The Open Markets Primer on Economic Interdependence, Industrial Supply Chains, and Shocks
March 15, 2020
The Open Markets team has long been the leader in America in highlighting the ways in which concentration of production capacity can make industrial, financial, and information systems subject to catastrophic crashes. Our body of work – and that of our allies – provides the most complete and rich analysis of the nature of the economic, political, and social risks posed by the fragility of these systems. Over the years, we have been invited to present on this issue to top-level officials in the White House, the CIA, the departments of Treasury, Defense, and Commerce, as well as to many members of Congress. We have also been invited to present to the OECD, the World Bank, the IMF, and to top officials in Japan, the U.K., France, Germany, and Sweden, among others. And we have worked in close collaboration on this issue with the leading academic experts on complex systems, including Yossi Sheffi, Charles Perrow, Michael Osterholm, and Ralph Gomory.
We began this work more than 20 years ago, after an earthquake in Taiwan on September 21, 1999, led within days to the shutdown of factories across the United States. It was our research into this first “industrial crash” that alerted us to the degree to which basic industrial and economic activities had been monopolized in America, and it also alerted us to the degree to which free market ideology had blinded policymakers and economists to the clear dangers posed by such consolidation. Indeed, all our subsequent work at Open Markets on the political and economic effects of monopolization, and on the power and behavior of powerful intermediaries in control of vital chokepoints, grows out of this initial period of research and writing.
To the extent that we can distill a few simple principles and rules from our research and writing on a wide variety of shocks during the last two decades, we have found that:
- The basic problem lies in the structure of the system, not the shock. As Charles Perrow put it, accidents are “normal,” hence the challenge is to design systems that are able to absorb any shock.
- “Just–in-time” manufacturing and distribution is not the problem, although it can accelerate the shock.
- We can make these systems almost perfectly resilient. There is never a reason for an industrial system to depend on single points of failure. We can structure and link these machines in whichever way we choose.
- We can structure these systems to promote peace and cooperation among peoples in different nations, in ways that promote broad prosperity.
- Local systems of distribution can be just as fragile as national and international systems.
The purpose of this page is to provide a brief introduction to our work on these issues, as well as to the work of some of our allies.
On the Magnitude of the Threat and the Origins of the Problem:
- End of the Line: The Rise and Coming Fall of the Global Corporation, Barry Lynn, Doubleday, 2005. This book provides the most complete history of how monopolization, outsourcing, and offshoring combined to undermine the resiliency of many of our most important industrial and financial systems.
- “Built to Break: The International System of Bottlenecks in the Era of Monopoly,” Barry Lynn, Challenge Magazine, March/April 2011. In this article, we update the basic thesis from End of the Line to account for lessons from the Lehman crash of 2008 and the Tohoku disaster of March 2011. This is the most concise, comprehensive explanation of the nature and origins of the problem.
- “Unmade in America: The True Cost of a Global Supply Line,” Barry Lynn, Harper’s, July 2002. This is our first article on the subject of supply chain fragility and industrial interdependence, and it provided the seed for End of the Line.
- “Shock Treatment: Building Resilient International Industrial Systems in 2030,” Barry Lynn, in Global Flow Security, Erik Brattberg and Daniel Hamilton, editors, Johns Hopkins, 2015. This project was co-sponsored by a Swedish government project led by Tomas Ries and launched by Carl Bildt.
- “The Fragility That Threatens,” Barry Lynn, Financial Times, October 17, 2005.
On the Intersection of Monopoly and International Relations:
- “The New China Syndrome: American Business Meets Its New Master,” Barry Lynn, Harper’s, November 2015. This article looks at the dangers of becoming dependent on a foreign power for vital labor, profits, and supplies.
- “A Glitch in the Matrix: Why the Pivot to Asia Has No Clothes,” Barry Lynn, Foreign Policy, September 2012. An examination of the misfit between the Obama administration’s China Policy and our national industrial security.
- “War, Trade, and Utopia,” Barry Lynn, The NationalInterest, Winter 2006. A straightforward discussion of the politics of industrial interdependence and dependence in a system marked by extreme concentrations of industrial capacity.
