There is almost always engineering explanation when things go wrong. The U.S. economy is no different.
Episode Summary:
Computer chip shortages have crippled the automotive industry, but they’re not the only one affected by broken supply chains. Empty store shelves are visible everywhere in the Western world, with the combination of pandemic induce labour shortages adding to demographic challenges to create the classic drivers of inflation. Is there an engineering solution to this problem? Jim Anderton argues, yes, but workable solution may require a fundamental shift in consumer behaviour. Will we willingly pay more for locally made products?
Access all episodes of End of the Line on Engineering TV along with all of our other series.
Transcript of this week’s show:
To see any images, graphs, charts, graphics, and/or videos to which the transcript may be referring, watch the above video.
Empty store shelves. Computer chip shortages. Labour shortages. Supply chain disruptions. . Inflation at levels not seen in 30 years. The list of bad news just gets longer and longer every day, as is the list of experts, pundits and academics attempting to explain why we are in the mess we’re in. I’m not normally short of opinions, and they usually involve an engineering explanation for why things happen, even in situations that are not directly engineering related.
In my opinion, economy as exists right now is a classic case. So, in a nutshell, here’s my theory on why we are in the mess we are in. I’ll start with an engineering approach to the problem, by defining baseline parameters. The planet is a giant consumption economy. At its most fundamental, people need to consume air, water, food, clothing, shelter, then other less immediate needs for long-term survival and happiness. It’s no coincidence that engineering devices such as the yoke for draft animals, the plow, the horseshoe, the water pump, the loom and other basic technologies were critical to population growth and social development for the last 4000 years.
Fast forward to today, and we still consume those basics, but we enjoy a greater supply of them, at lower cost, however you measure it, than ever before. To achieve this, we use two techniques: mass production, and market economics. Market economics, in this case meaning the pricing mechanism, creates an information feedback system that helps individuals decide how to allocate resources efficiently. If prices are low, a farmer may not plant as much barley this year. And Ford may not make as many F-150s. Or Boeing, 777s.
The beauty of market economics is that this feedback mechanism is essentially free, and it immediately matches what people want with what people can make. Mass production is all about lowering consumer prices by decreasing unit cost. That means making a lot of things in one place and at one time and breaking up the task of making those things into smaller subunits so that unskilled or semiskilled workers can make complex products. When Henry Ford was a young man, it took a skilled craftsman to build an automobile. By the time he was done, semiskilled workers, doing simple, repetitive tasks on a moving assembly line, could, with a couple thousand others, build more complex automobiles at lower prices.
We know this, but how did we end up where we are today? Well, as the consumer goods became more complex, and mass production became wildly successful at lowering costs and prices, the labor component of manufacturing represented one of the few places where cost control could flow directly to the bottom line. The computer software people talk about margins of 30 or 40%, but 5% is more common in mass production of things like cars and appliances. In the absence of advanced automation, low-cost labour is essential. Therefore, we outsource mass production of goods and the component parts that make goods, to low wage jurisdictions, generally in Asia. And even as relative wages rose in those countries, the advent of low-cost shipping solutions like containerization and very large ships to carry them, kept the offshore competitive advantage strong.
Until Covid-19 came along. The pandemic simultaneously disrupted every aspect of global supply chains, from labour shortages in the originating factories, to shortages of truck drivers to haul the goods to ports, to shortages of shipping containers, which are piling up in the wrong places all over the world. Can the lack of a single integrated circuit stop production something as complex as an SUV? It can, and it does. So, why not just make everything we need here at home? Well, we can, but American consumers have consistently shown that, given a choice between higher-priced domestic goods and similar products sourced offshore at lower prices, they will choose the latter. They do with every paycheck at every Walmart, Target and Dollar General in the nation.
Does this mean we’re doomed? No, but it does mean that in the transition period between current production technology and advanced automation that completely replaces human labour, costs will be higher for domestic production. And with domestic labor shortages driving up wages, the combination of higher wages, driving higher prices equals inflation. And the end of the pandemic may not solve this problem. What will solve it, is advanced automation.
The only question then is, with fewer and fewer workers actually producing anything, will enough people have disposable income to buy the things like factories make? And that’s going to be the fundamental problem of the 21st century.
