Bootleggers and Baptists-XXXI: Microchip Shortage

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Bootlegger and Baptist  (1983) coalitions are dynamic alliances that form a juncture between the overlapping interests of two unlikely factions. Whether these oddball partnerships are implicit or explicit, there cannot be enough emphasis placed on the fact they are dynamic. In most scenarios, these normally divergent interest groups tend to part ways once the initiative has been resolved.  The aptitude of Conservative Christians and Feminists finding common ground after shared advocacy for legislation regulating pornography is improbable at best. Once the bill is defeated or passed these odd bedfellows part ways until a corresponding initiative is revived due.

Aside from the temporary resolution of a public policy issue, other factors can shake up Bootlegger and Baptist dynamics. A shift in vicissitudes can severely alter the incentives structure of one of the adjoining parties operating within the alliance. Arguably the current microchip shortage afflicting the technology industry best exemplifies this concept. The news regarding the microchip shortage started to break back in early 2021. The supply shortage was mainly spurred by an influx in the demand for consumer electronics during the 2020 pandemic. It was originally speculated that companies involved in the distribution and sale of electronics and technology would be the “Bootleggers” of the microchip shortage. The investment publication Barron’s suggesting that the shortage would be lucrative for IT distributor Avnet. However, such suggestions were somewhat premature, since the microchip shortage has cost the automobile industry billions in revenue. Similar ripple effects are likely to impact other sectors of the economy heavily reliant on microchip components.

Now the role of  “Bootlegger” could potentially be assigned to microchip producers in Taiwan and the Taiwanese government. Several democratic mid-western senators came together to write to Taiwan’s  Bi-Khim Hsiao for help with navigating the components ravaging the American auto industry.  Taiwan has long held a comparative advantage when it comes to microchip production. The Biden administration has also sent over “… 2.5 million COVID-19 vaccine doses..” which is significantly more than what was originally allocated to Taiwan. Some commentators may call this an equitable trade, microchips for vaccines. However, this exchange isn’t quite so linear. The United States is really at the mercy of Taiwan since the product constraints are profoundly stymieing automobile production. The old saying goes “Beggars can’t be choosers”, which encapsulates this situation in a nutshell.  The United States simply lacks bargaining power in these negotiations conferring all the leverage to Taiwan. In contrast,  Taiwan has one of the world’s superpowers at their backdoor step pleading for help. This does not depict a deal brokered between equals, but rather emergency assistance from one nation to another.

The mid-western senators reaching out to Taiwan are our “Baptists” as they act as our moralizing agents. These individuals fulfill this role by stressing the economic calamity, carnage, and overall harm that the microchip shortage could have inflicted upon the U.S. economy.  The Taiwanese government and producers are the clear “Bootleggers”.  Since they enjoy the position of being one of the most robust and efficient microchip producers in the world they have an asymmetrical advantage over the United States. Not only from a production standpoint but also in terms of negotiation power. The United States is coming to Taiwan in desperation rather than a firm bargaining vantage point. Frightened by the prospect of the already ailing auto industry taking any more shocks, these senators are looking for a quick solution, with little consideration for optics or downstream consequences.  Not to mention the additional vaccine dosages are merely the cherry on top.

Cooperation and Conflict

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Staying within the structure of methodological individualism it is important to see how Smith’s Pin factory example (p.54-55) exemplifies the coordination of a group of economic agents. All working in unison towards the common goal of producing pins. All of these individual works comprise the overall assembly line. The totality of all the adjacent departments related to manufacturing makes up the internal structure of the firm. Any social institution whether it be a hobbyist club, social club, buyers club (e.g. Sam’s Club, BJ’, Costco), government, business, trade association, private governing bureau/authority (e.g. homeowners association), charitable foundation, research institute, study group, etc. are comprised of multiple individuals forming the group. It is flat-out erroneous to speak of the entire organization without any consideration for its members. The collective action of all the group members acting harmoniously to achieve the same ends is much more complex than treating these collective efforts as lumped together aggregate.

Each member of an organization has their internal objectives, thoughts, feelings, and desires. It can be said that all the active participants have their utility functions (p.25-26). Meaning that to some extent their wants, needs, and desires align with the overall group goals. For example, very few people like their jobs, but they voluntarily consent to the terms of employment because of their desire to earn money. Whether it is for the intrinsic satisfaction of possessing money or what currency can be redeemed for. Keeping within the theme of a Smithian analysis of social institutions, it is important to note that more than tangible goods are exchanged through interaction with others. We exchange ideas, culture, skills, knowledge, friendship, guidance, sympathy, morality, and moral support among other forms of desirable forms of social currency. Political activities tend to be a form of social association that is frequently marred by corruption and various forms of abuse. However, is the dynamic of politics overtly a zero-sum game? Not necessarily. As it can be viewed as a form of exchange, individual actors engage in various exchanges for mutual benefits (p.25). One example being logrolling the practice of lawmakers trading votes/favors.

