Wouldn't a "supply network" be a more accurate term? I've never understood what Austrians meant by "roundabout". But a network... well, that works exactly like the internet(work) example you gave. Independent nodes of production, who send their product along to other nodes. If they get a better signal (i.e. a higher price), they send change and send their product along to the higher priced node.
Beyond that, I always have the sense that too much emphasis is put on price. "Expectations" do a lot of heavy lifting in monetary economics. Probably too much, because there's not really a systematic understanding of what is meant by the term (similar to "inflation"). And yet, I'd think about expectations here as a good framework for how production nodes evaluate price signals.
If they didn't, how else do we explain why it took me 7 months to get the new couches I ordered? In a price-determinant world, this shouldn't happen. Why are producers leaving this kind of profit opportunity on the table? Our basic understanding is that they should raise prices or increase production, but neither seems to happen. I think this is based on their expectation that the price increase is short-term and that, for reasons unknown, they don't feel they can raise prices in the short-term, but I don't have a good sense of what those reasons are.
Supply chain is as good a term as any to describe interdependency in production of a good (“without a nail”, and all that). If you treat that as a literal description of how parts are sourced, of course it is going to be wanting, as one doesn’t just buy chips, screws, or financial instruments from a single source. It would seem more accurate to say that cars aren’t being built because chips are too expensive for what the car can sell for, but those chips had to be ordered 18 months ago — and there is no spot market in ASICs (as they are not fungible). Note the WSJ article on how chip fab houses for the automotive market used to allow last minute cancellations of fab orders. They don’t anymore, because they don’t have to, and that has decreased flexibility in the “chain”.
Analogies are just analogies, and simplifications simplify. Supply chain is a much less problematic term than Greedy Corporations.
"Instead of “supply chain,” we should say “roundabout production,” the term preferred by Austrian economists."
Nobody normal will use "roundabout production". As suggested above, network & web are both better, as would be net. Altho these all seem too close to the internet.
I'd suggest supply grid - because the constraints of a traffic grid and "congestion" are far more like what is now happening with our current supply grid and specific bottlenecks. But this will only take off if a great book is written explaining it, and the writer is, or becomes, a celebrity with TV presence and uses that term or something other than supply chain.
PRICES are right focus - anything that there is "too little" of, should be going up in price. So more of it becomes available.
I want to push back a little. The term "supply chain" is fine, when it is used in business. Economists use it very poorly, and frankly understand damned near nothing about how businesses actually function in the economy.
To point 1, for the individual company, they do design their supply chain, if only a few links up or down from their own. Typically within the company there are more links than between companies being designed by any one node. Wal-Mart can directly take a hand in a few nodes up-stream from themselves, but most companies have their suppliers and don't worry about who supplies them. Downstream it depends, as many business to business firms do have rules about what you can use the product for, who you can resell it to, etc.
To point 2, well, yes, supply chains are typically a lot more resilient than the current self serving narrative makes them out to be, because no company wants to be at the mercy of their suppliers having issues and plan around that. This is why companies have inventories of finished goods and the various inputs to make finished goods; the less reliable the supply chain, the more insurance you buy in the form of inventories.
On the other hand, sudden issues can wreck a supply chain, and interruptions in a supply of a critical input can stop production and cause lots of down stream issues. Shutting down e.g. a Georgia Pacific toilet paper plant because you didn't get enough eucalyptus paper pulp delivered is a multi million dollar mistake. It actually is an open question about whether one could start the plant back up right away. Generally these issues are protected against, but if something along the lines of "close all non-essential businesses" is decreed from on high, nothing is going to be protected from that.
So yea, supply chain is fine, supply network also works pretty well. Economists just need to get real jobs in industry so they can learn how businesses actually work. I say this as someone who has worked in supply chain for over a decade, only getting my PhD in economics a few years back. Economists as a whole are embarrassingly ignorant of how industry actually works, except perhaps for the finance and banking industry. Not the profession has a great grasp of that, either...
