Governments Broke the Supply Chains

It’s great that so many have copies of Adam Smith’s The Wealth of Nations, but very unfortunate that so few have read it. The alleged “supply chain” problems we’re enduring right now were explained by Smith in the book’s opening pages. 

Smith wrote about a pin factory, and the then remarkable truth that one man in the factory working alone could maybe – maybe – produce one pin each day. But several men working together could produce tens of thousands. 

Work divided is what enables the very work specialization that drives enormous productivity. If this was true in an 18^thcentury pin factory, imagine how vivid the truth is today. Figure that something as basic as the creation of a pencil is the consequence of global cooperation, so what kind of remarkable global symmetry leads to the creation of an airplane, car, or computer?  The kind that can’t be planned is the short answer, but more realistically the only answer. 

Please keep this in mind as you read media coverage of the so-called “supply-chain disruptions” resulting in “shortages” that are said to be causing “inflation.” If you want a bigger laugh, read about what President Biden wants to do in order to get “supply” back on the market with an eye on replenishing U.S. retail shelves that are increasingly bare. He’s decreed 24-hour port operations! Yes, thanks to the 46^th president we now know what held the Soviets back, and ultimately destroyed the Soviet Union: their ports weren’t open long enough; thus the shortages of everything…

All of the above would be funny if it weren’t so sad. Media members, “experts,” economists, and politicians don’t even disappoint anymore. To say they do would be to flatter them. 

Either they think we have inflation, shortages, or a combination of both. Wrong on all counts. Really, who was talking about supply-chain shortages or the impossibility that is demand-driven inflation in early 2020? Very few were, and that’s because the U.S. economy was largely free then. At which point politicians panicked. And in panicking, they imposed a rather draconian form of command-and-control on the U.S. economy. 

Some were free to work, some weren’t, and more still were free to work and operate their businesses within strict political limits. From freedom to central planning in a very small amount of time. At which point it’s worth considering once again the simple pin factory that Smith witnessed in the 18^thcentury versus the global cooperation that was the norm 19 months ago.

The supply lines of February 2020 were impossibly complicated structures that no politician could ever hope to design. Think billions of individuals around the world pursuing their narrow work specialization on the way to enormous global plenty. Put another way, the shelves in economically free countries were heaving with all manner of products based on economic cooperation that was staggering in scope. Brilliant as some experts claim to be, and brilliant as some politicians think they are as they look in the mirror, they could never construct the web of trillions of economic relationships that prevailed before the lockdowns. But they could destroy the web. And they did; that, or they severely impaired it.

In which case let’s please not insult reason by talking about “shortages” or “inflation” now. Let’s instead be realistic and talk about central planning. We know from the 20^th century that when politicians, authoritarians or both substitute their intensely narrow knowledge for that of the marketplace that immense want for very little (and lousy) supply is the logical result. Yes it is. When we’re not economically free, bare shelves are the inevitable result. 

Conversely, product and service abundance is a certain consequence yet again of the infinite actions and trillions of economic relationships entered into by billions of people. These commercial tie-ups were constructed by consenting individuals over many years and many decades only for them to be wrecked by a political class arrogantly seeking to protect us from ourselves. That’s what happens when command-and-control replaces voluntary order. The remunerative ties that bind us fray, or vanish altogether. Consenting, profitable economic activity was suddenly illegal. Yet politicians and other experts are only now wringing their hands about a lack of supply?

Really, what did they think was going to happen? While politicians couldn’t ever create or legislate billions working together around the world, they could and can surely break voluntary economic arrangements. When you have guns, handcuffs, the power to quite literally shut off power sources to the productive, not to mention the wealth produced by the productive, you have the power to impose command-and-control. And so they did, only for the “supply chains” painstakingly created in self-interested but spontaneous form over many decades to suddenly break apart. Just don’t call it inflation, or shortages. 

Inflation is a devaluation of the unit of account. In our case it’s the devaluation of the dollar. And while Treasury hasn’t always done a great job as the dollar’s steward over the decades, that’s just the point. Devaluation was routine problem in the 1970s, it ceased to be in the 80s and 90s, but it reared its ugly head once again during the George W. Bush administration in the early 2000s. To say inflation is a “now” thing is to ignore that it’s more realistically been a 21^st century-long thing. 

We don’t suddenly have an inflation problem. To say we do is the equivalent of saying that the Soviets had inflation because all the goods worth getting were both difficult to find, and incredibly expensive if they could be found. In our case we’ve had a lockdown problem care of nail-biting politicians that suffocated commercial cooperation around the world. And with work divided less than it used to be care of government force, productivity is naturally lower than it used to be. 

Please consider modern productivity in terms of Smith’s pin factory example yet again, and ask what it would do to supply. The only thing is supply shortfalls are not evidence of inflation. A rise in one price due to lack of supply implies a fall in other prices. Yes, we have a central planning problem. Were he around today, Adam Smith could diagnose this in seconds.

Republished from Forbes.