With the onset of the COVID-19 pandemic, global supply chains have found themselves in repeating rounds of shortages in necessary resources and materials.
These intermittent problems have continued to affect most of the global economy off and on for months, leading Axios to write in November that “Supply Chain Troubles Aren’t Going Anywhere.” Similarly, CNBC recently reported that the “big business bosses” are warning that these problems are “here to stay.”
Suffice it to say, these headlines do little to encourage economic optimism for the immediate future.
For many living in the West (North America and Europe, predominantly), this will be the first time that they have had serious concerns over their store shelves being stocked with all the usual goods they routinely buy. The sight of numerous “Out-of-Stock” signs awakens one to privileges you weren’t even aware you had. Grocery stores are usually emptied during certain extenuating situations, such as large snowstorms or hurricanes, but these types of shortages are temporary and localized. The “COVID-Shortages” are significantly more widespread, affecting many geographical areas, goods, and services all at once.
An Important Question
A moment’s reflection on these shortages prompts a striking question: why don’t these types of shortages happen more often?
Why are shelves only empty during exceptional circumstances and not more regularly? If one takes the time to research and track the global supply chains for the products that we use on a daily basis— the number of transactions taking place, goods exchanging hands, and products moving from one place to another—it boggles the mind. Just to follow the production and transport processes of relatively common goods like shoes or dairy products can be incredibly complex. The sheer amount of information that goes into the creation of these goods can be overwhelming for one person to absorb.
With all of the intricacies and details involved in the production of these goods, how is it that shortages are so rare? After all, if one were to try and oversee these processes from beginning to end, it would take an inordinate amount of time and energy for a single individual to ensure that a shipment was to transition smoothly through the process of resources, production, transportation, and sale.
For goods to fall seamlessly into the shopping carts of consumers without delay, there is very little margin for error. Raw materials have to arrive, goods have to ship, and products have to be delivered all precisely when and where they are needed. Yet even in the face of this herculean task, shortages are a relatively rare occurrence on markets.
How can this be the case? How is it that markets are able to organize production so effectively? The answer can be found in two qualities present within the market: freely determined prices and distributed information.
Prices give the entrepreneur the information he needs in order to determine how he should allocate his resources. If the price for one of the goods that he produces increases, consumers are effectively telling him that he should direct more of his resources into this line of production. If the costs of the inputs for a good he produces rises, this is a signal informing him that these resources are highly valued elsewhere and he should use them sparingly. Because of the existence of a price system, the entrepreneur has a method by which he can evaluate and adjust his production according to the wishes of consumers.
In addition to the price system, entrepreneurs also make use of their specialized knowledge to effectively allocate resources to create goods and services. Entrepreneurs, by virtue of their production in a specific industry, become individual experts in the details and intricacies of that industry. Because of their unique position of oversight and responsibility of these production processes, they accumulate unique knowledge of how these processes operate and how they are best carried out. In order for the entrepreneur to derive profit, he must utilize this knowledge to streamline his firm’s production and make it as efficient as possible.
In a free market economy, there is no single entity overseeing entire production processes as is the case in a socialist economy. As counter-intuitive as it might sound, this is beneficial, not detrimental, to the productivity of the market. A decentralized system of production allows for entrepreneurs to utilize their knowledge individually, as opposed to having to follow the dictates of a central planner. The knowledge necessary for efficient and cost-effective production is dispersed in the minds of individual entrepreneurs, so production is best carried out by these entrepreneurs themselves.
These two factors, the price system and the knowledge of entrepreneurs, create an environment that punishes and minimizes shortages in the economy. Prices communicate to entrepreneurs the desires and wishes of consumers, and the knowledge the entrepreneurs have equips them to precisely carry out these orders. The result is an economic system that gives entrepreneurs the tools they need in order to efficiently bring goods and services to market.
This does not mean shortages will never occur on a free market, as unexpected occurrences (such as a worldwide pandemic, for instance) happen from time to time. But these shortages will rarely be chronic in nature. The market rewards those who satisfy the wishes of consumers, so those entrepreneurs that are unable to prevent shortages from occurring for their products will be replaced by those who can.
Those who live in free market societies are often unconscious of the benefits of free markets, as the COVID-19 shortages demonstrate. The ability to go out and purchase the goods you want, at the places you want, at the time you want to have them is commonplace today, but would be seen as a miracle throughout most of history (and in many other parts of the world today).
Banal luxuries abound under a market system, but these should not be ignored or forgotten. The shortages from the COVID-19 mitigations will abate soon enough, but they provide a valuable lesson about the importance of markets. Those in the West experience a level of privilege, “capitalist privilege” as it were, that is easily overlooked when it is present, but impossible to miss when it is absent.
JW Rich is a economics student in Charlotte, NC. His interests are economics, history of economic thought, and philosophy. You can read his work here.
This article was originally published on FEE.org. Read the original article.