Substitution is an important concept in economics, whether we consider the consumer or the producer, and whether the latter produces bubble gum or, like a state, national defense. If the price of a good (or service) increases relatively to the price of other goods, a rational consumer will partly substitute another one that is anyhow substitutable according to his own preferences. Similarly, if the price of an input increases relative to the price of another, a rational producer will substitute some of the latter for some of the former. For example, if the price of labor increases relative to the price of robots (a sort of capital goods), the firm will substitute some robot use for some labor services. (Co-blogger Kevin Corcoran provided further explanations in a recent post.)
There is much formal theory explaining the rationality of such substitutions either for the consumer who maximizes his utility or the producer who maximizes his profits. As I suggested, the theory also applies to a rational government or army, which does not make formal profits but is instead interested in maximizing its production of defense (or aggression) output, at least up to a point (in more sophisticated theories of the state, other maximands also exist).
A story from The Economist just provided an illustration of substitution in war production (“Why Economic Warfare Nearly Always Misses Its Target,” October 3, 2024). The magazine explains how today’s “economic warfare” consisting in “sanctions” or export restrictions doesn’t seem to have the intended effects. The goal is to deprive the enemy or potential enemy of “strategic good” or, in our mercantilist world, deprive a commercial “adversary” of essential inputs. The methods of economic warfare generally do not work because few goods have zero substitutes. Using input substitutes will cost more or reduce production but it will continue. Workarounds will be found.
The Economist‘s illustration relates to what happened when, between August and October 1943, American airplanes bombed Schweinfurt in Germany, a city where half the Third Reich’s supply of ball bearings was produced. Ball bearings were used in many war implements, from engines to automatic rifles. In the short run, after the production capacity in Schweinfurt was destroyed, the German government substituted other inputs and, after some time, was able to restart the production of the ball bearings it still “needed” despite higher cost:
It was quickly discovered that, in many cases where manufacturers used to swear by ball bearings, simple bearings would suffice. For the uses that remained, extensive stockpiles could be drawn upon, which bought time to build replacement plants and, eventually, engineer ball bearings out of many military supplies.
A US government report later found “no evidence that the attacks on the ball-bearing industry had any measurable effect on essential war production.” It presumably imposed higher costs to the warring enemy, though.
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DALL-E, to whom we owe the featured image of this post, did a good job for a bot, but the reader will easily find many errors and glitches. Your blogger bears the responsibility for inventing the name of the German manufacturer portrayed.
Bombing of a ball bearing factory in Germany during WWII, with a bit of artistic license from DALL-E and the other artist involved
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