The reason it happens this way is that in a multi-agent economy with reliable trade, reserves against disruption get interpreted as wasteful and competed out. Investors seek the higher returns from companies that cut that below-the-line cost and plow the savings into capital goods or other things that can increase future revenues.
For example, Just In Time delivery swept the business world because investors and managers optimizing for profits began to see warehouses full of inputs as places that were costing money, not making money. JIT eliminates that inventory, but it relies on the assumption that you can always collect your inputs from suppliers just before you need them.
This was continuous with a century-long trend of vertically-integrated manufacturing dis-aggregating into contract networks, which made total sense as long as transaction costs kept dropping.
Another way to look at it is this: As long as communications and transport are getting cheaper and more reliable, profit maximizers will try to use them to replace more expensive goods, including storage space. Since food is perishable, the advantage of not buffering it in warehouses is exceptionally high. Which is fine until the cost gradients reverse and JITting your food from overseas gets expensive, at which point you can be in a heap of trouble.
Is efficiency-driven supercriticality the only reason for interconnected failures at all scales? No. Is it an important driver, perhaps the single most important one under modern conditions? Evidence points to yes. Worked example follows: embedded electronics for automobiles.
This is an example of how even ordinary fluctuations in demand for non-perishable goods (something much less disruptive than a war) can cause cascade failures in a system that’s supercritical due to insufficient buffering. In 2020, automobile manufacturers reacted to a COVID-induced collapse in demand for their product by letting their contracts with the chip fabs making their car electronics go un-renewed—assuming that once demand picked up they could buy the chips again at the same prices.
When they went back beginning in later 2021, they discovered that (a) the chip fabs had converted the idled capacity to higher-margin products, and (b) they hadn’t warehoused enough parts to keep making cars until they could buy line capacity. The consequences rippled down the chain towards consumers as a bunch of availability and price shocks, nearly wrecking several manufacturers and damaging a legion of related service businesses.
Took them a lot more money to get production reestablished than it would have to keep their piece of the fab capacity running through the slump. The recovery isn’t done yet, and business schools are already treating this as a textbook case of the management stupids
The reason it happens this way is that in a multi-agent economy with reliable trade, reserves against disruption get interpreted as wasteful and competed out. Investors seek the higher returns from companies that cut that below-the-line cost and plow the savings into capital goods or other things that can increase future revenues.
For example, Just In Time delivery swept the business world because investors and managers optimizing for profits began to see warehouses full of inputs as places that were costing money, not making money. JIT eliminates that inventory, but it relies on the assumption that you can always collect your inputs from suppliers just before you need them.
This was continuous with a century-long trend of vertically-integrated manufacturing dis-aggregating into contract networks, which made total sense as long as transaction costs kept dropping.
Another way to look at it is this: As long as communications and transport are getting cheaper and more reliable, profit maximizers will try to use them to replace more expensive goods, including storage space. Since food is perishable, the advantage of not buffering it in warehouses is exceptionally high. Which is fine until the cost gradients reverse and JITting your food from overseas gets expensive, at which point you can be in a heap of trouble.
Is efficiency-driven supercriticality the only reason for interconnected failures at all scales? No. Is it an important driver, perhaps the single most important one under modern conditions? Evidence points to yes. Worked example follows: embedded electronics for automobiles.
This is an example of how even ordinary fluctuations in demand for non-perishable goods (something much less disruptive than a war) can cause cascade failures in a system that’s supercritical due to insufficient buffering. In 2020, automobile manufacturers reacted to a COVID-induced collapse in demand for their product by letting their contracts with the chip fabs making their car electronics go un-renewed—assuming that once demand picked up they could buy the chips again at the same prices.
When they went back beginning in later 2021, they discovered that (a) the chip fabs had converted the idled capacity to higher-margin products, and (b) they hadn’t warehoused enough parts to keep making cars until they could buy line capacity. The consequences rippled down the chain towards consumers as a bunch of availability and price shocks, nearly wrecking several manufacturers and damaging a legion of related service businesses.
Took them a lot more money to get production reestablished than it would have to keep their piece of the fab capacity running through the slump. The recovery isn’t done yet, and business schools are already treating this as a textbook case of the management stupids