Do the basic principles of economics still hold?
By Morf Morford
Tacoma Daily Index
If you consider the basic principles of economics and how they apply to production, distribution and customer behavior, you can be forgiven for walking away convinced that either, 1. we live in a time when, for whatever reason, these guiding principles no longer apply, or 2. as appealing and even attractive as they may have appeared, they never really made sense or matched the reality of the working marketplace.
Here’s what I mean – take the standard supply and demand formula. Supply and demand, in a rational business environment, is the relationship between the quantity of a commodity that producers have available and the quantity that consumers wish to buy.
It is the main model of price determination used in economic theory. The price of a commodity is determined by the sometimes stable, sometimes wildly fluctuating interaction of supply and demand in a market. The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good.
It’s a rational system, based on the assumption that customers are rational and that producers are honorable – and that there is not a plethora of middle-men, scalpers and IRL or online re-sellers eager to seize any opportunity to gouge, cheat or deceive potential customers.
In other words, in a fair, honest and idealistic world, supply and demand would be a reasonable and reliable benchmark for products and their prices.
As I implied in my first paragraph, it is possible that world never existed. Our supply and demand formula, as tidy and universal as it may have appeared, has, at best, hit a rough patch.
And I’d define that rough patch as human nature.
We, the residents of 2020, are finding ourselves in the cross hairs of an economy going two, or three or even more directions at once.
I’ve studied the marketplace for many years, but I’ve never seen these dynamics at work so intensely and intrusively; supply shock and demand shock.
Supply shock is where there is a shock to the supply chain. It could be a disruption because of trade polices, weather, production problems, difficulties in finding adequate skilled labor or an outbreak of a major contagion – or in the case of 2020 -all of the above.
Demand shock is kind of the same – one day the market for a product is overwhelming. The next day it is dead.
Toilet paper – of all things – has become the barometer of America’s, if not the world’s economic health.
America’s toilet paper crash of 2020
I am certain that business and economics textbooks of the future will focus on the great American toilet paper rush of March 2020.
For those that had other things to think about at the time, here is a brief recap; for whatever reason, as the coronavirus expanded over our headlines and yes, into our schools and public places, panic-buying set in as people prepared to shelter-in-place by stocking up on essentials like non-perishable food and bottled water.
I must admit that I didn’t understand the rush to buy bottled water – COVID-19 did not effect water quality or access, but what really baffled me was the run on toilet paper.
Surely the supply chain on toilet paper was not affected, but why had the demand changed – especially so quickly and to such an extreme?
COVID-19 does not cause diarrhea or anything like it. Was there something else coursing through the veins – or digestive systems – of the average American consumer?
The American economy is consumer driven – about 70% of the US economy is related to consumer behavior.
Fast food, even fast fashion, has been a mainstay of the American economy for years, if not decades. But why, when buyers rushed into stores, fearful of the latest virus and with an eye on daily essentials, would they focus on toilet paper? Why not paper towels or tissues? Or toothpaste? Or shoes?
Somehow toilet paper – or our obsession with it – has become the totem, the icon, the towering reference point for our culture and economy.
Instead of hoarding gold or weapons or even food for an impending emergency, the average American hoards toilet paper.
In a way it makes sense; it will keep and it will eventually be used. But is it urgent, at least in Coscto-sized increments? In a rational world, does the average household need 200 rolls of toilet paper?
And consider the other side of supply and demand shock – yes, production will be ramped up to meet increasing demand, but will that demand be there a week or month from now?
Does anyone think that those eager consumers who filled their SUVs with toilet paper a week or so ago will be back any time soon for more?
Our consumer gyrations regarding toilet paper match the gut-wrenching extremes of the stock market and shrieking daily headlines.
If it’s not COVID-19, it’s the stock market, and if it’s not the stock market, it’s the price of oil.
Those burning issues of only a few weeks ago – like surging housing prices or the ever-expanding numbers of homeless have been relegated to the back pages.
The one reliable economic indicator that seems to still stand is that the market (Wall Street and Main Street) hates uncertainty.
Businesses need to hire workers, factories need to produce, stores need to sell, and it all depends on a stable and (relatively) predictable market and customer base.
Almost everything presented in the marketplace is done so on the margin, with an eye on the foreseeable future.
This means that businesses are primarily – if not exclusively – interested in the next decision being made – the next sale or the next contract.
No matter the market, every business operates on one principle – continuing survival.
Sales of a jillion rolls of toilet paper is great – but not at the cost of near zero in the next sales quarter.
Many years ago I was teaching a business class and I had a guest speaker from Edward Jones who talked to my class about the stock market.
After addressing assets, liabilities, market opportunities, dollar-cost averaging and long term asset management, among other things, he closed his talk by saying that the stock market is 95% psychological – in other words, NOT based on principles of rational investing or market fundamentals.
Who among us would ever have guessed that the buying of toilet paper would ever be primarily psychological?