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[Great Order]

Funnily enough, my dad and his friends got pulled over on suspicion of that despite the fact they weren't doing it.

They'd gone off to France to buy a load of cheap goods with the intention of gifting and personal use. Problem was, it was the 90s, there were three of them, and they had a white van. They couldn't have made it look more suspicious if they tried.

[Loud Whispers]

Funnily enough, my dad and his friends got pulled over on suspicion of that despite the fact they weren't doing it.

They'd gone off to France to buy a load of cheap goods with the intention of gifting and personal use. Problem was, it was the 90s, there were three of them, and they had a white van. They couldn't have made it look more suspicious if they tried.

Fake moustaches and funny nose clipped on?

[McTraveller]

Anyone have any references to good academic material on the phenomenon of why businesses over-hire and then lay off workers?

I can understand how companies that have a fairly tight relationship between demand and workers required to meet that demand can get into this situation. So I'm not talking about "wow demand for our product dropped 30%, we don't need as many people making widgets."

What I can't understand is why companies that don't scale output proportionally to demand would over-hire so many people that they could afford to then lay off thousands of people - what are those thousands of people doing in the first place, if there wasn't a return on that investment?

[Thorfinn]

Austrian business cycle theory.

Look on mises.org for "business cycle". If you have the chops for it, by all means, Rothbard's Man Economy and State and Power and Market. The problem with that is that it does assume a pretty good understanding of Austrian economics. If you get started and don't quite follow the jargon, there are lots of very approachable writers on the subject. Robert P. Murphy has a book written for more or less high school AP level, (I forget the name, but if you look it up, his short pamphlet Chaos Theory is interesting, too), Tom Woods has stuff for the educated layman, Dilorenzo, Salerno and Garrison are good for smart people who had a major other than economics, Klein, Sennholz, Reisman, Gordon and Hulsmann will likely have you reading the same sentence  repeatedly, having packed too much into one sentence for most readers. That's off the top of my head. The site has an impressive collection of material from some fantastic authors.

BTW, most or maybe all the books I'm thinking of are available for free download there.

[EDIT]
The short answer is that because of the way money enters the economy, there is no way to tell whether any given increase in quantity demanded is a real increase in demand or because of the influx of money. If it is not an increase in real demand (from savings or even an arbitrary fraction of cash flow, not from credit), it is not sustainable and results in mal-investments -- hiring too many employees, building new facilities, etc., which there is not a real demand to support.
[/EDIT]

[EuchreJack]

It might be a form of employee screening.  If you hire several teams, then fire the underperforming teams, you are better insulated from discrimination lawsuits than if you fire singular underperforming employees.  Also: Most managers are idiots.

[McTraveller]

Thanks -  it's been a while since I've poked around mises.

I have to say though I was hoping for something alternative to "it's the business cycle" - I mean I guess I understand the business cycle theory, but it doesn't feel right; in the sense that "if you have to make a change of 1-2% here or there, sure. But 10-20% changes (basically anything active, instead of just not backfilling attrition) "overnight" makes me think EJ's assessment is more accurate: people collectively are idiots, no matter how smart any subgroup might be.

Basically - if "everyone" knows the business cycle is broken, why don't "we" fix it? Is it because people really do like the "excitement" of an unstable system, over a nice (theoretically) continually improving one, that doesn't have systemic downturns? One where you have reasonable savings margins and buffers against chaotic events like weather and disease?

Or is it really just that even if you have populations trying for stability, that social structures (explicit like laws, or implicit like culture) cause it to revert to unstable boom-bust cycling?

[Maximum Spin]

I have to say though I was hoping for something alternative to "it's the business cycle" - I mean I guess I understand the business cycle theory, but it doesn't feel right; in the sense that "if you have to make a change of 1-2% here or there, sure. But 10-20% changes (basically anything active, instead of just not backfilling attrition) "overnight" makes me think EJ's assessment is more accurate: people collectively are idiots, no matter how smart any subgroup might be.

You have to understand, businesses can motor on quite happily accumulating inefficiencies at, say,  a modest 2% a year for five years before the lean times come and the fat has to be trimmed. Nobody tells you that a division is underperforming until it starts to take in less than it spends; you don't get to see the amount of money you could've been making.

Basically - if "everyone" knows the business cycle is broken, why don't "we" fix it? Is it because people really do like the "excitement" of an unstable system, over a nice (theoretically) continually improving one, that doesn't have systemic downturns? One where you have reasonable savings margins and buffers against chaotic events like weather and disease?

Or is it really just that even if you have populations trying for stability, that social structures (explicit like laws, or implicit like culture) cause it to revert to unstable boom-bust cycling?

Worse, it's innate in the mathematics and in human psychology. There is no possibility of stability. To understand this, you need to really drill down into what that would mean - like that "reasonable savings margins and buffers against chaotic events like weather and disease" means that, when the weather turns out to be fine and you're not diseased, you have capital lying on the ground being wasted, you produce less than you could have, and somewhere on the margin people starve to death who could've been fed.

