Roundabout Production

Worth thinking about

There are a number of simple economic concepts that yield interesting insights once you think about them. One such concept is roundabout production. This essay will draw out some of the insights.

Roundabout production means that you can get more of something by first producing something else.

You can stand in the middle of a river and try to catch fish with your hands. But you probably will have better luck using a net. This is a roundabout process. First you make the net. While you are making the net, you are not fishing. But then when you go fishing, you catch more fish.

Roundabout production is very complicated. It is also extremely efficient.

Consider a modern fisherman, using a fishing rod. Before he could use a fishing rod, a store had to stock fishing rods for him to buy. Before it could stock fishing rods, a construction business had to build the store. Transportation firms had to ship fishing rods to the store. A manufacturer had to produce fishing rods. The manufacturer needed metal and other materials. By the time you trace all the processes back (the transportation firms need trucks, which need …., etc.), many thousands of steps are needed in this process.

It gets almost ridiculous when you start to think about how roundabout things have become. Imagine trying to explain the occupation of “influencer” to someone born in 1900.

We use these roundabout production processes because they end up being much more efficient. All of the steps in the roundabout production process have to add up to less cost than the alternative process that is not roundabout. Our standard of living is much higher than it was hundreds of years ago, thanks to roundabout production processes.

One step in roundabout production is acquiring knowledge.

In 2002, scientist Rodney Brooks predicted,

30 years from now, instead of growing a tree, cutting down the tree and building this wooden table, we would be able to just place some DNA in some living cells, and grow the table, because they self-organize. They know where to grow and how to change their production depending on where they are. This is going to be a key to this new industrial infrastructure of biomaterials—a little bit of computation inside each cell, and self-organization.

This prediction seems unlikely to hold up. We do not yet have the knowledge to be able to manipulate biology in order to grow a table. But suppose that our bioengineering knowledge were to double every year. Then if we could grow a table in 2032, we would only be halfway there in 2031!

Trade, including international trade, is a form of roundabout production.

Maybe eventually we will be able to bioengineer a car. Maybe not. But we can already grow cars, as David Friedman pointed out in Hidden Order: The Economics of Everyday Life. He noted that American farmers can grow grain, the grain goes to Japan in ships, and the ships come back with automobiles.

Thinking in terms of roundabout production, there is no fundamental difference between international trade and other roundabout methods that yield greater efficiency. Any form of roundabout production gets rid of some jobs. Using a fishing rod gets rid of the job of making a net.

There are many roundabout production processes that get to the same endpoint.

Think of all the ways that you can end up eating fish. You can catch a fish and prepare it yourself. You can buy fresh fish at a fish market. You could buy frozen fish from a grocer. You could eat fish at a restaurant.

The many paths to output make the economy as a whole very robust, even though any individual path might be fragile. If something happens to the supply chain and a given restaurant is out of fish, there are other ways to find fish to eat.

Roundabout production processes are too complicated for any single authority to manage.

When an adverse event affects a particular production path, the economy naturally shifts to a different path. The instructions for doing so do not come from a central authority. They come from the price system.

In theory, a computer could have data on every single roundabout production process. But even then, the “tacit knowledge” that consumers and workers are unable to articulate. And it would not have knowledge of potential different production processes. The price system works better than even the most powerful possible computer.

We call our economic system “capitalism.” But we really ought to call it roundabout production processes.

Austrian economics actually defines capital as roundabout production. The more roundabout the production process, the more it is “capital intensive.” But as we have seen, roundabout production involves more than just the use of factories and equipment.

The essence of our economic system is not that one class owns “the means of production.” The essence of our system is that people are free to experiment with many forms of roundabout production, with prices providing the information used to determine the most efficient methods.

Question for thought: how do regulation and compliance fit into the roundabout production framework?