One could argue that there are two challenges concerning the words or metaphors on the one hand and the analysis on the other.
Obviously there is a difference between a chain and a web. The chain perspective can be attributed to the perspective of a company. The web would be the market and macro perspective. The chain emphasizes the direct linkages as well as aspects as dependency, efficiency, routine, reliability. The web stands for coordination, flexibility, decentralized knowledge.
Considering opportunity cost one would argue that there will be additional costs for a company as soon as the established supply processes do not work any more. They entail finding alternative suppliers, assessing the quality of their products and making new contracts.
As Russ Roberts demonstrated in "The Price of Everything" price can rise extensively in times of shortages due to a natural disaster. And sometimes it's not about coordination or prices it's just about TINA - the is no alternative supplier for anti-lock disk brakes. That is the moment when the production stops because the supply chain is ... empty.
> The term “chain” is misleading in at least two ways. First, it suggests something that is designed
I am speculating a little. But it's likely that many nontrivial chains of supply that we rely on really are designed. The product of multiple companies in multiple companies negotiating the structure and encoding it on contracts complete price and volume guarantees, exclusivity deals etc.
In normal operation these are more efficient than what people can do by buying things in the open market. But they also increase the fragility of the system.
But given that in practice there *are* regulations that cap prices and allot some goods to particular uses, doesn't that make the notion of a supply "chain" more meaningful in our non-libertarian reality than it would be in a completely free market?
How about "supply chain" => "emergent supply environment"? Or one could try for a descriptive backronym ... "market emergent supply system" => MESS? But, although MESS is descriptive of the Secretary of Transportation's management of problems in certain container ports, MESS does not describe the power of the tens of millions of people (or more?), that underlie market roundabout production, to adapt.
Whatever you want to call it so long as you're not promoting the fantasy that the price system is providing at every moment the best of all possible worlds
Wouldn't a "supply network" be a more accurate term? I've never understood what Austrians meant by "roundabout". But a network... well, that works exactly like the internet(work) example you gave. Independent nodes of production, who send their product along to other nodes. If they get a better signal (i.e. a higher price), they send change and send their product along to the higher priced node.
Beyond that, I always have the sense that too much emphasis is put on price. "Expectations" do a lot of heavy lifting in monetary economics. Probably too much, because there's not really a systematic understanding of what is meant by the term (similar to "inflation"). And yet, I'd think about expectations here as a good framework for how production nodes evaluate price signals.
If they didn't, how else do we explain why it took me 7 months to get the new couches I ordered? In a price-determinant world, this shouldn't happen. Why are producers leaving this kind of profit opportunity on the table? Our basic understanding is that they should raise prices or increase production, but neither seems to happen. I think this is based on their expectation that the price increase is short-term and that, for reasons unknown, they don't feel they can raise prices in the short-term, but I don't have a good sense of what those reasons are.
Supply chain is as good a term as any to describe interdependency in production of a good (“without a nail”, and all that). If you treat that as a literal description of how parts are sourced, of course it is going to be wanting, as one doesn’t just buy chips, screws, or financial instruments from a single source. It would seem more accurate to say that cars aren’t being built because chips are too expensive for what the car can sell for, but those chips had to be ordered 18 months ago — and there is no spot market in ASICs (as they are not fungible). Note the WSJ article on how chip fab houses for the automotive market used to allow last minute cancellations of fab orders. They don’t anymore, because they don’t have to, and that has decreased flexibility in the “chain”.
Analogies are just analogies, and simplifications simplify. Supply chain is a much less problematic term than Greedy Corporations.
Whatever you call it, the result is the same: a lower rate of final output and higher prices.
"Instead of “supply chain,” we should say “roundabout production,” the term preferred by Austrian economists."
Nobody normal will use "roundabout production". As suggested above, network & web are both better, as would be net. Altho these all seem too close to the internet.
