Wednesday, March 18, 2020

Economics Lesson -or- Why the shelves are empty (Non-fiction)

[This isn't even a rough draft, not really, it's something that I typed out in a Discord chat, but it is a something that you might find useful when trying to understand the world in which we live and the state in which it is in.]
[I've edited it a bit, I suppose it probably qualifies as a rough draft at this point.]

Ok, economics lesson time, mostly because I've been seeing people who are Wrong on the Internet™.  Also on mainstream (and fringe) news media, but I'm mostly concerned with the internet. Obligatory xkcd link:

In an ideal system (the thing that is to capitalism as a frictionless vacuum is to high school physics problems), there would be no warehouses, there would be no back in which employees could check for products when the shelf was empty and, honestly, there would be no shelves.  Products would be sold the instant they were created and nothing would ever sit around ever.

In the real world, it doesn't work that way.  Certain things can be produced on demand at the point of sale, but most things will have to wait at some point in their life cycle.  They wait on the shelf for people to buy them, they wait in the back room (or under the counter, or up high, or wherever the company stores excess) for there to be space on the shelf, and they wait in a warehouse somewhere for there to be space in the back room.

All of this costs money.  Obviously any shelf-space occupied by something that isn't selling could be more profitably filled with something that is, but that's nowhere near the chief concern.  Warehouses cost the most.  You have a whole fucking building that doesn't make a cent but has to have utilities, property taxes (where applicable), maintenance, and so forth paid for.  That being said, even having something in the back room instead of on the shelf is losing you money that you would be making in a frictionless vacuum an ideal system.

Also, no matter where it's being stored, paying for something before you can sell it costs money too.  Time is literally money (see: interest rates) and by buying this thing (whatever it happens to be) before it will sell you lose that money and have to pay to store it.

At some point people realized that with the speed of modern communication, with advanced statistical modeling, and with other crap like that, they could reduce that cost.

The result has been decades of efforts to make sure that retailers have enough for normal demand and not a jot more.  Well . . . that's not quite true.  Empty shelves don't make people feel safe and secure and happy about a store, so the ideal towards which businesses have been working is to have exactly enough to keep the shelves filled, and not a bit more.

You can cut out entire warehouses, or at least sell them and replace them with smaller ones, you can reduce the time between paying for an item and selling it, and --in many cases-- you can even do a bit of remodeling to convert some of the back room storage space into additional store space which will increase your profits if you utilize it properly.

The goal, of course, is to have absolutely nothing in reserve, and have all the stuff on the shelves be bought that very day.  That goal has not been reached yet, but impressive strides have been made in that general direction.

Profits have increased, prices haven't really gone down, and everybody's happy (at least everybody who matters.)  Everything is perfect.

But, chris, you say, if there's only enough to meet demand, what will happen if demand increases?

Worry not, that problem was noticed long ago and a wonderful solution was found.  That solution is very simple: ignore the problem and hope it goes away.

I jest.  In fact it's more a "You can't make an omelette without breaking eggs" thing.

If people are at home instead of outside (at work, shopping, watching a movie, going to a club, celebrating Saint Patrick's Day, what have you) then there will be a massive spike in demand for everything that they're used to getting elsewhere.  This runs from food they might get at restaurants, to the toilet paper they would use in public (or work) restrooms.  Since you never bothered to have reserve stock, you won't be able to meet that demand.

However, since all of your major competitors have been operating on the same damned model, they won't either.  You're not losing your customers to other companies, so no real harm done.  After all, selling all of your stock (which is what left you with empty shelves) means you're doing way better than usual.  Profits are high.  Everything is good.

What about old fashioned "mom and pop" stores who--

First off, most of them went out of business ages ago.  Second, note how I said "major competitors"?  Well, with all of them, and you, out of the same product, anyone who does keep supplies in reserve is going to find themselves overburdened regardless, and they'll run out soon too.  There might be a brief spike in your customers going to them, but it'll die out pretty soon.  By the time this is over your customers won't even remember that those guys had it in stock for longer than you.

Still, doesn't it . . . I don't know, look bad when I'm out of the stuff I'm supposed to not be out of?

In other circumstances, it kind of would.  See the above thing about empty shelves being a turn off to consumers.  That doesn't apply here, though.  If everyone has empty shelves, then your shelves being empty doesn't reflect badly on you.  You're judged in comparison to your competition, not the Platonic ideal of a compassionate company.

Ok but it's my job to provide this stuff, won't it reflect poorly upon me if I can't?

Not really.  You can just blame the consumers.  "Look at all of these people buying stuff they suddenly need three times as much of; aren't they stupid?  They're the reason we ran out.  Just blame them," you'll say.

But in times of crisis the government advises people to--

No one cares.  No one ever blames a corporation for failing to provide what it promises.  Moreover, you've missed the point.

The point, dear reader, is this:

Everyone knew from the beginning that this would cause stores to run out of essentials the moment something changed.  No one cared.  Why?  Because it works.  You save money constantly by not having to buy excess stock, and whenever the shelves run empty that just means you sold more than you expected.  It's a windfall, not a problem.

After all, if you're the kind of person deciding on whether to make yourself somewhat richer or serve the average consumer in the times of heightened demand that you know will come from time to time, you're never going to run out any of that shit, now are you?

No one you care about suffers.


