Our current supply chain struggles can largely be understood through the lens of the fundamental problem of economics, the knowledge problem. The knowledge problem was originally characterized by Hayek:
"The economic problem of society is not merely a problem of how to allocate given resources....it is a problem of utilization of knowledge which is not given to anyone in its totality."
This can be understood by recognizing that 'know how' and 'know what' are spread across many minds to paraphrase some of the work by economist Kenneth E. Boulding and as discussed in Peter Boettke's Living Economics. The knowledge problem is also exemplified in the words of Leonard E. Read's pencil in his essay I, Pencil, "Not a single person on the face of this earth knows how to make me."
This excellent YouTube video update of Read's essay provides a modern illustration:
"if I didn't already exist you might think that such a flowering of free cooperation, competition, and creation was either impossible or magical and yet here I am!"
How does this apply to our supply chain issues? Well because 'know how' and 'know what' are spread across so many minds, not a single person on the face of the earth knows how to make anything. As a result, no one has the knowledge to fix our supply chains. Our supply chains are the result of human action but not human design. Of course this is a feature and not a bug. As a result most consumers and policy makers usually remain comfortably blind to the knowledge problem and the role of the price mechanism that solves it.
Our economy is not analogous to an engine that will automatically restart after shutting down like the engine of a car at a traffic light. Instead of thinking of our economy and the supply chains that sustain it as a mechanical system that can be engineered by technicians, a better analogy is an evolving ecosystem. Each product we consume and its components have evolved to fit into very specific niches. We could think of our supply chains as habitats that have been threatened by COVID and our response to it.
Just as restoring an ecosystem after an environmental disaster requires an understanding of ecology, we must understand the ecology of our markets and supply chains in order to restore our economy and avoid an even worse ecological disaster. We must recognize that the knowledge problem post COVID is more challenging than pre covid made evident by recent price spikes and shortages that some people could be confusing for monetary inflation. We have to understand that our supply chains evolved over a number of years, even decades, and ‘regrowth’ will take time and things may not grow back to look like they did before.This could mean higher prices now and well into the near future for a number of goods, with some items reaching new higher equilibrium levels as tastes, preferences, and production practices may have changed post COVID.
COVID and our response to it unfortunately destroyed the ‘know what’ and ‘know how’ that was spread across millions of minds and across decades of building our supply chains. There is no simple blunt monetary or fiscal policy that can substitute for the ‘know how’ and ‘know what’ it’s going to take to rebuild them. It’s going to take time. Prices have to search and signal for the ‘know how’ and ‘know what’ to rediscover and rebuild what was lost.
Our supply chains co-evolved over time with a number of prohibitions and frictions. We learned during the pandemic the potential of relaxing some prohibitions such as those in healthcare, which allowed supply to creatively meet demand using telemedicine. What other opportunities exist to help rebuild our supply chains?
Policy makers must think carefully about how to respond going forward and must be willing to allow new species to emerge as different sustainable patterns of specialization and trade evolve post COIVD. Because, they don't possess the ‘know how’ and ‘know what’ to fix it. If anything, COVID has reminded us all of the words of Frederick Hayek:"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
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