One of the most misleading popular phrases used today in discussions of economics and economic policy is “supply chains.” The reason is that in the modern, complex economy, there are no supply chains. There is, instead, one immense, unfathomably complex, astonishingly productive, globe-spanning web of economic interconnectedness. Therefore, calls to “secure our critical supply chains” are words with far less meaning than those who pronounce these words – and many of those who hear these words – suppose these words to possess.
… Suppose that tractors are declared to be among the inputs that are part of the “critical supply chain” for ensuring that we Americans can reliably produce our own “critical” foods. Which inputs are “critical” for the production of tractors? Metals, plausibly, are critical. But is rubber? What about paint? (Unpainted farm equipment will be rapidly ruined by rust.) Which of the multitude of ‘beneath-the-hood’ parts of tractors – components such as fuel pumps, carbon-fiber hoses, the ceramic used in spark plugs – are “critical?” These questions must be answered in order to implement Sen. Hawley’s policy.
That was economist Don Boudreaux at Cafe Hayek, “The Economy Is an Immense Web, Not a Series of Chains.” I think when we narrow our focus to the Department of Defense, the network of activity is somewhat more knowable. But “knowability” is probably the wrong goal, because it means we have a less dynamic and resilient system — less connected to the commercial economy.
Even then, the DoD has more of the complexities of an economy than a business. For example, in 2005 Pierre Chao reported that there were roughly 300,000 third-tier contracting companies. And that’s just an arbitrary cut off at the 3rd level.
It’s inconceivable to me for there to be some standard reporting structure through the national security supply chain. Again, the overall effect would be to expel firms and simplify the supply chain further.
I don’t have any good answers other than making it easier and more profitable to do business with defense. The surest way to plug a supply chain gap is to pay well for it. The natural reaction of many people, especially in times of emergency, is to fix prices and limit profits. But as any economist knows, that distorts the entire system of information about relative scarcity and valuations, and in the end reduces supply and increases prices. On the other hand, paying a price that draws firms into the sector creates competition and returns prices and profits back down to “normal” levels. Politically, however, that strategy might as well be impossible. But redundancy of supply is a short-term inefficiency to create long-term effectiveness, and can only be obtained by paying for it.
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