And that has been today's economic lesson.  The empty shelves we're seeing now (and I was shopping today, I saw entire empty aisles in the best stocked store I visited) aren't a bug or a miscalculation.  They're a predicted and acceptable (to those who made the decision) side effect of optimizing profit by reducing unused stock.


The system is working exactly how it was designed to work.  This was always part of the plan.  The flip-side of saving money by only buying the absolute minimum to fill your shelves has always been and will always be having those shelves empty when you underestimate that minimum because of unforeseen circumstances, which you know will inevitably arise from time to time.

Once upon a time people realized they could save money at the cost of having this happen every so often.  They responded with an enthusiastic, "Worth it!" and they haven't changed their tune yet.  No one with the power to change things is talking about going back to having more stock in reserve.

(Which is why I'm stuck in a house with three people and no toilet paper.)


[In response to someone offering sympathy for the parenthetical:]

It's not pleasant, but I'm actually somewhat more annoyed with myself for forgetting the economics behind the whole thing when it first started happening.  Yeah, it definitely seems weird when all of the toilet paper is getting sold out, but when you remember that the businesses that are sold out have spent literal decades trying not to have any extra, it makes sense that a mild increase in demand (on a global scale) would have that result.

It's really easy to blame people who are, by and large, doing sensible things instead of the ones who are actually responsible, and I did it myself a few days ago.

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The really short version:

All of this --every inventory shortfall, everything (no matter how necessary) that you can't get because the stores are out-- was foreseen.  It was considered an acceptable cost to incur in order to reap the associated benefits (vis-à-vis savings during normal operations), and now that we're in the midst of it that hasn't changed in the least.

It's not a feature, per se, but it's definitely not a bug.  That means no one is going to fix it, because in the eyes of those who set up the system, nothing is broken.


  1. I've been struggling a lot with this over the past week or so as we come to see "just-in-time inventory" as a great evil because of what happens in an emergency.

    But there's this other side, ESPECIALLY when you're talking about food: just-in-time inventory minimizes waste. When there isn't an emergency, those stockpiles in the warehouse or the back room are taking up space as they edge toward their best-by date. We've suddenly put "Have enough for everyone even in a crisis" at odds with "Don't waste resources producing more than you need". And for that matter with many of the forms of "Buy local", because producing at the scale that lets you stockpile like that requires industrial production.

    I mean, preventing waste is not really a major motive for the people who forced us into a just-in-time world, but still. I'm feeling a lot of tension from the sudden pivot to "Actually maybe we should go back to preferring shelf-stable canned goods rather than lionizing that everything be fresh farm-to-table"

    1. A lot of stuff has been going on, so this is ten days late, but I do want to respond to this. Mostly because you're right, but that has nothing to do with my point.

      I wasn't talking about food. Maybe it's different now (I'm not about to go out and check), but the empty shelves I've seen haven't been ones for perishable food. Most of them haven't been food shelves at all, and the few that were used to store food were for the sort of food items that you can buy, leave on your own shelf for a year, and then use with basically the same results as if you'd bought it that day.

      You didn't know that, because I didn't say it (so that's entirely on me), but the kinds of things you're talking about aren't the kind of things I was talking about.

      There's a difference between when you're trying to minimize the time between production and sale because the the product might go bad if you don't, and when you're trying to do it because you want to increase profits whatever the cost.

      Consider hand sanitizer and toilet paper, two of the things that ran out first. While there were definitely price gougers buying up a ton of hand sanitizer (not sure about the toilet paper) they weren't responsible for the shortfalls. Not even close. They simply didn't have the buying power. The reason businesses ran out was because they were actively trying not to have any reserve inventory.

      Hand sanitizer goes bad about three years after it's been opened. Not sure how long it can sit in a warehouse unopened before it starts to lose effectiveness, but we're not talking about a ripe tomato here.

      Somewhat weirdly, the 3 year figure comes up with toilet paper too.

      So long as it's in a properly maintained environment (ideally a warehouse or store), toilet paper has a useful shelf-life of decades, however it would never actually be allowed to sit on the shelf or in a warehouse for anywhere near that long because when it's given a best-by date, that date tends to be three years after the date of manufacture.

      The thing about the just in time model is that it isn't based on, and completely ignores, how long the product can wait to be bought. It treats something that will go bad in a week the same way it treats something that will be good as new after a century.

      By actually taking into account how long the product can last, you're actually rejecting the model, because the model says that that doesn't matter.

    2. FUCK!

      I typed up a big thing. It got eaten.

      I think I should talk more about food because I did list as an example even though I wasn't really talking about food. It's subject to all the same things, so it made sense as an example.

      The key thing to point out is that while people not getting as much food outside the home need more food at home, it doesn't need to be the same kind of food. Having enough food in reserve to meet heightened demand doesn't need to result in more food going bad.

      For perishable food you want to unload it as fast as you can lest it be wasted, but if it runs out the calories and nutrients no longer provided by perishable food can instead be provided by stuff that can safely wait a good long while between production and sale.

      And, actually, what I've been seeing is the opposite of how things should be. I could get fruit that would go bad in a week, I couldn't get stuff that could have safely stayed on the shelf for years.

  2. I have been trying to explain this concept to less informed friends and relatives and I have not been one tenth as clear as this article. Thanks!

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