Adam Smith meets the Suez container ship

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Now that the massive container ship Ever Given has been freed from clogging up the Suez Canal, perhaps we can step back from “crisis economics” to look at the larger state of global transportation logistics. I agree with Australian economist John Quiggin that this event was more of a temporary glitch in this complex system, and perhaps a warning flag for Mediterranean governments, than it is a major worldwide economic event.

I liken it to the multiple times that I have been stuck in a massive traffic tie-up somewhere on Interstate 75 between Michigan and Florida, most likely in Atlanta, where two major freeways merge for ten miles at the worst possible downtown location. The economic impact in lost travel time for thousands of drivers is huge by itself, and somebody really needs to do something about it, but my aggravation does not really affect anyone in California or New York in a noticeable way.

In order to see this economic snag more clearly, I’d like to take a dive into how the rise of the container ship has definitely screwed up the classic capitalist economics of Adam Smith.

The carrying trade

As I have written before, Scottish economist Adam Smith (c. 1723–1790) mentioned something called “the carrying trade” 35 times in his 1776 classic book The Wealth of Nations. The “carrying trade” was the term for the growing international business of transporting goods, which we now call “transportation logistics.” Smith characterized the carrying trade as a kind of natural “brake” on international commerce, protecting “home produce and manufacture” with a price advantage, especially on common goods. [1]

Adam Smith

It would take another 50 years before David Ricardo would articulate the more complex concept of comparative advantage in international trade, but Smith demonstrated how the global logistics of that era’s carrying trade, plus the many assessed import duties of that “mercantilist” age, impacted absolute advantage. Because of the high costs of transportation in those days, Smith describes how international trade would necessarily focus on luxury goods, like fine liquors, and the era’s exotic goods, like spices from the East Indies. Manufacturers of common shoes in England, he would argue, would have little to worry about:

“But the owner of that stock necessarily wishes to dispose of as great a part of those goods as he can at home. He thereby saves himself the trouble, risk, and expense of exportation; and he will upon that account be glad to sell them at home, not only for a much smaller price, but with somewhat a smaller profit, than he might expect to make by sending them abroad.”

But then came the container ship, which first emerged in the 1960s to reduce two of the big costs of international trade. First, the packaging of goods into standardized containers that could efficiently be carried by trucks, before and after the boat trip, without unloading (called intermodal freight transport) crashed the “stevedore” or “longshoreman” trade, the tedious and costly task of loading and unloading ships at ports.

Then, the container ships got bigger and bigger. The aforementioned Ever Given is one-quarter mile long and can hold 20,000 truck-trailer-sized containers. This is where we get into the basic fixed-cost versus variable-cost math used by the early Venetian sea traders that Franciscan friar Luca Pacioli formalized in his 1494 treatise, where we first saw the “debits” and “credits” language of accounting.

Luca Pacioli

Luca Pacioli

The Venetian traders had figured out how to accumulate a record of the big “fixed costs” of mounting a sea voyage, and then fairly allocating those costs, and the resulting profits, to ship captains and investors across the value of the many items typically brought back. The Ever Given effectively takes the huge fixed cost of transporting 20,000 containers over thousands of miles, and divides that cost by the hundreds of thousands of individual pairs of shoes or laptop computers inside those containers.

The net per-unit cost of the Ever Given’s ocean voyage allocated to that one pair of sneakers that you purchased, then, comes down to mere pennies. The “absolute advantage” of “home goods” over transported goods that was central to Adam Smith’s theory of international trade has become irrelevant.

The penny suckers

The delay of the Ever Given and the ships queued up behind it, then, only adds pennies to the costs of most of the transported goods on a per-sale basis. Some perishable cargo has been lost, but much of that was insured. Economist John Quiggin, mentioned earlier, notes that some ships were able to avoid the “traffic jam” by taking the more circuitous route around Africa’s Cape of Good Hope, but even those extra miles, divided by the hundreds of thousands of items on board, likely suffered a one-time added cost allocation of just a few cents.

There are many companies who are what I call “penny suckers.” These are businesses whose success depends on aggressively shaving pennies, or even fractions of pennies, off the vendor cost or the labor cost of each sale. Sam Walton turned a 3-cent-profit per sales dollar near-religious belief into Walmart’s massive presence in retailing worldwide. On the labor side, this penny sucking has been a primary reason why wages have not kept up with rising labor productivity over the last thirty years, while executive salaries have skyrocketed.

While this penny sucking has been only briefly interrupted by the Suez constipation, it is these very companies who have dismantled much of Adam Smith’s theory about international trade. As with those sneakers, there is no longer a “home manufacture advantage” on much of anything in financial terms. I have argued that even much of the “luxury goods” industry has devolved into an international cost competition of near-fungible (i.e. interchangeable) goods.

The long-term impact of the container ship

David Ricardo’s comparative advantage modification to Smith’s absolute advantage argument moderates the problem somewhat by demonstrating the financial conditions under which a country is still better off manufacturing an item at home. That is a difficult rabbit hole to go down without drawing a lot of economist’s marginal cost graphs, but suffice it to say that even that theory has not fully addressed the economic devastation experienced by some communities who have lost their economic livelihood to cheaper foreign imports thanks to container ships.

I have written about this subject before as well, but in short, this becomes a political football that few national politicians want to champion. The very local and very individual-company favoritism that is likely required to support or rescue individual communities has a tough time getting national political consensus.

Small towns all over the Midwest, where I have spent a lot of years, have been devastated by the loss of dominant-employer factories to cheap imports. At the same time, monoculture industrial agriculture for export, where the U.S. has gained through the cost advantages of ocean shipping, has sucked the business diversity from those same towns, even as Walmart has killed local retailing diversity. Cheap oil imports from massive tanker ships killed a lot of environmentally awful, but once economically profitable, coal communities in Appalachia, but multiple political candidates have found their aid proposals toxic to some voters.

Nationally and globally, we are better off through expanded international trade and container ships, but with consequences that are much more local and personal. Answers are beyond the scope of this post, but the philosophy is not. It boils down to a “me” versus “us” question. And we have not been doing well in addressing “us” questions lately.


Notes:

  1. Smith defined the carrying trade as “carrying the surplus produce of one [nation] to another.”

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1 thought on “Adam Smith meets the Suez container ship

  1. Lisa7

    “Small towns all over the Midwest, where I have spent a lot of years, have been devastated by the loss of dominant-employer factories to cheap imports.”

    Don’t know the answer either, but social costs are not factored into the price of goods and services. If it can’t be quantified according to GASP or any other accounting standard, the cost doesn’t exist. Have been thinking about this with respect to air/water/land/space pollution.

    Reply

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