I'd suggest supply grid - because the constraints of a traffic grid and "congestion" are far more like what is now happening with our current supply grid and specific bottlenecks. But this will only take off if a great book is written explaining it, and the writer is, or becomes, a celebrity with TV presence and uses that term or something other than supply chain.
PRICES are right focus - anything that there is "too little" of, should be going up in price. So more of it becomes available.
I want to push back a little. The term "supply chain" is fine, when it is used in business. Economists use it very poorly, and frankly understand damned near nothing about how businesses actually function in the economy.
To point 1, for the individual company, they do design their supply chain, if only a few links up or down from their own. Typically within the company there are more links than between companies being designed by any one node. Wal-Mart can directly take a hand in a few nodes up-stream from themselves, but most companies have their suppliers and don't worry about who supplies them. Downstream it depends, as many business to business firms do have rules about what you can use the product for, who you can resell it to, etc.
To point 2, well, yes, supply chains are typically a lot more resilient than the current self serving narrative makes them out to be, because no company wants to be at the mercy of their suppliers having issues and plan around that. This is why companies have inventories of finished goods and the various inputs to make finished goods; the less reliable the supply chain, the more insurance you buy in the form of inventories.
On the other hand, sudden issues can wreck a supply chain, and interruptions in a supply of a critical input can stop production and cause lots of down stream issues. Shutting down e.g. a Georgia Pacific toilet paper plant because you didn't get enough eucalyptus paper pulp delivered is a multi million dollar mistake. It actually is an open question about whether one could start the plant back up right away. Generally these issues are protected against, but if something along the lines of "close all non-essential businesses" is decreed from on high, nothing is going to be protected from that.
So yea, supply chain is fine, supply network also works pretty well. Economists just need to get real jobs in industry so they can learn how businesses actually work. I say this as someone who has worked in supply chain for over a decade, only getting my PhD in economics a few years back. Economists as a whole are embarrassingly ignorant of how industry actually works, except perhaps for the finance and banking industry. Not the profession has a great grasp of that, either...
One could argue that there are two challenges concerning the words or metaphors on the one hand and the analysis on the other.
Obviously there is a difference between a chain and a web. The chain perspective can be attributed to the perspective of a company. The web would be the market and macro perspective. The chain emphasizes the direct linkages as well as aspects as dependency, efficiency, routine, reliability. The web stands for coordination, flexibility, decentralized knowledge.
Considering opportunity cost one would argue that there will be additional costs for a company as soon as the established supply processes do not work any more. They entail finding alternative suppliers, assessing the quality of their products and making new contracts.
As Russ Roberts demonstrated in "The Price of Everything" price can rise extensively in times of shortages due to a natural disaster. And sometimes it's not about coordination or prices it's just about TINA - the is no alternative supplier for anti-lock disk brakes. That is the moment when the production stops because the supply chain is ... empty.
> The term “chain” is misleading in at least two ways. First, it suggests something that is designed
I am speculating a little. But it's likely that many nontrivial chains of supply that we rely on really are designed. The product of multiple companies in multiple companies negotiating the structure and encoding it on contracts complete price and volume guarantees, exclusivity deals etc.
In normal operation these are more efficient than what people can do by buying things in the open market. But they also increase the fragility of the system.
But given that in practice there *are* regulations that cap prices and allot some goods to particular uses, doesn't that make the notion of a supply "chain" more meaningful in our non-libertarian reality than it would be in a completely free market?
theoretically there should be a supply network
in practice
competition or regulations or natural monopolies creates singular nodes
e.g. ports or chip manufacturers
How about "supply chain" => "emergent supply environment"? Or one could try for a descriptive backronym ... "market emergent supply system" => MESS? But, although MESS is descriptive of the Secretary of Transportation's management of problems in certain container ports, MESS does not describe the power of the tens of millions of people (or more?), that underlie market roundabout production, to adapt.
Whatever you want to call it so long as you're not promoting the fantasy that the price system is providing at every moment the best of all possible worlds