But the production and delivery of goods depends on a complex supply chain that is usually invisible to most of us, but is proving to have limited capacity and more fragile than almost everyone suspected. And this supply chain was quickly overwhelmed. Most visible were dozens of container ships steaming back and forth outside congested ports, and even cargoes that had been successfully unloaded spent many days waiting for someone to take them to their destinations.
The result has been a worldwide shortage of shipping containers, which carry many items of modern commerce, and an incredible increase in shipping costs.
I’m happy to say that that climb is now behind us. But there are still some ongoing bottlenecks in key products. In particular, global automobile production is still being slowed down by the shortage of some semiconductor chips.
So our shipping problems anticipated the problems the West is now having in supplying Ukraine with ammunition: There was ample production capacity overall, but not enough of the specific capacity we needed at the moment, especially considering the complex logistics which must also be present in order to get goods to where they need to go.
What does that say about the economy in general? One of the most fundamental ideas in this area is that economies can compromise by producing more of some things if they are willing to produce less of others.
Now nobody doubts that there are trade-offs, that an economy can change the mix of goods and services it produces. But are these trade-offs relatively smooth and easy?
In the long run, the answer is almost certainly yes. But, to paraphrase John Maynard Keynes a bit, unfortunately quite a lot of Ukrainians will be dead in the long run.
Both the supply chain crisis and the current ammunition problem suggest that even if you’re willing to give up a lot of butter, it can be very difficult to produce more weapons in the short term.
The revelation that economies are not as flexible as we thought has many policy implications. Supply chain constraints were not the only reason for inflation in 2021, but they were clearly an important part of the story with implications for future monetary policy. And in general, economic inflexibility suggests that we should take more precautions against the possibility of future disruptions, particularly for strategic assets, but potentially more extensively.
But all of this requires a much longer discussion. The main point for now is that it turns out the Rolling Stones may have got it wrong: Modern economies generally do a very good job of giving people what they want, but sometimes you just don’t get what what you need.
This article originally appeared in The New York Times.
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https://www.smh.com.au/business/the-economy/what-guns-ships-and-chips-say-about-the-global-economy-20230308-p5cqb2.html?ref=rss&utm_medium=rss&utm_source=rss_business What guns, ships and chips say about the global economy