[McTraveller]

To understand this, you need to really drill down into what that would mean - like that "reasonable savings margins and buffers against chaotic events like weather and disease" means that, when the weather turns out to be fine and you're not diseased, you have capital lying on the ground being wasted, you produce less than you could have, and somewhere on the margin people starve to death who could've been fed.

I don't think I understand this - why would capital be wasted here? By "stability" I mean you do is "bank" your excess produce, so when you have a production interruption you can draw down your stores instead of having nothing.  The old "let's build grain silos and store up our extra produce during good years, and then live like kings when there's a famine" strategy.

Instead of "hey we only have demand for X this year, so let's only produce X even though we have capacity to produce X+Y, and oh crap next year something happened and demand is still X but we can only produce X-Z."  Sure I guess if you're the producer you can get more money in the short year, but you can't get more product which is what people really want.

[Maximum Spin]

I don't think I understand this - why would capital be wasted here? By "stability" I mean you do is "bank" your excess produce, so when you have a production interruption you can draw down your stores instead of having nothing.  The old "let's build grain silos and store up our extra produce during good years, and then live like kings when there's a famine" strategy.

The wasted capital in this case is the land, labor, seed, water, etc. that goes to growing the excess produce that you store up in the grain silo instead of any other possible use that might help people today.

In the case of actual literal grain, we can't always help this, since most of that capital has to be committed well ahead of time, though we absolutely try our best. In the case of more modern products, it's almost always possible to turn the capital to more immediately useful uses, practically on a dime.

A great example happened in the United States in 2020, where many manufacturers changed their production lines in a matter of days to churn out new ventilators on the assumption that there would be ventilator shortages, only for it to turn out that ventilators made most patients worse and usage never came close to predictions... even while manufacturers were still under government contracts to keep making them. I had a pretty close secondhand insight into this at a major automobile manufacturer at the time. While it might seem like a good thing to have a stockpile of ventilators, the losses to the economy in terms of the labor and machinery time were enormous.

[EuchreJack]

You're both also forgetting that Rich People can profit from cyclical economic times. And Rich People control a lot.

[Maximum Spin]

You're both also forgetting that Rich People can profit from cyclical economic times. And Rich People control a lot.

This is pretty naive.
On the one hand, I can profit (have profited) from cyclical economic times, and so can you.
On the other hand, rich people can profit a lot more from "up graph goes up", and have more incentive than even the rest of us to want to maintain it (since they have more pieces of paper to increase in value). Which is why, eg, the fed keeps trying so hard to maintain it.
On the gripping hand, there are a lot of rich people whose interests are by no means all aligned, and the economic cycles are just not that easy to control.

[EuchreJack]

I still suspect that Presidents can and do control minor fluctuations in the market, and they profit themselves and their supporters. Both Trump and Biden had a little shit son acting as their liaison in these things.

[McTraveller]

I think "control" is overstating it - "influence" is more accurate.

Regarding @MaximumSpin - I think this depends on definition of "waste".  After all, sure if you have a few extra things in your pantry, that's not waste. But if you keep doubling your supply of bandaids every year, that's probably waste.

That's a good observation about the differences in ability to change output of production for different types of capital.  How if you have a sewing machine you can change it quickly from producing T-shirts to masks quite quickly but if you have a field full of corn you can't switch to integrated circuit production in a few weeks.

EDIT whoops, that * was to a big deleted thing during a draft...

Spoiler: regarding * (click to show/hide)

So I had originally include "shift the roles of people in society" as an example of "switch production" - like suddenly switch a bunch of people from non-healthcare to healthcare work.  This is not something that can be done "quickly" - although there's an argument that you can incentivize existing workers to get back to work.  The * was expanding on that thought of incentives:

*Sure I mean you could in the limit "print money" to pay existing health care workers more, and maybe bring in some people on the fringes, but that's just money and it won't actually prevent physical burnout or magically create more workers (or create more goods that those health care workers would want to buy with that newly printed money); it may just incentivize people in the short term to burn themselves out faster, which will then make the supply problem worse.

[Thorfinn]

And don't under-appreciate opportunity costs.

There is a cost to having production build up, and not simply in terms of the materials and labor that went into the production. It's what you could have done with those resources had you not opted to convert them to finished goods and store them in a warehouse. Inventory does not make you any money. Inventory churn does. The consumer might prefer larger inventories, sure, but he has a demonstrated aversion to paying for it, choosing to buy from the JIT supplier who did not have as much overhead in inventory.

Downside of JIT is, of course, it is phenomenally sensitive to supply shocks. And that's what we got from the response to COVID. As indirect (roundabout) as production chains have become, there is a tendency for at least some of these disruptions to have positive feedback loops.

[Maximum Spin]

After all, sure if you have a few extra things in your pantry, that's not waste.

Of course it is. Hasn't your mother ever told you, "clean your plate, there are starving children in Africa"? It's a very minor example of waste in the long run, but it is deadweight, resources just sitting around when they could be helping someone now.

Look at it like this: if the family next door sells off everything in their pantry at the end of the day, while you let it sit, that family (which presumably eats as much as yours in the long run) will outcompete yours in the market whenever there isn't a supply shock, which is most of the time.