Why Economists Can't See the Economy
On page one of The Wealth of Nations, Adam Smith illustrates the central principle of his economics with an example taken from, in his words, a "very trifling manufacture": the making of pins. Smith goes to some effort to describe the process. "One man draws out the wire," he writes, "another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head." In all, Smith counts 18 different "operations," then estimates that such specialization boosts productivity at least 240 times over what the same number of men, each working alone, could accomplish.
Smith's pin factory has served economists ever since as an organizing vision of what economics should work toward. "Specialization is wealth" is the idea that, to greater or lesser degree, orders the thinking of all economists. And due to the immense influence of economics within our society, this vision has come to shape how we view our world and organize the industries on which we all rely. America's promotion of free trade, at the most simple level, is just the vision of the pin factory supersized into national policy. If specialization across the factory floor is good, and across the nation's breadth is better, then across the face of the globe is best. But what does it mean when such a dream comes true, and the dreamer does not realize it?
Look closely at today's global production system and you will see shockingly high degrees of specialization, in terms of both geography and ownership. More and more activities take place in only one or a few places on earth, and within one or a few companies. This is especially true in electronics: Taiwan produces more than half of the world's vital customized chips. But it is also ever more true of heavy industries, like automobile manufacturing, even of agriculture and food processing. One of the crowning conceptions of the Enlightenment has been achieved, yet economists appear entirely unwilling to recognize the fact, let alone begin the task of examining how this revolutionary event might alter the purposes and pathways of their work.
For America, this is a big problem. As Adam Smith understood 230 years ago, decisions on how to divide the tasks necessary to produce pins are based not merely on questions of efficiency but also of engineering. If anything, the engineer's work naturally precedes that of the economist. Americans would never ask an economist to design a suspension bridge or a new jetliner, though we wisely insist that engineers give the economists a seat at their table. Yet when it came time to design the most amazingly complex system ever devised by human beings -- the global production machine -- we relied only on principles that spring from the mind of the economist. We did not insist that economists offer the engineers a single stool at the table; we did not insist they even invite the engineers into the room.
Our brand-new global factory does look awfully efficient. But it is an efficiency purchased through the destruction of all flexibility, and hence sustainability. What we should be fretting about now is what happens when, one day soon, we awake to find that war, revolution, disease, or natural disaster has cut us off from some one of the increasingly scattered pockets of workers we rely on to produce keystone industrial components or to process vital back-office information; what happens when, for want of access to one or a few of the links that make up the global assembly line as a whole, our entire industrial system breaks -- pins, electronics, pharmaceuticals, food, and all.
One of the more fascinating academic exercises in America these days is to sit down with an industrialist to discuss the growing brittleness of our production systems, then raise the exact same points with an economist. The industrialist grasps the idea of fragility immediately, and often offers up fresh tales of production shutdowns and close calls. Indeed, industrial fragility has quietly emerged as perhaps the single biggest operational concern of business today, reflected in a boom in programs to study supply chain risk at places like MIT's Sloan School of Management and Penn's Wharton School.
The economist, by contrast, just as swiftly rejects the idea of such fragility outright. Why? Because no industrialist, the economist will declare, would ever take such a risk. Industrialists who say that market pressures force them to take too much risk are simply seeking protection. They are selfish, or lazy. To understand why economists will so audaciously dismiss the words of industrialists like Intel's former Chairman Andrew Grove -- who a few years back warned that any break in trade between Taiwan and China would precipitate the "computing equivalent of Mutually Assured Destruction" -- it helps to look at how the engineering of today's global production system differs from the engineering of the previous production system. Because to the extent that economists' thinking is based on the real world, it is the world that existed in mid-20th-century America.
Read Barry Lynn's article on The American Prospect