June 26, 2022

What East Germany Can Teach Americans about the Current Supply Chain Crisis

America’s current supply chain problems are unusual. So why do they normally not occur?

What is happening with our supply chains? They seem very rusty, if not altogether broken. There are numerous ships at several California ports waiting patiently to be unloaded. We are talking thousands, maybe tens of thousands, of gigantic railroad car sized containers, all just sitting there; well, floating there. Meanwhile, our supermarket shelves are sometimes as much as half empty. Grocers are all too often out of the foodstuffs and other things we used to take for granted.

A similar situation took place a while ago. Supermarkets in West Germany were chock full of products. In East Germany? Not at all. The communist functionaries who visited West Germany (there were two Germanies after World War Two) complained that only a few grocery stores in East Germany were as fully packed as those in West Germany. They assumed that the Western powers were selectively showing them the better grocery stores just to (falsely) demonstrate the supposed benefits of capitalism. The eastern apparatchiks knew, they just knew, that most other such big box stores in the West had massive amounts of shelves gathering dust, just like the grocery stores in the East.

This tactic would not have been new. In medieval times, when a city was under siege, starved of food, the defenders would still gorge a few people; they were kept fat to show the surrounding army that their tactics were a failure. The capitalists in West Germany were accused by the communists of East Germany of analogous “piling on” behavior.

Of course, the communists were all wrong. The West Germans, like participants in all other countries where free enterprise was not entirely smothered, had full shelves everywhere. Profit and loss considerations ensured this. It was not a special ploy to show up the Communists, it was just an everyday occurrence.

The problem in West Germany and all other such nations, in the view of some, was that it had too many goods, too many choices. For example, Senator Bernie Sanders continually complains about there being too many brands of breakfast cereal, toothpaste, and deodorant. Maybe Bernie would be happier in countries like Venezuela, nowadays, where the “problem” of a surfeit of goods does not exist. Certainly, this problem would not have plagued him if he lived in East Germany after World War Two. (Come to think of it, he did spend his “honeymoon” in the USSR.)

Until the Biden administration, all our large groceries, and small ones too, were bursting at the seams. It appears that we are now headed in the direction blazed by the East German economy, not toward the status quo ante.

Forget for a moment supply chain problems. They are unusual. Why, ordinarily, do they not occur, at least not in countries with a bit more than vestigial free enterprise institutions? It is simple: free market prices, the profit and loss system, private property rights.

Consider this simplified supply chain. 1. The farmer grows wheat. It is shipped to 2. the commercial baker. That firm combines material from this crop with yeast, salt, milk, and other such ingredients of bread. This product next appears in the 3. grocery store. Initially the profits earned by all three are equal at 5%. Thus, there is no tendency for resources to shift anywhere; everything stays put – we are at equilibrium.

But then let us suppose something comes up to disturb this idyllic scenario. Posit that some of the baker’s ovens go out of order due to overheating. He can only use half as many inputs as before, and, thus, now ship out, say, half as many loaves. The price of wheat falls since he is purchasing less from the farmer. The price of bread rises, since he is now supplying less to the retailer. Profits in baking rise from both these sources.

But profits under free enterprise are like a call in the wilderness from a lost hiker in the woods. With high baking profits, other bakers expand their base of operation. They put on extra shifts and are led by Adam Smith’s “Invisible Hand” (he thought this was the hand of God) to do something in their selfish interest, earn more profit, which just also happens, providentially, to be in the public good. (Ronald Reagan, bless him, called this the “magic of the market.”)

As a result of this tugging, pulling, and pushing of the free marketplace, more wheat is now purchased from farmers, raising its price, and thus reducing the baker’s profit. Also, more bread now heads in the direction of the consumer, thus lowering prices and thus profits in baking. We are back to normal once again. (Homework: trace through what would happen if farmers lost half their crop due to a frost; show which market forces would bring us back to an even keel; hey, I’m a professor, I have to give homework, or they’ll kick me out of the profession).

So, why is this automatic profit and loss system failing us?

In no small part due to the Biden administration’s policies, we no longer have as much of a laissez faire capitalist system as once prevailed. The profits that once attracted entrepreneurs have been impeded with tax and regulatory hurdles, and the president’s misguided policies have helped create a historic labor shortage, leaving many productive workers on the sidelines. Mr. Biden for many months paid people as much or more for sitting on their couches as they could have earned working, so it’s no wonder that all too few people are flooding into trucking, or baking and farming in the hypothetical example.

Then, too, Mr. Trump’s efforts to reduce regulation have been overcome by the present White House. For example, truckers in California have been made to jump through extra hoops. (Trump’s support of lockdowns is another matter; they have no doubt created significant problems throughout the pandemic.)

Fortunately, the solution to the supply chain crisis is not complex. Supermarkets in West Germany were packed with goods because its leaders allowed for a relatively free market. Their counterparts across the Berlin Wall failed because they believed they could effectively regulate an economy.

If America wishes to avoid the fate of the East Germans, it should abandon interventionist policies and recognize that prosperity lies in a laissez faire capitalist system.

This article, What East Germany Can Teach Americans about the Current Supply Chain Crisis, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.