Ascribed Value

As a people become more affluent, the influence of the price factor declines.  The supply and demand paradigm loses potency and becomes less valuable as a tool in much of the analysis. This is because market decisions are not based on price.  Or, buying is superseded by spending.

In “The Visible Hand” I wrote that the rich can handle price increases but not supply shortages.  This article deals with price.

Under normal economic models, the law of supply and demand states:  When demand exceeds supply, prices rise. When supply exceeds demand, prices fall.  That, of course is still valid.  However, there is more to it than that. 

Theory + Case Method.

To adjust to the market forces, if prices increase, the demand will taper off as people find prices to high and prices will level off or began to fall.

Case

Avocados sell for $2.00

Consumers do not buy avocados at $2.00

The avocados begin to turn.

The manager of the market cuts the price to 99 cents (when no one wants them).

I’ve seen this failed pricing policy repeated too often over the years.  Now, avocados are priced to sell. 

However, with rising affluence, demand does not abate as prices rise.  In this scenario, people who can afford them, buy the avocados at $2.00. The rich absorb the price increases. Then, to exploit the demand, avocado prices increase artificially to $2.50.  The rich buy them to serve a much more lavish lunch.

Of course, food is perishable and avocados are not a staple. E.g. Bread, milk, mayonnaise, cereal, peanut butter, baloney, tuna fish, and so on.

Back to the Paradigm

As supply falls and demand does not abate as the rich absorb the price increases, the increases place a greater hardship on those who fall between rich and poor.  Example: gasoline prices rising from $3.39 a gallon to $3.89 a gallon.

The poor buy less, or buy something else, or—as with petrol—stay home.  As this happens, one or two of two things will happen.

The absorption of price increases and the increase in purchasing and demand shifting will lessen the demand for that which is in greater supply (or less demand) forcing prices down and sellers revenues along with them.

The rich will buy (at an attractive price) what is out of demand favour either for the purposes of conspicuous consumption or speculation. This will further hurt the poor. 

At this juncture, conspicuous consumption becomes a misnomer because what is being purchased is not being consumed as needed and or as wanted. Ergo: Gratuitous Consumption. Or, in some cases, Ridiculous Consumption.

There is a variation on gratuitous consumption. To explain this, I will create a metaphor.  This is a metaphor!

A $35,000 handbag

A   $1,000 handbag

People are employed to make handbags.

I can hire one person to make a $35,000 handbag.

I can hire 35 people to make one handbag each to sell at $1,000 each.

If I hire one person to make a $35,000 handbag, and pay him $1,000, I have a $34,000 profit.  I cannot pay 35 people $1,000 each to make one handbag each, to sell for $1,000 each.  On a percentage basis, I pay 35 people $28 each and make a $34,020 profit on the enterprise. 

With rising affluence, I can cater to the rich or I can cater to the less affluent. This requires cutting costs (wages) and outsourcing or off-shoring my labour.

NB:  We are not discussing the affluent.

We are discussing rising affluence.  We are discussing a new paradigm.  And, rising affluence for the purposes of this discussion refers not to those who have more, but rather to those who spend more.  (Low key displays of wealth still exist. But you don’t see as much of it anymore.  Then again, you wouldn’t.)

Remember that $1,000 handbag?  That handbag now has a designer inscription and a $2,000 price tag.  What happened?

To understand this, we go to the question, “What makes that $35,000 handbag worth $35,000.  This is a question often asked in the media.  I will tell you.  That handbag tells people you can afford to spend $35,000 on a handbag.

This differs from numismatic value.

The last “antique pocketbook” at auction may sell for $35,000 because people collect them.  They are dwindling in number and availability. And, People believe that they will increase in value, hence increase in price—there will always be a market for them.  Picasso, Monet, Faberge Eggs, Harley Davidson motorcycles, coins, stamps and so on, fall into this category.  For our purposes, antique pocketbooks.

There is a downside to this and this downside is not new.  Holland experienced this in the 1600s when a Tulip bulb sold for the price of a house.  Things did not turn out well.

Now we come to what I call Ascribed Value.  There is no numismatic or speculative (future price + ROI) value, or significant increase in quality that precipitates or necessitates the increase in price.  Rather, speaking  metaphorically or literally, the increase in prices is based on what is written on the handbag—the designer’s logo and the high class price tag appended to the handle.  What causes the price to rise is the imputed value.

DISCLAIMER:   

This is not to suggest that a $35,000 handbag is not a piece of quality merchandise.  It is a piece of quality merchandise.  It has

• An attractive design

• Quality materials

• Skilled craftsmanship.

In addition, there is a big difference between a designer handbag and a handbag with a designer label.

Back to Economics

A higher price was a valid factor when I paid $100 for a pair of Florsheim® shoes rather than $25 for a pair of shoes from the other store.  The Florsheims lasted and lasted and lasted. They were good quality, well made, and stylish.  (I suspect that the Energizer Bunny® wears Florsheim Shoes.

Elois Papillon, a character in the novel St. Lawrence Blues (Un Joualonais sa Joualonie) by the brilliant and highly esteemed French Canadian author Marie Claire Blais, declaimed, “Credit is the poor man’s illusion of wealth.”  Here, too, we move to a new paradigm, a new social class.

With many of the consumer goods sold lately, the market imputes quality based on price and a new social class is creates.  Not the rich, but those who enable the rich to get richer bases solely on the fabricated price of their products.  And the richer they get, the greater the value imputed to their products.

Remember that $1,000 handbag that sold for $2,000?  It now sells for $3,000.  Why?  Because the designer is richer.  That extra $2,000 is “Fabricated Pricing" based on “Imputed Value.”

