William H. Janeway at Project Syndicate: Whether mobilizing for war or (re)constructing advanced manufacturing capabilities in peacetime, success turns on the functioning of complex supply chains. But this truth was long forgotten – or at least under-appreciated. Not until recent supply-chain shocks did academics, policymakers, and others start paying more attention to the complicated, barely studied “meso” (middle) domain between microeconomics and macroeconomics.
While microeconomics deals with the behavior of individual agents (firms, consumers, workers, investors), macroeconomics addresses the behavior of statistical aggregates (as represented by GDP, national income, and so forth). But the space between has largely been neglected, particularly with respect to how it serves as the dynamic context in which economic policies play out. One source of this lacuna may be the simplistic faith that markets can be trusted to deliver the most efficient solution, or at least trusted more than corruptible politicians.
The issue that has called attention to this domain has been the fragility of an economy whose structure has been optimized for efficiency. The COVID-19 pandemic exposed how the longstanding commitment to maximizing returns on capital (for the benefit of shareholders and executives) meant that minimal capital was put toward maintaining buffer stocks or redundant secondary sources that could have helped absorb supply shocks. Since the systemic benefits from these investments are positive externalities, they do not factor in individual firms’ calculations.
Moreover, ignorance of the interconnected structure of the economic system also constrained efforts to address systemic fragility. That is why there is now an urgent need to understand the economy as a complex set of production networks that evolve dynamically in response to specific demands and supply-side shocks.
A good example of such work is a landmark 2020 paper by Vasco Carvalho of the University of Cambridge and his colleagues, which traced the “propagation effects” of the 2011 Great East Japan Earthquake to identify its cumulative economic impact. They examined how the “disruption caused by the earthquake and its aftermaths propagated upstream and downstream supply chains, affecting the direct and indirect suppliers and customers of disaster-stricken firms.” And by applying a “general equilibrium model” of production networks, they were able to “estimate for the overall macroeconomic impact of the shock by taking these propagation effects into account.”
This focus on production networks opens new avenues for the economics discipline. Two great economists, going against the grain, did concern themselves with this intermediate domain. The first was the Soviet-American Nobel laureate Wassily Leontief, who constructed the first input-output table to illustrate the flow of goods from primary resources to final products.
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