Monday, April 17, 2006

fun with economics

My friend A- sent me this story about how a man has traded a paperclip for a house:

This story provides an interesting demonstration of economic principles. A- used a physics analogy to think about the story. Paperclips like electrons have a value/energy level. To exchange a paperclip for a house, you have to add tons of value/energy.

In efficient markets, trading a paperclip for a house would be impossible by some type of law of conservation. However, because of "transaction costs" (see Williamson), barters can be made where there are gains from trade, where the value of an item to the seller is greater than the value to the buyer, and thus "profit" is made.

So to prevent arbitrage, these gaps can only exist in the presence of search costs, and that is where the value/energy is added.

The Marx' theory of value that says value comes only from labor holds here. The value is created from the man's labor, in using the internet to find all these mutual exchanges of wants.

Of course, that is only the base analysis. We could get into more detail by saying since this is a special case, it makes a cute story. Some value is also created from the sheer entertainment value of the story. Each person who participated in the chain gains status and satisfaction from telling how he played a part in this scheme, and thus is willing to trade for more than the items were originally worth...

Isn't economics fun!

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