Economic Competition and Supply Chains

July 21, 2017

Economic Competition and Supply Chains

We have written about the massive changes in manufacturing globally over the last few decades. As we have shown, the data shows that the USA remained the largest manufacturer until 2010 when China finally took over as the largest.

The massive declines in manufacturing employment were global. It led many to believe jobs were moving from the USA to China but much more accurately jobs were being eliminated everywhere. China lost more manufacturing jobs than the USA during the 1990s and early 2000s.

The manufacturing job losses have been caused by productivity improvements. And those productivity improvements have provided us much cheaper access to manufacturing goods. That continued downward pressure on prices has been a big factor in the drastic decline in inflation. The threat of excessive inflation, which was so feared in the 1980s, has been replaced by the opposite problem – the threat of deflation.

One aspect of the productivity improvement has been the global supply chains that have allowed companies to increase efficiency. The requirements of managing global supply chains are extremely complex and likely would not be possible without software to aid in the complex task.

In his book, The Great Convergence, Richard Baldwin discussed how important the decline in shipping costs had in the economics of the last 50 years (we wrote about this book in: Historical Global Economic Data and Current Issues for Globalization). Those declines in prices, aided by other factors, increased the importance of supply chains.

The last few decades have also seen dramatic changes in supply chains due to the internet. The time from manufacture to consumer has been shaved by direct shipment to consumers and nearly direct shipment to consumers via companies such as Amazon. Again software plays a central role in tying the manufacturing floor to a nearly instantaneous status of incoming orders from end users. Or in the case of software and entertainment, companies like Apple and Netflix have replaced the entire supply chain of manufacturing physical goods (DVDs, CDs…) with software.

These changes in addition to increasing efficiency are again decreasing jobs by increasing the efficiency of the economy. These changes cause harm to those that are being squeezed (both employees and companies) while the economy overall gets more goods at lower prices to consumers.


Category: Economics

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