The intangible exchange of social commodities cannot be understated in formulating effective working relationships. One crucial assumption of Smith’s Theory of Moral Sentiments (1759) that we seek the “approbation” of others. In other words, we seek to praise and approval from others. We are constantly seeking the acceptance of our peers. Being well-liked on the individual level wields a significant amount of social currency. If the ability to seek acceptance and cooperation is applicable on the individual level, couldn’t it also apply to the harmonious relationships between groups of people? After all the scope of social and economic interactions operates on a continuum of scale, what is applicable on a minuscule level should also work on a larger scale. The principle is a general maxim governing social interactions, therefore it should be transferrable. One of the best ways to overcome cultural barriers is through finding a form of social exchange desired by both parties. It does not mean that it must take the form of economic exchange. It possibly manifests itself in alliances and treaties among nations. Special agreements, pacts, contracts among nonpolitical social units. Most often it takes the form of economic trade between foreign nations. The necessity of unilateral trade agreements is refutable. Consumer sovereignty is the true impetus of international trade. Despite the bluster and theatrics of vociferous diplomats and other garden variety elected representatives.

Why voluntary association over other coercive means do we yield harmonious interactions? There isn’t a magic bullet answer to this question. However, some insights from Public Choice pioneer Gordon Tullock may help elucidate a potential variable that sheds some light on this occurrence. It is the ability to choose our partners in voluntary social arrangements that reduce the instance of Prisoner’s Dilemma. If our trading partner is not being cooperative, we can easily do business with someone else. Because of the mobility of free association (which is purportedly protected under the First Amendment) we do not need to be held captive by aggressive or hostile social relations. Due to this consideration, it is easy to see the original sentiment behind antitrust laws, but much like all laws, they suffer from loopholes and other issues. Even from the standpoint of the definition of a monopoly. One of the common attributes of monopolistic market behavior is assessed by is market concertation. However, this is problematic how do we determine which market is categorically correct for the assessment of market concentration? Nevertheless, we can freely choose our partners whether in trade or other forms of social situations it reduces the occurrence of the perverse incentives to be noncooperative. Sullying our reputation deprives us of the esteem that Adam Smith surmised we all crave.

Considering that trade is one of the forms of association that fosters cooperation. Even if free trade is not the key to world peace, it still makes us less apt to raise the sword to our geographic neighbors. To repudiate the previous administration’s trade policy, international trade should be encouraged. It is only natural to perceive David Ricardo’s concept of comparative advantage as an extension of Smith’s pin factory.  The premise of comparative advantage is that it can make production global and explains why we tend to import higher-order goods to produce commodities domestically. No one climate can best produce glass, grapes, and corkwood in the Cognac region of France. However, all of these components are required for assembling a commercially produced bottle of Cognac brandy. This specific region in France has some of the best grapes in the world for brandy production. The climate is wholly inappropriate for cultivating and harvesting the wood used in the stopper placed in every Cognac bottle. To avoid placing great restrictions on our ability to manufacture sophisticated goods, we need to trade with other nations. We can only truly achieve this through peaceful relations. Free trade in itself helps to facilitate peaceful relations.

Comparative Advantage = Global Extension of The Division of Labor

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Observation: The concept of comparative advantage operates as a natural extension of the division of labor. If it is most efficient for each worker and firm to focus on what they are most proficient at producing, this naturally gives way to vocational specification. The more specification within the division of labor the more complex and advanced the economy. As technological innovation drives the consumer demand for intricate technologies, the need for specialization within the workforce becomes more pressing. An advanced technological product such as a smartphone could not possibly have all of its components harvested, processed, and manufactured by one firm. Generally, the constituents of such a device are produced by multiple companies. These parts serve as the higher-order goods in the production of a smartphone. It would be naïve to assume that all of the companies that possess a comparative advantage at crafting these components all reside in the same country. If we look to Leonard Read’s iconic essay I, Pencil it becomes evident that even a commodity as simple as a pencil requires the services of companies across the globe to be satisfactorily produced. Demonstrating that the principle of comparative advantage extends the division of labor to an international scale. It is impossible that one nation would possess all the conditions necessary to efficiently make one product of any degree of complexity. Never mind a gadget as elaborate as a smartphone. Providing another concise yet realistic reputation of the obstinate justifications for protectionism.