Quality or Value?  That handbag is worth the extra $2,000 because it costs an extra $2,000 because the designer is now a wealthier ergo a more successful ergo a much better designer.

In short:  The value of the merchandise lies in the price of the merchandise.  The handbag is worth $3,000 because the handbag costs $3,000.

“Then, the label spoke to the quality of the merchandise, now the labels speaks to the price of the merchandise.”  ~ Slim Fairview. 

From, The Quotations of Slim Fairview © 2014 
Robert Asken as Slim Fairview. All rights reserved.

Warmest regards,

Slim

slimfairview@yahoo.com

PS  I was thinking about economics over the past week and something occurred to me. Perhaps, this is nothing new. Perhaps there have been many theses written about the above. It may even be a much studied paradigm.  If it is, please let me know, I would love to read about it. Sincerely, Slim.

If you find anything here to be helpful, please don't hesitate to send me a really tricked out Mac Book and to tuck a few dollars into the envelope along with the thank you note. Slim.

Robert Asken
Box 33
Pen Argyle, PA 18072

Copyright © 2014 Robert Asken as Slim Fairview

All rights reserved.

 

A Primer in Economics by Metaphor

This is how economics evolved. This is a metaphor.

Bill is a caveman back in primitive days. He lives in a cave. He lives in a community among other cave dwellers. Some hunt, some gather, some cook, but not Bill. Bill crawls in the dirt, using his hands to make holes in the dirt. He drops seeds into the holes. When he is finished planting, he goes out to gather. He is not good at hunting so he only gathers. The seeds grow. Bill eats.  Bill barely survives.

Bill has a neighbour, Tom. Tom is a hunter. He works hard. Hunting is dangerous. Some of his friends have been killed hunting. Still, he does it.

Now, Bill and Tom have a neighbour Jack. Jack thinks. He thinks what Tom does is dangerous and only marginally profitable. He thinks what Bill does is not the most effective way of doing what he does. Jack comes up with an idea.

Jack takes a stick; he walks across the field poking holes in the ground. Then, using a hollow reed, he drops a seed through the reed into the hole. He plants many seeds.

When Jack is through, he gathers. Because he has more time to gather than Bill does, Jack gathers more food than Bill does. Jack has more food to share, so he trades food with Tom who hunts. This causes Bill a problem. He does not have enough food to buy meat from Tom, so he eats less.

Jack’s farm prospers. He not only gathers and trades he now reaps and trades. He trades food with Bill for labour. Bill now works on Jack’s farm in exchange for food.

Jack now has twice as much food so he stops gathering. He cultivates more land. He grows more food. Now he can trade more food for more labour. The gatherers find Jack’s steady supply of food to be a better alternative to gathering.

Tom, seeing how the investment system works, and with meat scarce and vegetables in plentiful supply, he charges Jack more for the meat. Jack pays happily. In addition, with the lessons he’s learned, Tom teaches others how to hunt, where to hunt, and supplies them with the tools to hunt. They pay for their lessons with some of their meat. He pays them for hunting with some of the vegetables.

Tom’s hunters increase the quantity of meat. Jack’s farmers increase the quantity of vegetables.

However, there is another problem. It takes time to make tools to farm the land, weapons to hunt for meat, and it takes time to make clothes from the skins.

Enter, James. James also thinks. He sees an opportunity. He agrees to supply the hunters and the farmers with tools and weapons and clothes.

He gets together with some of the less successful hunters and gatherers and promises to pay them in meat and vegetables in exchange for their labours making tools and weapons and clothes. They don’t have to hunt. They don’t have to gather, and they can eat. That works for them.

James begins his business. Soon, more people are making tools, weapons, and clothes. More people are farming. More people are hunting. However, things are a bit dull despite the prosperity. Enter the arts. (It will be centuries until things become dull because of the prosperity.)

Tom, Jack, and James can afford to take time to pursue the arts. However, they are not very good at it. Enter, Dave.

Dave tells stories. He is paid with food.

Susan can paint. Susan is paid with food.

Peter, Paul, and Mary can sing. They are paid with food.

Mark and Lorraine get an idea. They seek out people who can tell stories. They arrange for storytelling. They charge people to come to listen to the stories and pay the storytellers with a part of the profits.

Susan, who can paint, teaches promising students to paint and helps them sell their paintings taking a commission on the sales.

Things are moving along reasonably well with the exception of dragging around sacks full of food and dead carcases. Moreover, there is quibbling. They agree to seek a solution from the elders. There, they listen to the elders suggest the formation of a council.

With time on their hands, and the evidence of intelligence, Jack, Tom, and Dave become leaders appointed by the elders. For whom everyone has respect.

Together they create a medium of exchange. Then, they issue an RFP and subsequently someone creates a food storage system. The people start schools where the experienced hunters and farmers can teach hunting and farming. Singing, storytelling and painting are also taught. However, there will always be troublemakers. At first, they are handled by a few of the leaders. Then the leaders appoint a shire reeve who calls a posse comitatus to handle problems when they arise.

Some people are smarter than others are. However, they are not creative; but they are inventive. They invent ways to make tools using metals. Some invent more expansive tools and machinery. They learn to grind wheat and make bread. Others figure out how to harness the water to turn gristmills. Others are natural born salesmen. They go out to sell the products of the industrious people of the community.

The community grows. Soon, other communities follow suit. People take what they have learned, their stock-in-trade, to other communities to help them plan their communities.

Some communities with more of something to sell sell it to those communities with more of something else to sell in exchange. Foreign trade is born. Treaties are signed. Thus, civilisation arises from the very dirt that Bill used to crawl in digging holes with his hands to plant seeds.

This is the entry to understanding economics.

Regards,

Slim Fairview

 

Mail  slimviews@gmail.com

Copyright (c) 2011 Slim Fairview