Thursday, July 9, 2020

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.


[1] One caveat: I know nothing of women’s hair dressing.  I am only thinking about men’s barbering.

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