demand go up.
The supply side seems more complicated. Rational expectations should play a role here. Supply side managers and workers could be expected to ask why demand has increased over expectations based upon recent history.
What will supply side thinkers find to answer that question? How will the answer affect the working decisions of each supply chain participant?
It seems to me that if increased demand is the result of a basic wage program, you would see basic workers stop their supply side jobs and begin depending upon basic wage program wages. Skilled workers, at the same time, would ask themselves if their skills are being rewarded properly considering the time and effort needed to become skilled. Supply side output would flow henceforth, influenced by the work patterns subsequently demonstrated.
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