Toilet Paper Econ 101

Dan Sanchez – April 11, 2020

An old saying goes, “You never know what you have until it’s gone.” This is especially true of toilet paper.

As the Great Toilet Paper Shortage of 2020 drags on for yet another week, many have a newfound appreciation for the basic household good.

Before the coronavirus, toilet paper was particularly easy to take for granted, because it seems like such a simple product: just flimsy paper rolled up around a cardboard tube. And yet, as soon as we can’t find it at the store, we’re stuck. Life is much less comfortable without it. And, as simple as it seems, it would be extremely difficult to make it yourself. Where would you even begin?

Homemade paper kits are a thing. But those don’t yield anything suitable for our plumbing or our nether-regions. Plus, according to Craftknights.com, it takes between two days and a week before you can use your homemade paper. So, imagine how long it would take to make anything truly buttocks-grade.

That’s the problem with do-it-yourself (DIY) production. It might be fun as a hobby, but it’s extremely inefficient as a way of providing for yourself and your family.

As simple as it seems, the high-quality, abundant, and low-cost toilet paper we’ve grown accustomed to can only be produced by a massive “division of labor,” which is an economics term for many people cooperating to produce something, each specializing in one part of the process.

How many people? Just as it takes millions to make a pencil (as Leonard Read explained in his classic essay, “I, Pencil”), it takes millions to make a roll of toilet paper.

Many are asking, “How, in the modern world, can we be running out of toilet paper?” But before we can answer that, we must first understand the solution to a mystery that is far more amazing:

How did we ever enjoy a regular supply of toilet paper in the first place?

That is a much more baffling question, because pulling that off takes the finely-coordinated cooperation of millions of people. Taking that into consideration, a fully-stocked shelf of toilet paper is a marvel to behold. We must first learn the “magic” behind that miracle. Only then can we understand how the wondrous spell gets broken and the shelves go bare.

I, Ply

This documentary show clip shows how toilet paper is made. It might seem like the process doesn’t involve many human beings at all, because it’s so automated. But workers are needed to monitor and maintain the mill and all of its machines, as well as to handle the business side of things.

And making toilet paper takes a lot of machines! Machines that pulp recyclable paper. Machines that clean, bleach, spread, and dry the pulp to turn it into paper. Machines that cut, emboss, wind, and join the paper to turn it into two-ply rolls. And the cardboard tubes have their own fleet of machines. It takes a lot of people to keep all that running.

But that’s not the end of the story. Before a roll is mounted on your bathroom wall, it must first be packaged, shipped, stocked, shelved, and sold. That means loading dock workers, truck drivers, grocery stockers, checkout clerks, and more.

And the toilet paper mill wasn’t actually the beginning of the story. Consider all the people it takes to make all those machines in the first place: to design them, manufacture the components, etc. And what about the tiny bit of glue that keeps the toilet paper from unrolling? Even that needs to be manufactured. So do the loading docks, the shipping trucks, and the grocery stores involved. All of these things need to be created for the toilet paper to get to you, and all of that creation takes more people.

It takes all this just to turn recyclable paper into another kind of paper. But turning trees into that recyclable paper in the first place is another huge extension of the backstory of a roll of toilet paper.

All told, millions of people around the world had a hand in producing the toilet paper that’s (hopefully) sitting in your bathroom: a massive division of labor. And they did a super-efficient job at it, because they specialized: they were each super-focused on one part of the mass-production process. That’s why they could produce so much of it so cheaply at such high quality.

As a result, you don’t have to fumble around the house all day trying to make the toilet paper yourself. You can just do a few minutes of paid work and use the money you earn to (normally) buy a pack.

An Operation without a General

Now, back to the big mystery: How was the effort of all those millions of producers coordinated toward the same objective? How did they all know how to play their part in this vast operation?

“Operation: Toilet Paper” didn’t have a single general with a loudspeaker calling out orders and handing out assignments. Such a central planner would be hopelessly overwhelmed. How much labor should be allocated to toilet paper vs. facemasks? How many delivery trucks should be used to transport toilet paper vs. food? There are trillions upon trillions of factors that are relevant to these decisions, including the various wants and needs of billions of people and innumerable facts of physical reality.