- Empire by Integration: The United States and European Integration, 1945–1997, Geir Lundestad, Oxford, 1998. An excellent short study of how America’s postwar governments structured an international industrial and trading system that was at once highly integrated and highly resilient.
- “Trade, War, and China in the 21st Century: Beyond TPP – Does America Need a New Global Strategy?” An Open Markets event at New America, September 21, 2016.
- “Step or Stumble: The Obama Administration’s Pivot to Asia,” statement by Barry Lynn, Hearing Before the Subcommittee on Asia and the Pacific of the Committee on Foreign Affairs of the House of Representatives, December 2016.
On the Role of Financialization in Creating the Problem:
- “How Detroit Went Bottom Up: Outsourcing Has Made the Automotive Industry So Co-Dependent and Fragile That One Company’s Downfall is Every Company’s Concern,” Barry Lynn, The American Prospect, September 2009. A detailed look at how financiers restructured the automobile production system in the United States in ways that created a “hydra” structure, in which multiple original equipment manufacturers rely on the same supplier system.
- Cornered: The New Monopoly Capitalism and the Economics of Destruction, Barry Lynn, Wiley, 2010. Perhaps the most complete description of how the combination of monopolization and financialization have eroded or destroyed vital industrial systems.
The Problem in a Picture:
This PowerPoint slide was designed by Japan’s Ministry of Economy, Trade, and Industry to explain the lessons learned from the extreme disruption of industrial production after the Tohoku disaster in March 2011. The slide shows how concentration within the supply system transformed the production system from a stable pyramid structure to an inherently fragile diamond structure.
On the Effects of a Demand-Side Shock – the 2008 Financial Crash:
- “Global Value Chains and the Crisis: Reshaping International Trade Elasticity?”, Hubert Escaith, Nannette Lindenberg, and Sebastien Miroudot, in Global Value Chains in a Post-Crisis World, World Bank, Washington, DC, 2010. This article by three economists describes in stark detail how the Wall Street crash of 2008 swiftly disrupted production systems on the other side of the world in ways that amplified the effect of the shock.
- “The Collapse of Global Trade: The Role of Vertical Specialisation,” Kei-Mu Yi, in The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G-20, Centre for Economic Policy Research, 2009. This paper also examines how the shock from the Wall Street crash of 2008 affected highly concentrated production systems in Asia.
On the Potential Effects of a Pandemic:
- “Preparing for the Next Pandemic,” Michael T. Osterholm, Foreign Affairs, July/August 2005. The first article to detail the lessons from the 2002 SARS pandemic, including the ways in which the pandemic disrupted the production of facemasks and other devices needed to fight the pandemic.
On the Systemic Nature of the Problem:
- “Systemic Supply Chain Risk,” Yossi Sheffi and Barry C. Lynn, The Bridge, Fall 2014. The first article in which an engineer recognized the systemic nature of international production arrangements and the potential for cascading crashes.
On the Intersection of Trade Policy and Competition Policy:
- “The Old-School Answer to Global Trade,” Beth Baltzan, The Washington Monthly, April 2019. An excellent history of mid-century thinking and debates that clearly connected trade policy to competition policy, and that envisioned using international trade agreements to police monopoly.
Fragility at the Regional and Local Levels:
- “New York’s Looming Food Disaster,” Sidhartha Mahanta, Atlantic City Lab, October 21, 2013. And “A Year After Sandy, Food and Fuel Supplies are as Vulnerable as Ever,” Sidhartha Mahanta, Reuters, October 28, 2013. The first article to detail the near collapse of food distribution systems in New York after Superstorm Sandy, and an excellent explanation of the origins of the problem.
Other Books to Read:
- The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, Yossi Sheffi, MIT Press, 2005. The best guide to preparing a company for the sudden loss of a vital supplier.
- The Power of Resilience: How the Best Companies Manage the Unexpected, Yossi Sheffi, MIT Press, 2015. The best guide to preparing a company for the sudden loss of production across an entire system, and to the limits of such preparation.
- Normal Accidents: Living With High-Risk Technologies, Charles Perrow, Princeton, 1999. The standard guide to the importance of focusing on ensuring the resiliency of the system and not solely on efforts to prevent shocks.