I just skimmed through a story about bluefin tuna. Apparently, we are about to run out. But yet it's everywhere. It makes me think about what might be a fatal flaw in our form of capitalism, and raises the following question.
What if supply and demand is a function of capacity but capacity is not a function of supply and demand?
Or think of it this way, what if you built a water well powered by a machine that was driven by a huge flywheel that took you 2 years to spin up. As you start pumping the water you deliver more and more to your thirsty customers who drink their fill. After two years, you are pumping as fast as the machine can go, and at this point your business is mature. Supply and demand are now pretty much about in balance. Basically, you have exploited the economy of scale of your massive machine. You serve a million people five million gallons a day and your pricing is low because of the sunk costs you've already paid for. Now you are in a prime capitalist position. Price the water as you please, but mostly to increase demand, pump out profits and keep your customers loyal. You sell subscriptions, you give discounts, you offer trials for new customers. It's all about marketing now. I would basically say this point is the maturity of the overwhelming majority of markets for consumer goods and commodities. They are machines.
Then you notice that the water supply is getting lower, in fact, you have about one year of actual supply left. If you slow down the flywheel, you'll have to lay off people, and that kind of disruption will start to kill your economies of scale. Your unit production costs will go up and you'll kill your margins. So what do you do?
I am guessing that in most industries, businesses keep up the demand pricing rather than supply pricing, and then figure out an exit strategy with fungible cash. Which is to say, you sell sell sell your product until the well runs dry. Then you crash the business and cash out. In other words, you are captive to the 'will' of the machine you have created which doesn't care about whether or not its resource is limited. It's job is to produce, not to conserve. When you run the mining equipment, or the farming equipment at anything less than full capacity, you're wasting money and will lose your customers.
In the case of a global shortage, this is dangerous. You will run at full capacity until you hit the wall, because it's too difficult to downscale the business, raise the prices, and retain the appropriate market share.
What if it's chocolate? What would people not pay for chocolate? The price elasticity for chocolate (whoops, now I'm going to make technical mistakes - beware) is negative. It might even be a Giffen good. In other words, you want it so badly that no matter what Hershey's charges, you're going to pay. With regard to the supply going tits up, Starbucks coffee drinkers will drink all of South America's coffee plants bare. There will never be a point at which gasoline costs too much for us to not empty all the wells. We will eat all of the bluefin tuna sushi until there is no more in the sea, and the businesses between us and the raw materials of the earth will spin their flywheels until the whole enterprise crumbles. In other words, people will watch Robin Williams tell jokes until the day he dies, even if show business is killing him. And the day before his last show, there will be no indication by the price of the ticket that it is the very last ticket.
Consumers won't know, because whatever it is, they can afford it. And then it's a ghost town.
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