Is Free Trade Dead?

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The Wealth Of Nations, Book IV Chapter II, pp. 456-7, paras. 11-12.

“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”

The Trump era will forever be distinguished by its notable shift away from free trade economic policies. Generating a resurgence passionate resurgence in the advocacy of protectionism. This rhetoric was salient even in the nascent period of the Trump phenomenon, dating back to his iconoclastic speeches on the campaign trail in 2015. Championing a quasi-neo-mercantilism that challenged the decades-long conventional wisdom of the Republican Party. This prevalent truism being that liberalized trade is a core component of any sound economic platform. Taking into account the modest reforms we saw under the Regan Administration. The wave of neoliberal trade policy continued through the 1990s with the bipartisan support of the NAFTA bill. It seemed as if the trend towards globalized trade was seemingly unstoppable. Until right-wing populism swept the United States indicating a change in public perception of moderately unfettered international free trade.

The Trumpian position on international trade dates back to the years of the NAFTA bill of the 1990s. Vocal high-profile opponents of the bill included columnist and former Presidential aide Pat Buchanan and Ross Perot. Expressing concern over the outsourcing of production and its direct impact on the American economy. Mainly, all of the U.S. workers have been displaced by outsourcing jobs to foreign countries. From a prima facie standpoint, this argument seems sound. However, after closer examination, it becomes quite clear that economically it is profoundly flawed. There is a moral dimension embedded in this argument because people do suffer from losing their jobs. The unfortunate economic vicissitudes of the American Rust Belt can be speculated to have been greatly impacted by the outsourcing of domestic labor.

On a deeper level, most of the variable causing the shift towards foreign production of goods has been engendered by faulty economic policies. Economic behavior is guided by the unwavering laws of economic exchange. Analogous to the laws of physics they cannot be indefinitely contradicted without serious repercussions. Since each economic agent acts in their self-interest they respond accordingly to government initiatives and laws that violate these immutable laws and informal laws guiding commerce. Domestic regulations laws governing minimum wage, production, transportation, and taxation become so onerous that firms become incentivized to move to manufacture abroad. While policies such as minimum wage laws are billed as means of improving the quality of life for low-skilled workers, it tends to have the opposite effect. Such measures only serve to benefit a few while harming many through increasing the unemployment rate. Raising the price floor for labor will impact profitability that leaves employers with a difficult choice. Either cut labor expenses through automation, outsourcing and working with a skeleton crew or succumb to bankruptcy.

Driving the shift to off-shore production is the comparative advantage that many countries have over the United States when it comes to manufacturing and other services. Classical economists such as Adam Smith and David Ricardo believed that it was more advantageous for each economic unit (whether it be an individual worker, firm, or national economy) to focus on the goods and services they produced most efficiently. In a sense comparative advantage logically extends the anything else that can be obtained through various trading partners.  For example, it is well known that Adam Smith was a big fan of Claret wine, a beverage fermented in France. The soil in Scotland is not generally unsuited to winemaking, therefore it would not be sensible to produce Claret in the United Kingdom. But Scotland does have climate amendable to the production of some of the world’s finest Single Malt whiskies.

The comparative advantage that countries such as China as over the United States are lower labor costs and fewer regulations. Due to measures such as minimum wage laws operating as price controls (functioning as a  price floor), they are bound to create disruptions in the labor market. Tempting producers to take actions such as outsourcing jobs to curtail losses. A sensible reaction to policies that effectively undermine the core purpose of prices. That purpose is to serve as a quantifiable signal that communicates the market supply and demand of a commodity. Suppliers and producers need to respond to the inflated value of labor accordingly to stay solvent. That unfortunately requires workers to be laid off and to find more affordable labor alternatives. To quote Milton Friedman manipulating prices is never a “free lunch”! The disutility of mandating a higher minimum is evident not only from the qualitative reason of human nature but also in quantifiable data. While estimates suggest that raising the national minimum wage to $15/hr would lift 900,000 Americans out of poverty. Simultaneously, such a change would also be projected to put 34 million Americans out of work. Demonstrating how the costs of raising the national price floor outweigh the minor benefits.

From a superficial standpoint, it is easy to label the competition of foreign as being the taproot of our economic woes. It makes for wonderfully succinct bumper sticker slogans that are catchy and fun to chant at rallies and protests. The protectionist approach of blaming others for our economic problems ignores the inherent issues with our domestic policies. Its restrictive regulations and high corporate tax rates drive businesses to go abroad. There was a lot of social currency in placing the blame on other countries for our inefficiencies in production during the Trump years. These admonishments of free trade are predicated upon economic fallacies and illusory thinking. For a politician, it is easier to play the blame game than to encourage innovation to stay competitive. It is also much quicker to mobilize crowds through economically illiterate bluster than to tell them to take control of their destiny.

