One of the things knowing economics has brought me is a general sense of amazement. An area of my amazement is in the power of voluntary associations of unrelated individuals. An example can be seen by the current interaction of COVID-19 and the logistics concept of supply chain.
My first professional exposure to the concept of a supply chain — all the interconnections between the initial stage of a production process to delivery to the final end user — was when I purchased the book Free to Choose by Nobel Laurette Milton Friedman and his wife Rose. Published in 1980, Free to Choose was the Friedman’s personal statement to the power of the free market and free people.
The direct reference to a supply chain was front and center on the book’s cover. It was simply Milton Friedman holding a wooden pencil. In the first chapter he explained the many steps required to make an old fashion yellow cedar wood pencil. He described the complete process as a voluntary association of unrelated individuals. No one person in the chain knows what others in the chain know. They only know what they know largely focused on their individual step. The forester who grows the cedar tree, who only wants to know to whom to sell his tree and the price he can get, does not know the yellow paint manufacture nor the one that paints the pencil, nor the slightest idea about graphite, and on and on. Yet, in the end, a yellow cedar wood pencil with an eraser held in placed by a metal finial is created. Only the manufacturer of the last step knows how to put it all together. Sadly, and of primary importance for me, few of them think of me, an end user. They don’t know if I am left-handed or right-handed or the number of pencils I may buy over a year. Everyone in the supply chain thinks only of themselves and their individual motivations. In the end, there is little if any difference between a supply chain and a social capital network that I have addressed in several past columns.
This interconnected production process — the supply chain — is also a chain of information. When information affecting the cedar tree grower changes, he/she changes his response to the information and possible changes to the incentives he/she faces. His/Her change then affects the next person in the chain as their information about the grower has changed. So his/her change is someone else’s new information and on and on. No one in the process knows everything. The process does, but each individual and their step does not.
So, everything in every store you frequent is the end of a supply chain. It is the end of the information chain. Now, think about all the stores in the Golden Isles; and all the stores in southeast Georgia; and all the stores everywhere. Supply/Information chains are everywhere. This is amazing to me. In fact, it is overwhelmingly amazing. Everything is there that I need. It is almost magical. This result comes from a voluntary associations of unrelated individuals. No one person is in charge. The self-interest of each person in each step is sufficient to regulate the entire chain.
New information brings changes to the supply chain. COVID-19 and disappearing toilet paper is new information to the supply chain. While, in the immediate, there are temporary shortages, in the long run there will be a better more efficient supply chain as those things that are unknown become known.
In closing, one piece of information about various supply chains has become apparent. Many supply chains pass through, or begin, in China. This is especially true of some medicines. In finance we have learned that portfolios of financial assets that minimize risk and maximize return are diversified across many asset types. Will supply chains become more diversified if a China connection is to our current crisis is discovered? If so, or in any case, this will be figured out by systems, each of which is a voluntary association of many unrelated people.
