Warning, this blog post is a bit of a rant. Consider yourself warned.
And why is the economics of supply chain management generally ignored by economic models?
Table of Contents
First, some definitions
What is economics?
Investopedia has a good definition, which starts with:
Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.
What is supply chain management?
Again, Investopedia has a good definition, which starts with:
Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products.
Per these definitions
Economics encompasses supply chain management.
Yet…
Yet when I read about economics, while they may make reference to “production” and “distribution”, when I see well-defined economic models and/or descriptions of such models, they all talk almost exclusively about money, and very very very little about stuff.
It’s as if an underlying assumption is that money matters more than goods and services.
I get that money matters.
In fact, financial services enable the ability to activate resources within an economy.
But… people commonly talk about economics as if the currency issuer within an economy has a scarce supply of money (“how will they pay for it?”), yet if they can find enough money, it seems there is no end to what can be bought.
In reality, exactly the opposite is true.
In any given economy (or more accurately, currency zone, as economies and deeply intertwined these days) the currency issuer can, if they so desire, print money forever.
They don’t want to, and that’s a good thing, but they could.
But… no matter how much money they print, there is a finite amount of stuff that can be bought.
That is because not only do economies produce a finite amount of goods and services, but there is a level of productivity where an economy maxes out.
Investments fall into two broad categories
Primary market = productive, mostly
Primary market transactions are when money from the sale of shares or debt or whatever flows back to the firm who uses it to either start or expand in some way. Primary market transactions generally results in some form of expansion by the firm.
Secondary market = speculative, mostly
In secondary market transactions none of the money that changes hands goes to the firm itself, unless of course the firm itself is selling in the secondary market. But most often, secondary market transactions transfer the financial asset (stock, bond, etc.) from one speculator to another with the hope the value of the assets appreciate over time. In secondary market transactions the underlying firm is not involved at all, unless they’re one of the entities participating directly in the transactions. Such as corporate stock buy-backs or some corporation subsequently selling shares in themselves that they own.
How much of which occurs?
We can get a sense of the relative scale by looking at U.S. equities.
There are two fundamentally different kinds of stock-market transactions.
In the primary market, a company issues new shares. Investors provide money to the company in exchange for those shares, so the transaction provides financing to the firm. That financing can potentially be used to expand production—for example, to build facilities, buy equipment, develop technology, hire employees, or acquire other businesses.
In the secondary market, investors buy and sell shares that already exist. If I buy $10,000 of stock from another investor, my $10,000 goes to that investor, not to the company whose name is on the stock certificate. Ownership of an existing financial asset has changed hands, but the transaction itself has not provided the company with $10,000 to invest in additional productive capacity.
The difference in scale between these two markets is enormous.
According to SIFMA’s 2025 Capital Markets Fact Book, U.S. equity issuance totaled $222.9 billion in 2024. Of that, $31.4 billion was initial public offerings (IPOs) and $169.8 billion was follow-on offerings. SIFMA excludes several specialized categories from these figures.
https://www.sifma.org/wp-content/uploads/2024/07/2025-SIFMA-Capital-Markets-Factbook.pdf
By comparison, secondary-market trading in U.S. stocks occurs on an enormous scale every trading day. SIFMA reports an average daily trading volume of 12.2 billion shares in 2024.
This comparison should be interpreted carefully. A dollar of primary-market financing and a dollar of secondary-market trading are not equivalent economic quantities. The same share can be bought and sold repeatedly during a year, so secondary-market turnover can become extraordinarily large without representing an equivalent amount of capital seeking productive uses.
Nevertheless, the distinction is important: most of what investors ordinarily do when they “invest in the stock market” is not the provision of new capital to the companies whose shares they purchase. It is the purchase of existing financial assets from other investors.
https://www.sifma.org/wp-content/uploads/2024/07/2025-SIFMA-Capital-Markets-Factbook.pdf
Secondary markets and financialization
This distinction is relevant to the broader debate over financialization—the increasing size and importance of financial markets, financial institutions, and financial activity relative to the production of goods and nonfinancial services.
American Compass discusses this issue in Has the Financial Sector Become a Drag on the Real Economy? It notes that the financial sector’s share of corporate value added rose from about 4% after World War II to 14% in 2020, while its share of corporate profits rose from less than 10% historically to more than 25% in recent decades.
But an important distinction needs to be made.
Buying an existing financial asset does not, by itself, increase the economy’s productive capacity. If I buy $10,000 of Apple shares from another shareholder, Apple does not receive $10,000 with which to manufacture another phone, build another data center, hire another engineer, or purchase additional components. I receive the shares; the seller receives my money.
