There's a continual call these days for companies to practice supply chain transparency. This is the idea that you should know where your supplies come from and what practices are used in their production. And this is intended to go further back down the supply chain, to your suppliers' suppliers' suppliers and so on. On the face of it this seems a reasonable enough demand. No one really wants to be profiting from the use of slave labor for example, we'd all prefer our phones were made without conflict minerals. Sadly though the idea is built upon a complete misunderstanding of how markets work. And how only markets work when we start to consider supply chains in a modern economy. The very thing that markets do for us is strip away the need for that sort of detailed knowledge of what is happening elsewhere. And there's just no manner at all that we can gain the detailed knowledge necessary to not use markets to do this for us.
This comes up in reference to the Fairphone idea:
Behind the glossy surface are dozens of minerals, processed in hundreds of factories, touched by thousands of hands. The more I ask about my phone’s roots in African mines and Asian assembly lines, the more uncomfortable I become. My phone might have supported forced labor or warlords.
...
There isn’t a single clear villain. There are too many people involved, a global supply chain full of complicated relationships and trade secrets. For everyApple or Samsung, there are thousands of companies under less scrutiny from regulators and journalists and all getting rich in the smartphone boom.
You can, just about, go and have a look at where the tantalum to make capacitors comes from. There are not that many mines, there are very few processing factories (this isn't something that can be done with a bucket out in the jungle, you must use HF and anyone trying that without the most rigorous safety standards will be dead in about 20 minutes. That is not an exaggeration) and in general it's an industry small enough to be able to oversee. You cannot do it with gold even though people are trying - there are just too many potential smelters of small amounts of unethically produced gold out there. You can sell raw gold in shops worldwide, it's a trade that you'll just never control.
Not that this has stopped people trying, the Dodd Frank Act has some insistences that listed American companies must at least attempt to identify such conflict minerals. The problem though is that even the SEC said it thought this would cost $4 billion in year one and that's just to check four and only four minerals coming from just a few areas of DR Congo. So, grossly expensive, of small scale use and even there not something that will work with every mineral.
But I'm afraid that it gets worse. Because the underlying idea is that all companies should be scouring their supply chains for everything. Not just for conflict minerals but for slave and child labor. And then demands go on from there, to no use of "excessive" overtime, making sure that workers get minimum wages and so on. Don't get me wrong, I don't say that people being forced to work excessive hours, or not being paid minimum legal wages, is a good idea. Rather, that there's no way that anyone can actually check on this over their entire supply chain. It's simply impossible.
The best example of why it is impossible comes from the classic essay I, Pencil:
Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum.
Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.
If you prefer your information in a visual format then here's the I, Pencil video from the CEI:
But do note that harsh and basic point. There is not one single person who knows how to make a pencil. Because to know how to do that would mean knowing how the whole global economy works. And similarly we cannot know how to make a phone. Friedrich Hayek got his Nobel largely for formalizing this point, that the only method we have of managing the economy is the economy itself. It's all just too complex to use any other method. And that is then why supply chain transparency is going to fail. Simply because it isn't possible to gain the knowledge of what your supply chain actually is. So thus how can you be transparent about what is happening in it?
It's going to fail just as badly as those socialist planned economies did. Sure, we can all file the paperwork as with Frank Dodd. That will cost a fortune just like that Frank Dodd paperwork does. And yet it still will not work. Because the supply chain for any product is that entire global economy, that entire global economy which is simply unknowable.
