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How Our East-Germany-like Widespread Shortages can be Fixed

By Walter Block

July 29, 2022

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All sorts of shortages are now popping up in our economy.

All sorts of shortages are now popping up in our economy. At the head of the list is undoubtedly infant formula, but there are literally dozens of other items in short supply. There are so many of them that I feel constrained to mention them in alphabetical order, lest I inadvertently miss one or engage in double counting.

Here they are, as best I can list them: aluminum, avocado, bicycles, blood collection tubes, blood for transfusions, canned vegetables, cat food, chlorine, Christmas trees, coal, coins, commercial air tickets, computer chips, cream cheese, dye used in CT scans, eggs, fuel oil, garage doors, gasoline, girl scout cookies, hand sanitizer, home covid tests, infant formula, juice boxes, liquor, lithium, lumber, maple syrup, meat, motorcycles, natural gas, paper towels, pet food, potatoes, semiconductors, soap, soda, sunflower oil, toilet paper, tomato paste and wine. Peanut butter has not yet been mentioned in this regard but will soon, undoubtedly, be added prominently to this list.

I’m not kidding: each and every one of these items has been mentioned in this regard in the major media. What is going on here? Has the economy gone crazy, or what? According to several headlines, that is just about what is occurring. Here are a few of them: “The world is still short of everything; get used to it.” “America is running out of everything.” “Product shortages and soaring prices reveal fragility of U.S. supply chain.”

If the shortage list is long, the presumed causes of this economic malfunction are almost as large.

If the shortage list is long, the presumed causes of this economic malfunction are almost as large. For peanut butter, it will be a recall due to contamination: a salmonella outbreak. But this is an input into many other products, such as fudge, chocolates and peanut butter sandwiches, which will also soon be hard to find. For many items on the list the antecedent is the Coronavirus, which has led to supply chain problems. Paying workers to stay home and earn as much or more than their salaries, a few months ago, also contributed. Blame was also laid at a harsh winter. Imports from abroad have been subject to sudden border closures. Ships stuck at harbors on the west coast have been vulnerable to shortages of truck drivers and regulations. Computer chips have been susceptible to supply inelasticity; new offerings as a result of higher prices take a great amount of time to become forthcoming. Consumers have been castigated for hoarding. Staffing problems have been held responsible for commercial air travel disruptions. Drought, the bird flu and the Ukraine war have been held culpable.

But we have had all of these things—war, pestilence, disease, bad weather, ill health, government regulations—before. However, massive shortages, not of everything under the sun, but pretty close, have never before disrupted the economy to anything like the degree we are presently experiencing (apart from the two world wars, of course).

Where is the much-vaunted free enterprise system in all of this? Nowhere, that is where. Has it succumbed to so-called “market failure?” Not a bit of it. Rather, the difficulty is that public policy has made capitalism operate with one arm tied behind its back, and it has not been able to function when hemmed in by a plethora of restrictions, limitations and regulations.

Basic introductory Economics 101 teaches us that a shortage occurs when demand for an item exceeds its supply. What invariably occurs then? Why, prices rise. When this takes place, businesses are incentivized to produce more, buyers to purchase less. Voila, the shortage ends. Why doesn’t this occur under the Biden Administration? Why do we have so many shortages?

One possibility not at all in the public eye is that business firms are afraid to raise prices lest they be charged with price gouging. And why in turn might this be the case? The Bidenites are not exactly friends of the free enterprise system. Yes, to be sure, prices have indeed been rising. But are they increasing fast enough so as to quell shortages? Evidently not. Why not? This is possibly due to fear of being accused of gouging, and being subject to antitrust attentions. Wages, too, are on the incline. But likely not sufficiently so as to overcome the supply inelasticity difficulty. Why not? Firms may well be leery of so doing, in case they have to be decreased later on, and will be accused of exploiting, or victimizing laborers, or some such.

Prices and wages are typically somewhat sticky; that is, they are not instantaneously and fully flexible. But an anti-business philosophy of the sort now prevailing in Washington D.C. makes them even less able to perform the tasks for which we need them, than would otherwise be the case.

There are numerous ships at several California ports waiting patiently to be unloaded.

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.

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 (3) the 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 is a combined edition of two articles originally published by the Foundation for Economic Education on January 20, 2022, and June 21, 2022, under the titles “What East Germany Can Teach Americans about the Current Supply Chain Crisis” and “These Widespread Shortages Can’t Be Explained by Supply Constraints Alone.”

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