That does not mean secondary markets have no economic value. Liquid secondary markets make securities easier to buy and sell, facilitate price discovery, allow investors to diversify and transfer risk, and can make investors more willing to provide capital in primary markets in the first place.
But the transaction itself should not be confused with investment in additional productive capacity.
The distinction becomes clearer if we separate three activities that are commonly described using the same word, “investment”:
Real investment: A business builds a factory, purchases machinery, develops software, accumulates inventory, or otherwise adds to productive capacity.
Primary-market financial investment: An investor provides financing by purchasing a newly issued stock or bond. The company receives the funds, although what the company subsequently does with those funds determines whether they ultimately finance additional production.
Secondary-market financial investment: An investor purchases an already-existing financial asset from another investor. The issuing company receives no new financing from that transaction.
Only the first of these necessarily represents investment in productive assets.
Does financialization cause us to overlook supply chains?
This brings us back to the question of supply chains.
Real investment has direct supply-chain implications. Building a semiconductor plant requires construction materials, machinery, electricity, chemicals, transportation, workers, suppliers, and ultimately customers. Increasing automobile production requires additional steel, aluminum, semiconductors, tires, batteries and thousands of other inputs.
Buying existing shares of the semiconductor or automobile company does not create those requirements.
So it is reasonable to ask whether an economy—and an economics profession—increasingly focused on financial assets, asset prices and financial returns might devote less attention to the physical networks through which actual production occurs.
But that is a question, not something demonstrated merely by the enormous size of secondary financial markets. To establish that financialization caused economists to neglect supply chains would require historical evidence showing that supply-chain relationships once played a larger role in economic analysis and subsequently diminished as finance became more prominent. I have not found evidence establishing that causal relationship.
There is also an important complication: mainstream economic statistics already distinguish financial transactions from productive investment.
GDP does not count purchases of stocks and bonds as investment
When economists talk about investment as a component of GDP, they are not talking about buying stocks, bonds, mutual funds, cryptocurrencies, or other financial assets.
The U.S. Bureau of Economic Analysis defines gross private domestic investment as private fixed investment plus changes in private inventories.
https://www.bea.gov/help/glossary/gross-private-domestic-investment
Fixed investment includes structures, equipment, and intellectual-property products. Private inventories include finished goods, work in process, and materials and supplies.
https://www.bea.gov/help/glossary/fixed-investment
https://www.bea.gov/help/glossary/change-private-inventories-cipi
Financial transactions are treated differently. The BEA explains that purchases and sales of financial securities are not directly counted in GDP because they represent exchanges of financial claims rather than current production. Capital gains are likewise excluded because they represent changes in the value of existing assets rather than income arising from current production.
https://www.bea.gov/help/faq/510
So we have an oddity in the language.
In everyday conversation, someone who buys $100,000 of stock is said to have “invested $100,000.”
In the national accounts, that purchase is not $100,000 of investment at all.
If a company instead spends $100,000 on a new piece of production equipment, that expenditure can be counted as fixed investment.
That distinction is important for the question we’re considering. GDP accounting already recognizes, at least implicitly, that acquiring an existing financial claim and adding to the economy’s productive capacity are fundamentally different activities.
The more interesting question is therefore not whether GDP mistakenly treats secondary-market transactions as productive investment—it doesn’t.
The question is whether our economic thinking gives sufficient attention to what happens inside the productive economy after actual investment occurs: the networks of suppliers, intermediate goods, inventories, transportation, production capacity, bottlenecks, and dependencies that make the production of final goods and services possible.
I’m interested in learning more about this
Clearly, this is an area where my understanding is incomplete.
I’m curious to learn more but have so far found very few papers that even talk about supply chains in economic terms.
Supply Chain Perspectives seems to be a somewhat generic look at the history and evolution of supply chains and their contribution to our increased standard of living. It is published on the WTO (World Trade Organization) website.
Supply chains and equitable growth seems to be about precisely what the title states.
Supply Chains and the Human Condition is a reprint of a paper previously published in a Marxist journal, which I expect is where a paper with such a title would be published.
A Network Economic Model for Supply Chain versus Supply Chain Competition seems to be about just that. How firms used to run highly vertical supply chains while competing with each other, but these days supply chains are networks of firms who compete with other networks of firms and their supply chains.
And while I plan to read them (when time permits), I’m curious for analysis of such papers done by others.
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