You might remember a time when markets seemed to work rather well. “Shortages” — as in empty shelves and lengthy order backlogs — were rare because Adam Smith’s “invisible hand”— in modern day terminology, the price mechanism — did its job. The great Scottish economist was primarily interested in how individual, possibly self-serving, behaviour would “advance the interest of the society, and afford means to the multiplication of the species”. Or, put another way, if we all “selfishly” respond to price signals, we’ll collectively be better off than might otherwise have been the case.
Supporters of free markets hated everything about Soviet central planning because the invisible hand was not allowed to function. Soviet saucepan factories tended to produce what was easy to make, not what customers wanted. The factories may have fulfilled their centrally-planned quotas but did so by manufacturing saucepans to be used in canteens, not in the kitchens of families of four.
Britain today, however, appears to be suffering from a “shortage” problem that reflects neither an outbreak of hostilities nor an unnoticed October Revolution. Some of this comes from Covid’s impact on global supply chains. Output of semi-conductors has not kept pace with rising demand for new cars worldwide, itself a reflection of reduced enthusiasm for public transport. Yet modern cars are chock full of semiconductors. As such, delivery lead times have got longer and longer. Order a swish Mercedes saloon now and the car might turn up next spring, if you’re lucky. For those craving instant gratification, second hand is a more plausible option. As a result, prices of used cars are heading higher, one reason why inflation rose to a well-above-target 2.5 per cent in June. Other shortages are a direct reflection of Brexit.
One French manufacturer of, amongst other things, premium shower gel is happy to sell its products in the US, Australia and La Réunion (the French territory in the Indian Ocean which also happens to be the main French “beta variant” hotspot) but not to the UK.
The paperwork is, it seems, just too onerous. Furnishing a flat is no longer as straightforward as it once was. British “own brand” retailers still depend on obtaining supplies from the other side of the Channel. Lead times are now a lot less predictable. People are increasingly reluctant to purchase online from non-UK retailers, fearing that the advertised price will not include the duty they’ll eventually have to pay. Our labour market, meanwhile, has been disrupted by both Brexit and Covid. Vacancies are higher than they were before the pandemic. Many industries complain about a shortage of foreign workers, some of whom have returned “home” either to shelter from Covid or hide from Brexit. Staycations have become trickier because of greater demand — Cornwall has replaced Catalonia as a destination of choice — but also because of a shortage of (foreign) workers. Remaining staff, meanwhile, are constantly being pinged. Try booking a table for two in a Padstow restaurant if you don’t believe me.
If the invisible hand is allowed to work, none of these shortages will be with us for long. Rising UK wages will attract more foreign workers. New restaurants will appear in Padstow (or in alternative villages). Higher staycation prices will persuade us to holiday in France or Spain. The French shower gel provider will eventually sort out the paperwork. Semiconductor supplies will respond to higher prices. Delivery times for new cars will come back down again.
The invisible hand can only work properly, however, if the invisible wall that now surrounds the UK is removed. That’s not happening any time soon. Even when the pandemic recedes into the background, Brexit will ensure that many invisible bricks remain. “Taking back control” carries its own price.
Stephen King is HSBC’s Senior Economic Adviser and author of Grave New World
What do you think is to blame for shortages? Let us know in the comments below.