Termites, capitalists, and resilience

When termites attack a wood building, they eat the structural resilience designed into the building. Being intimately aware of the tension in the fibers they are eating, they leave before the rupture point. Then, the unexpected load of an earthquake, strong winds, or a party with fifty friends, makes the house fall down. Free market capitalism works the same way.

In manufacturing, uncertainties in component production and transportation can cause expensive delays in assembly, which can be avoided by stockpiling materials. The greater the stockpile, the greater the resilience in the system, but with greater cost incurred. In the 1970’s, the Japanese perfected what became known as “just in time manufacturing.” With exacting timing of component production and reliable inexpensive transportation, parts arrive for assembly “just in time,” reducing stored inventory costs. As long as everything works as designed, this gives a competitive economic advantage, and the process spread around the world. But like termites, all system resilience is squeezed out, making systems extremely vulnerable to the unexpected.

For example, in July, 1993, there was an explosion at a Japanese factory making epoxy resin used to encapsulate semiconductor chips. Despite a massive global market for semiconductors, this one factory was the primary source for the resin. Chip prices doubled within days and looming shortages threatened disruption of multiple industries. At great cost, the market place scrambled to establish alternative production lines to produce this essential ingredient.

The illusion of economic thrift from reduced resilience was central to the disaster of America’s Covid-19 response. For decades, capitalists have told us that we can’t afford socialized medicine, public health for all, despite every advanced country in the world having figured out how to make it work. Because profit, rather than a healthy population, is the primary driver in our system, there is incentive to reduce public health infrastructure to the bare minimum, accepting that some people are priced out of the market. During normal times, the result is a high level of chronic diseases resulting from unaddressed preventative care, leading to more expensive emergency room admissions. During the pandemic, the result was the highest death toll on the planet.

The world hasn’t faced this kind of pandemic for a century, and even nations with good public health infrastructure were hard hit. Our health care industry is regulated to some extent, is a combination of non-profit and for-profit entities, and is somewhat backstopped by the federal government. Even with dysfunctional federal leadership for the first year, states and hospitals worked together, sharing resources, information, and staff, and managed to avoid total collapse of health care. But it was a close call in many communities.

To see the full downside effect of no resilience in an unfettered capitalist free market, look no further than the recent collapse of the Texas power grid due to cold weather. This event wasn’t even unexpected, since the same thing happened ten years earlier.

Convinced that government is always a problem and privatized free market capitalism is always the solution, Texas Republicans created an unregulated energy grid in the 1990’s. It was intentionally disconnected from the rest of the country to avoid federal regulations, promising that competition would insure Texans got the cheapest power possible. But cheap is different from quality.

In theory, when demand exceeds supply, prices rise, reducing demand or inviting new resources into the lucrative market, bringing prices back down. In practice, the Texas energy market rapidly concentrated into two major providers, which wound up overcharging Texans by $28B over the next 3 decades. With no incentive to invest in reserve capacity, or costly upgrades to improve weather resilience, the entire system was unprepared for infrequent extreme conditions. Last month, unusual cold froze half of the available Texas grid generation, reducing supply to 40 megawatts trying to meet a 70 megawatt demand. People couldn’t reduce demand, and there was no way to import new resources. To avoid complete destruction, the grid was shut down, creating a record setting $20B disaster. To add insult to injury, unregulated market prices spiked to produce some consumer bills over $10K for the month, thus capitalizing the profits and socializing the losses.

Creating system resilience to avoid large social and economic disasters requires long term planning and upfront investment, impossible for corporate capitalism, driven by least cost, short term profit.