Wonder Bread, Twinkies, & The Economy

Revealing Lessons On Booms & Busts From A Bread Salesman

One of my early jobs was as a Wonder Bread and Hostess snack salesman servicing Mesquite, Nevada, a small casino town.

Interestingly, pushing bread and Twinkies taught me much about the economy, and it specifically gave me the ability to see through economic fallacies.

One of the lies perpetuated by the Great Depression, and which is being mirrored in our current economic crisis, is that the free market, by virtue of the profit motive run amuck, causes recessions. And, of course, the logic is that since busts are caused by the free market, government intervention and increased regulation is the solution.

Read on while an old bread salesman tackles this lie head on and demonstrates how ridiculous it is.

A bread salesman has three days to sell his product off the shelf before he has to remove it as stale. Any stales came off my bottom line, which meant that I had to track my numbers religiously.

If I put too much bread on the shelf it would stale out; too little would result in lost sales.

In other words, I had every incentive to match my production with existing market demand. If I tried to inflate my production by ordering too much bread, it would do nothing but harm me.

While I could, to a certain degree, increase market demand by offering discounts and bettering my marketing efforts, my influence was limited, checked and balanced by my consumers and competitors.

Lesson #1: Entrepreneurs have every incentive to ensure that their predictions match market demand.

A critical role of entrepreneurs is to predict the types and quantities of goods and services that people will actually buy. They use natural market indicators, such as past consumption, to make their predictions.

Producing more than the market will bear harms entrepreneurs, whether they sell bread, steel, clothes, or mortgages.

As a bread salesman my route book, which was my ordering Bible, tracked every sale of every product every day.

Without that I was shooting in the dark and my profits would plummet. With it, efficiency was optimized, waste was reduced, and profits were maximized.

However, occasionally I would experience sharp deviations from my normal sales, which threw off my entire process.

For example, one day, shortly before a Superbowl Sunday, all of my hot dog buns in the grocery store mysteriously disappeared.

My numbers were perfectly in line, yet some external force that I didn’t understand was at work.

I bumped up my orders. The next day, the shelf was wiped clean of hot dog buns yet again.

I bumped up my orders even further. The next day, same thing. This time I really cranked up my orders.

Super Bowl weekend came and passed, and on Monday I walked into mountains of hot dog buns, most of which eventually staled out.

In other words, there was a hot dog bun boom, followed by a bust.

Traditional economic theory says that I caused the bust with my profit-motivated greed. I wanted to make money so badly that I ramped up my orders.

The truth is the exact opposite; I had no incentive to do so, and the bust was caused by forces beyond my knowledge and control.

In that case, what had happened was one of my casinos held a last-minute Super Bowl party for which they needed hot dog buns.

Rather than ordering them directly from me, which is what they should have done, they had gone to the store for several days in a row and bought every package of buns on the shelf.

The boom was a fluke; the bust was simply a market correction of the fluke.

Lesson #2: Abnormal, artificially-induced market factors cause entrepreneurs to make faulty judgments regarding production.

Entrepreneurs who inaccurately predict demand fail; those who predict accurately thrive.

But when external factors distort the indicators that they base their predictions on, the result is chaos and lost production.

Just as politicians leveraged the panic of the Great Depression to blame the failure on the free market to amass more power, so are we being told today that our financial crisis was initiated by greedy and speculative entrepreneurs.

What we’re not being told is how the Federal Reserve and other government agencies distorted free market indicators prior to the crisis.

For example, in September of 1999 the New York Times reported:

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action…will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.”

This report details how Federal Reserve policy heavily influenced the crash, including controlling the interests rates and margin requirements.

Here’s the big picture: The Fed controls the money supply and interest rates, which are huge determinants of market demand. When money flows freely, people spend freely.

A “booming” economy in America today is largely false and artificially created by the Federal Reserve manipulating the money supply.

Then, when the true demand catches up to the Fed-created market lies, it all comes crashing down.

In other words, our booms are false and our busts are but corrections.

Lesson #3: When created by the manipulation of the money supply, economic booms and busts do not represent the free market, and the culprit is illegitimate government intervention, not the free market.

In actuality, an economic bust — when preceded by a government-interventionist boom — shows the true power of the free market to realign itself even when influenced by massive external forces.

In the case of my hot dog buns, the culprit was a casino that failed to order enough product at the last minute then distorted my grocery store numbers without my knowledge.

Similarly, our current financial crisis was not caused by the free market; it was caused by government intervention.

The Federal Reserve distorted natural market indicators which in turn prevented entrepreneurs from predicting accurately.

Lesson #4: The solution is less regulation, not more.

The way to prevent economic booms and busts is to prevent the government from illegitimately manipulating the money supply.

The money supply must be backed by hard, precious assets, which largely prevents top-down exploitation.

Keep the money supply stable, protect unalienable rights, then get out of the way as entrepreneurs pursue the profit motive, understanding that they are naturally incentivized to match their production with legitimate market demand.

Recommended Reading:

America’s Great Depression by Murray Rothbard

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Stephen Palmer is a marketing consultant and persuasive writer with KGaps Consulting, a co-founder of The Center for Social Leadership, and the New York Times best-selling co-author of Killing Sacred Cows: Overcoming the Financial Myths that are Destroying Your Prosperity.

He is a liberal-arts graduate of George Wythe University and a graduate of the “non-traditional business school” Wizard Academy.

Stephen resides in Round Rock, Texas with his gorgeous wife Karina, awesome son Alex, and princess daughters Libby, Avery, and Laela. Stephen and Karina blog about their magical life on Palmer Journeys.

Connect With Stephen:

Email: spalmer [at] kgaps [dot] com