How Does a Barber Thrive?
Yesterday I had to cut my own hair
(again--thanks COVID). I cannot say that I did a great
job, but it got me thinking about barbers.
How much has the job of a barber changed over the past several decades?[1] I don’t think it has changed too much. So what does a barber need? A chair.
A cloth and a strip of paper that tucks under into the collar. Scissors.
An electric clipper and attachments.
A comb and some blue liquid to drop the comb into. And maybe a water squirt bottle. Maybe.
And not much more.
So here is my question: As the world
progresses, how does the barber thrive? I
can imagine a company which comes out with a new product, expands into new
markets and thrives. I can also see a
scenario where a company cuts its costs, thereby increasing its profitability
and thrives. However a barber, not a
chain of barber shops, can’t really come out with new products nor expand into
new markets. And it isn’t likely that
the barber is able to cut his costs year-after-year to enhance his profit
margins. So how does a barber thrive? In other words, how does the barber increase
his standard of living when he doesn’t have the same paths open to him as other
businesses do? Let’s explore some
possibilities.
If the barber raises his prices each
year, would he then be able to raise his standard of living? Let’s think that through. First of all, it is probably true that the
barber’s prices do rise, but this is most likely due to inflation. As the money supply expands, each dollar
loses some of its value. This drop in
purchasing power requires the barber to raise his prices to keep pace. So the real question is not whether the
barber can raise his prices each year, but can he raise his prices faster than inflation
and make a larger profit? To answer this
question, we first have to recognize that demand curves slope downward. That means as the price falls, people will
want more; and as the price rises, people will want less. So as the barber raises his prices faster
than the rate of inflation, he will lose some business. It comes down to which change is bigger:
quantity or price. A business’s revenue
is Price × Quantity. If the change in
price (say +10%) is larger than the loss in quantity (-5%), then the revenue
will increase. Economists call this
situation inelastic
demand. Whenever a
company faces inelastic demand, raising prices will lead to an increase in revenue. However, there comes a point where the demand
stops being inelastic. And so companies
(even in complete absence of competition) stop raising their prices when they
reach that last point of inelasticity.
So let’s assume that our smart
barber has found that point. Now
what? He can’t raise his price any
further without losing too many customers.
In fact, let’s assume that barbers found that most profitable point long
ago. Let’s say they found it some time
back in the 1950s. How can we explain that
the barbers’ standard of living has improved even though they can’t raise
prices faster than inflation, can’t diversify into other markets, and don’t really
have any mechanisms to consistently cut costs?
What can the barber do to raise his
standard of living? The simple answer is
nothing. There is nothing that he can do, all by
himself, to raise his standard of living. He needs the help of others. And this truth is the miracle of the
market. Markets help people and improve
lives without intending to do so.
The barber’s life improves every
time another person introduces a good idea to
the market. When that other person
figures out a new way to cut his own costs, he is able lower his price. He doesn’t lower his price to help the
barber. He does it to gain market share
and increase profits. Nevertheless, the
barber’s standard of living improves as the price falls. Every time an entrepreneur improves a
product, he does it for his own gain.
However, the barber benefits from that improvement, too. As the smart phone replaces the flip phone,
the barber’s life is improved. As
streaming services replace expensive cable and satellite providers, the
barber’s life improves. When a business
launches a new product, it does so out of its own greed for profits. However, the barber now has another option on
which to spend his money.
The barber’s life is improved, not because
he has done anything different. He
hasn’t raised his prices, increased his revenue, increased his market share,
nor cut his costs to increase profits.
Nevertheless, his standard of living improves year-after-year because of
the help and cooperation of countless numbers of strangers that he could never
meet even if he were to try.
The miracle of the market is quite simply
something that we too often take for granted.
It is invisible. It is
quiet. It is humble and does not
boast. And it is possibly the most
powerful force to improve human life the world has ever seen. So before we throw it all away, let’s pause
and think about why a barber thrives.
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