Coronavirus- Its Impact on Nutanix and the Global Economy


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Hyperconverged pioneer Nutanix is once again starting to falter. At the start of 2020, the outlook was much rosier after a slump in August 2019. Stocks rebounding by approximately 83%. Speculated improvement stemming from greater confidence in their transition from software to subscription services [1]. Nutanix exhibiting a 97% retention rate on their subscription services is promising [2]. Back in January, the threat of the COVID-19 (Coronavirus) was dormant. Its impact on commerce is now a matter of concern for the tech industry.


Nutanix shares sank as much as 24% in extended trading on Wednesday after the developer of cloud storage and networking software cited coronavirus concerns as one reason for lowering its 2020 revenue outlook”



This resulting in the company’s lower revenue projections from $1.3- $1.4 billion to $1.29 -$1.36 billion [3]. 22 % of  Nutanix’s 2019 revenue came from Asia [4]. This is problematic due to Asian countries being profoundly impacted by this emergent illness. Nutanix is far from the only tech company that grappling with the economic complications of the COVID-19 outbreak. Both Apple and Microsoft have indicated that they will not meet their quarterly business goals [5]. Fears of the virus certainly have sullied sales prospects industry-wide. The reverberations are also being felt on the opposite side of the supply-chain.  Considering 73 percent of all of Microsoft’s components are manufactured in China [6]. One of the world’s prominent production hubs being the epicenter for an obscure virus is disastrous.


Naturally, the economic stress engendered by COVID-19 is not relegated to the tech sector. Substantial downturns have been estimated for other industries as well. For instance, the hospitality sector is anticipating stalls in sales internationally [7] [8]. The constraints on the economy may stretch beyond restricting the supply in some sectors and reducing demand in others. Countries are stifling commerce through various restrictions to prevent the spread of COVID-19. In the United States, it has even been stated that measures such as quarantining entire cities [9]. At first, glance does appear to be slightly excessive. Especially considering how much more pervasive the Flu is when compared to COVID-19 [10]. The perceived threat seems to stem more from the obscurity and ambiguity of COVID-19. Mirroring the reactionary stances taken in the event of an outbreak of communicable diseases. Regardless of whether this outbreak is truly a world health crisis or not, its impact on the economy will be all too real.


Placing restrictions on the flow of foreign goods will prove to be detrimental. Whether those restrictions are through tariffs or pragmatic embargoes to prevent the spread of disease. All modern economies are heavily reliant on imports. Not due to callous self-interest, but out of the virtue of efficiency. Comparative Advantage has allowed for intense specialization which enables countries to focus on the production of specific types of goods and services. Thank you, David Ricardo. Concentrated specialization has lead to increases in product quantity and quality. Whatever you cannot produce can be acquired through trade. Hence, why 60% of our global productivity is dependent on international trade [11]. Making it imperative that all restrictions placed on international trade be necessary. Per the AIER article Economic Policy Must Prepare for Pandemic Disease :


“What we do not see are the infinitely complex ways that productive structures depend on smoothly functioning markets that could all face deep disruption.

Efforts to examine the possible economic impact are few but a 2006 Congressional Budget Office study suggested that a 1918-style pandemic today could drop GDP by 4.25%, which would put the economy in painful recession territory”  [12].


Granted these findings are theoretical and most likely retrieved from economic models, still eye-opening. COVID-19 can present a serious risk to the United States. However, the benefit of being cautious needs to be weighted in relation to economic losses. Is it worth the losses in productivity to attempt to secure the U.S. against this virus? There are already confirmed cases here in the United States. There is little to stop COVID-19 from spreading. Quarantines and trade embargoes with nations that have confirmed cases cannot guarantee the number of cases domestically will not rise. Such measures only create a false sense of security. What isn’t speculative is production shortages, an increase in prices, and even the loss of jobs. Imports are the lifeblood of our advanced economy. Putting up barriers to our trading partners is merely cutting off circulation to the arteries.

As the quote above indicates, what initially seems reasonable doesn’t always work. Superficially, trade restrictions seem like a great way to curb the spread of this disease. Taking this course of action ignores the consequences downstream. It could even be said it lacks foresight. It is ineffective and impractical to produce all the goods that we utilize domestically in production. There is a reason why Target purchases its plastic lawn furniture from vendors in China. If produced domestically the same products would be triple the price and not maintain a level of quality commanding such a price tag. It becomes quite evident how a chain of such events could be harmful to the entire economy.