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

Teaching Austrian Economic Theory

This weekend I had the pleasure to speak before the 12th Annual Economics Teaching Workshop co-sponsored by UNC-Wilmington and Cengage Learning.  My topic was "Teaching Austrian Economic Theory."  The attendees were professors and instructors (with a few grad students thrown in for flavor).  I was happily surprised to see several hands go up when I asked how many have heard of Austrian Economics.  

When I was asked to give the talk, I was given a wide latitude about what I could say.  While having such discretion is a wonderful thing, I found that I had very little idea who my audience would be.  After thinking about it, I realized that I had to do the following:

1. Introduce and explain what Austrian Economics is.
2. Show how it differs with the mainstream.
3. Show how to teach it.
4. Show why it is better.
5. Do it for enough topics to be relevant.  (I chose to cover value theory, capital theory and business cycle theory.)
6. And do it all in under an hour!

To be certain I talked quickly.  I don't think that I went too fast, however I did promise to post the PowerPoint presentation of the talk so that they weren't scrambling to write down a bunch of stuff. To fulfill that promise here are the PowerPoint notes.

Once again, I would like to thank my hosts for the event.  In particular Rob Burrus and Pete Schuhmann of UNC-W and John Carey of Cengage.

Business Cycle Talk at Furman University by Cwik

Recently, I had the pleasure to give a talk at Furman University to the group, "Conservative Students for a Better Tomorrow."  The talk was, "It Didn't Have to Be This Way: From the Great Depression to Financial Meltdown."

There were about 70 students in attendance and several sat without chairs.  I commend the group for gathering so many students to listen to an economics lecture on the night that competed with the first Presidential Debate.

As you can see, they are a good looking group...

Additionally, the lecture was recorded.  It was split into two parts.  Here is Part 1...

Here is Part 2...

Again, I want to thank Furman University and the student group, Conservative Students for a Better Tomorrow, for their hospitality.

FEE--Introduction to Austrian Economics Summer Seminar 2012

For the week of June 4^th – 9^th, the Foundation for Economic Education (FEE) held the first seminar for the summer in Atlanta.  This is the 50^th anniversary for FEE to host a summer seminar.  I am honored that this has been my 10^th year to lecture to students for FEE.

This past week was an introduction to Austrian Economics.  Steve Horwitz and I suggested a schedule for this year and we are grateful that it was accepted without revision.  I am really pleased with how well the lectures were integrated.  I can’t really think of any particularly unique issue that we didn’t at least mention.  The lectures were videoed and FEE will be posting them later this summer.  When they come out, I will link to them on the left-side of this blog. (You can see some earlier lectures posted there now.)

I gave four lectures for FEE and participated in a roundtable discussion on the controversy between fractional reserve free banking and 100% reserve banking. 

My first lecture was “Menger and the Early Austrians.”  In it, I talk about four major contributions Menger made.  Since I covered issues of capital and interest in a later lecture, I focused on Böhm-Bawerk’s approach to value theory and his refutation of Marx.  Then, I walked through the books that Wieser wrote, with (of course) some analysis of each.  And I finished by covering some of the insights made by David Green, Philip Wicksteed, and William Smart.  The PowerPoint to the “Menger and the Early Austrians” lecture is found here.

The second lecture was “Praxeology, Supply and Demand.”  Here I began by comparing the methodology of the Austrians with the mainstream.  I presented the mainstream’s approach to methodology and critique it.  In contrast, I presented the Austrian methodology and build up the Laws of Demand and Supply from first principles.  We then built a model of the market.  I finished the lecture by comparing the manner in which the mainstream derives demand curves using indifference curve analysis.  The mainstream’s approach suggests that there is an income effect and a substitution effect for each price change.  The Austrians tend to think that policies that are derived from this thinking are equivalent to hocus-pocus.  The bottom-line is that when the mainstream derives demand curves in this fashion, they are comparing two levels of total utility and looking at the marginal rate of substitution.  When the Austrians derive demand curves, we are looking at the marginal utility derived from the next unit.  While both approaches use marginal analysis, they are not the same.  The PowerPoint to the “Praxeology, Supply and Demand" lecture is found here.

The third and fourth lectures really build upon each other.  The third was “Capital and Interest” and the fourth was “Business Cycles.”  In “Capital and Interest,” I criticize the mainstream’s approach of allowing objective factors to control the interest rate and also the notion that capital can be represented by a homogeneous pool.  In contrast, the Austrians hold that interest rates are determined by subjective time preference for both the supply of loanable funds (savings) and the demand for loanable funds (borrowing).  Furthermore, Austrians hold that capital is mostly complementary.  As a result, capital has a structure that cannot be ignored.  If we do so, we miss some significant aspects to economic theorizing.  The PowerPoint to the “Capital and Interest” lecture is found here.

The last lecture was on “Business Cycles.”  I began by developing Garrison’s three interlocking graph model.  It contains the Loanable Funds Market, the Production Possibilities Frontier Curve, and the Structure of Production.  We then walked through how the model works for various macroeconomic fluctuations and finished with working through the stages of the Austrian Theory of the Business Cycle.  The lecture finished with examining how the other modern macroeconomic theories explain the boom and bust of a business cycle.  The PowerPoint to the “Business Cycle” lecture is found here.

The last activity was a roundtable on 100% reserve banking vs. fractional reserve free market banking.  All four of the faculty participated in this discussion.  We started by first explaining why the current system of fiat banking with a Central Bank was a terrible system.  Then we explained how 100% reserve banking would work and then how fractional reserve free banking (with competitive note issuance) would work.  We then voiced our concerns about each system and then took questions from the students.  Since this was the last time we were talking before the group, we opened the last 15 minutes up to any question the students had on Austrian Economics.  There are no PowerPoint slides associated with this so I cannot link to anything right now.  However, when FEE posts it on the web, I’ll be sure to link to it.

I want to thank FEE for hosting another very good summer seminar.  The students asked some of the best quality questions we have heard for quite some time.  And the FEE staff did a marvelous job.  I appreciate the fact that the supporters of FEE have been able to keep this program going and also to be able to do it at such a high quality level.  Thanks!

Real Meaning of Say's Law

Last March I gave a talk at the John Locke Foundation in Raleigh, NC.  The topic was on Say's Law.  In this interview I explain the real meaning of Say's Law and contrast it with today's Keynesian point of view.




Here is the clip from that talk last March.  (I also posted this last March.)

Say's Revenge: Living in Keynes' Long-Run

I gave a talk at the John Locke Foundation today, which I thought went rather well.  It is called, "Say's Revenge: Living in Keynes' Long Run."  Here is a clip from the talk:

For the full video please go here:
http://lockerroom.johnlocke.org/2011/03/21/saying-what-say-said-rather-than-what-keynes-says-say-said/
or here:
http://jlf.streamhammer.com/speakers/paulcwik032111.mp4