Efficiency requires us to force out duplication and redundancy, increase specialization and more seamlessly connect things together. Resilience, on the other hand, enables us to adapt to changes in our environment. Efficiency and resilience are opposing forces in our economy, and the pandemic has shown us the high price we are paying for the modern focus on efficiency at the expense of resilience: We don’t have immediate access to the needed test kits, masks and ventilators because it wasn’t efficient to have mass production of these items in the United States, and we’ve come to believe that stockpiling supplies is wasteful. Specialization means that production of medical equipment depends on other countries, and there is no backup supply if the Chinese government is serious about limiting exports of the drugs and drug ingredients on which the United States utterly depends. And seamless connection means that everything travels quickly and effortlessly, including goods and people — and viruses. Just like that, all three ingredients that make up the formula for efficiency are exposed in the current crisis.
Starting with the first wave of corporate raiders in the 1980s and continuing with the activist hedge funds of the past decade, companies have been under extreme pressure to cut costs. They’ve outsourced massive amounts of manufacturing to China since its admission to the World Trade Organization in 2001, leaving non-Chinese companies all over the West specializing in other parts of the value chain to survive. And, not to be overlooked, the rise of the Internet has woven one market seamlessly to the next, making price discovery and comparison quick and easy, and driving less efficient providers out of business.
You might ask: “What’s wrong with that? Don’t we want the economy to be efficient?” The answer is yes, these initiatives have all generated benefits. But the relentless drive for efficiency above all else has also eliminated any redundancy or buffers that might exist. Business school professors might call such redundancy and buffers “waste” or “slack.” I think the better word is resilience because two important features of systems that can bounce back from adversity are the alternative mechanisms by which they can operate and the availability of buffer stocks for unanticipated swings.
Of course, all resilience and no efficiency makes for a fundamentally uncompetitive and unproductive economy. It is a question of balance, but we are dangerously out of balance.
It wasn’t always this way. In the late 19th century, clever American business executives such as John D. Rockefeller and Andrew Carnegie rolled up their industries into monopolies that were very efficient, at least in the short term. American society determined that these monopolistic trusts weren’t resilient, however. They produced monocultural suppliers with no interest in innovation, capable of extracting from customers all the value of their efforts. That concern was the genesis of the Sherman (1890) and Clayton (1914) antitrust acts, which kicked off nearly a century of antitrust enforcement designed to balance efficiency and resilience.
Then things shifted. Beginning in 1982, the efficiency defense against antitrust enforcement took shape. If this shift were the product of one party, I would say it was a partisan political issue. While the first revision was under the Republican administration of Ronald Reagan, the fourth revision was under the Democratic administration of Bill Clinton in 1997. What’s more, the efficiency defense was adopted by Canadian and European antitrust authorities — both typically more liberal jurisdictions.
We will continue to be unprepared for new calamities such as covid-19, the disease caused by the novel coronavirus, unless we rethink our pursuit of efficiency in three fundamental ways:
First, we need to define certain essential buffer stocks — whether of people or such products as ventilators or N95 masks — as something other than slack to be eliminated. We already have a model. The Strategic Petroleum Reserve was created in 1975 in the aftermath of the OPEC oil embargo with the idea of stockpiling 30 days or so of oil available for U.S. consumption. While the reserve’s size has fluctuated somewhat, nobody has tried to eliminate it because it isn’t categorized as waste.
Second, we need to look at why virtually all of the biggest medical research companies simultaneously chose to specialize in pharmaceuticals rather than vaccines and then restructure the industry’s incentive systems so that vaccines aren’t overlooked. That specialization may be efficient but it certainly hasn’t proved effective.
Third, by spreading so quickly, this pandemic has already illustrated the downside of our seamlessness in travel and trade. Early on in this pandemic, complete travel bans were seen as overly disruptive and draconian. For the future, we need to accept that the timely imposition of travel restrictions, within and across countries, is a powerful and necessary weapon, and adjust our travel expectations accordingly.
All these measures would introduce productive friction into a system that has been developed over 50 years to be as ruthlessly efficient as possible. As this pandemic has shown us, we need to value other qualities such as redundancy and buffers, if we are to tackle the next catastrophic event.