But how else could so many strangers cooperate so smoothly and efficiently?

In a word: prices.

When you buy toilet paper, your purchase helps support the retail price of toilet paper at a certain level. The higher that price, the more profit stores will earn from selling it. That increases the stores’ own demand for toilet paper from wholesale suppliers, as well as contributing to the stores’ demand for other resources (labor, land, etc.). That bids up the wholesale price of toilet paper and increases the supplier’s profits. That increases the wholesalers’ demand for toilet paper from the manufacturers (plus for other resources), and so on, all the way up the supply chain to the logging industry.

In other words, every time you buy toilet paper, it sends a “more, please” signal to the seller. The seller passes that signal on to all of her sellers (including workers, who are sellers of their labor), and that signal gets propagated throughout the toilet paper’s entire family tree. The higher the price of toilet paper, the stronger the signal, and the more resources are drawn toward providing that toilet paper.

Of course “more toilet paper” isn’t the only signal that matters. Whenever you buy a book you send a similar “more books” signal. And that signal tugs on the supply of paper (and labor, and delivery trucks, etc.) from a different direction.

So every resource is being drawn toward trillions of different signals. Generally, the most urgent signal wins out, and the resource is allocated accordingly. When entrepreneurs rearrange capital to seek greater profits and workers redeploy their labor to seek higher pay, they are following those urgent signals.

In a nutshell, that’s how the millions of participants of “Operation: Toilet Paper” are drawn to work together for your comfort and hygiene, without a central planner, and in a way that factors in the complex wants and needs of everybody else in the economy.

This market process is highly orderly. But it’s a bottom-up order: one that arises from the free interplay of the participants. It is a spontaneous order.

The Wrench in the Gears

So, if spontaneous order is so great, why are we short on toilet paper now?

The problem is, spontaneous order was interfered with, as it often is. If spontaneous order had been left alone, the following would have happened:

When shoppers rushed to stockpile toilet paper, that would have driven up the price of toilet paper precipitously. The higher price would have discouraged hoarding, which would have meant wider availability for more people, albeit at a higher price.

That sky-high price would have been a booming signal: “MORE TOILET PAPER, PLEASE!” That signal would have sent powerful marching orders to entrepreneurs and workers all up and down the economy to redirect resources away from less urgent lines of production and toward ramping up toilet paper production and delivery. The increased supply would then drive the price back down. If that had been allowed to happen, almost nobody would have had to do without toilet paper for long.

But it wasn’t allowed to happen. Spontaneous order was second-guessed, overridden, and replaced by central planners. State and city officials enforced laws against “price gouging,” which capped the prices sellers could charge for certain goods. They decided that they, in all their wisdom, knew better what certain participants in “Operation: Toilet Paper” should or should not do.

And so what should have been a resounding signal was muted, and toilet paper production was not ramped up as much as it would have otherwise been.

Governments could solve the toilet paper shortage today by simply abolishing (or not enforcing) laws against price gouging. If prices were allowed to reflect market demand, a clarion call of “MORE TOILET PAPER, PLEASE” would ring throughout the land, and a workforce of millions would snap to attention and rearrange their production priorities to provide people what they are most urgently lacking.

The Great Toilet Paper Shortage of 2020 is only one of many enormous economic and social disruptions created by the coronavirus and government’s response to it. If we are going to recover from this anytime soon, we need to work together. And that doesn’t mean following the orders and advice of central planners. It means cooperating with each other with the level of intricate coordination that only spontaneous orders like the price system are capable of. It means setting those spontaneous orders, especially the price system, free from the disruptive meddling of central planners.

If you want more toilet paper, if you want a strong recovery, if you want to avoid another Great Depression, set individuals free to cooperate through the price system, and prepare to be amazed.

Originally published at Fee.org. Dan Sanchez is the Director of Content at the Foundation for Economic Education (FEE) and the editor of FEE.org.

Image credit: Pixabay | Pixabay license (https://pixabay.com/service/license/)

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