Harford presents some fascinating topics about economics and how the world really works and why. While I found many of the ideas interesting, one that really sparked my interest was his mention of scarcity, technology and value of stocks.
Harford establishes that the value of a product or service is directly related to its scarcity – this is the old “supply and demand” theory; the less there is of something, the more that the limited amounts are worth (as long as demand is there – the computer game Moon Tycoon is very hard to find, as my son discovered, but with little to no demand it is almost worthless). This certainly makes sense – if I want a bag of apples and apples are hard to find (maybe they are out of season, maybe there are not apple orchards nearby and the cost of fuel means no one wants to bring apples to my city, maybe there is an apple blight) then the cost of apples can be expected to be high. The scarcity factor really comes into play when applied to a product or service that has a predictable scarcity; this wouldn’t affect apples (the next season may be a bumper crop) but would affect the cost of a telecom license since airwave access is limited. So we know that scarcity plays a part in determining how the consumer values a product or service.
Harford gives a brief nod to technology when he discussed the internet and the many businesses associated with the computer age. He rightly establishes that scarcity does not play a large part in determining the value of an internet based company, since there is little scarcity involved – anyone can start up an internet business in their garage (and many have). Harford states: “…the economy will never change so much that companies with no scarcity power become highly profitable”. This information explains the “dot.com” bubble which I would have thought was obvious to anyone with a basic understanding of supply and demand – when anyone can start up an internet company, the supply outweighs the demand and limits the profits that company (or industry) can expect to gain.
What we do find is that companies that can create a scarcity, like Microsoft has done, can establish lasting scarcity power which leads to high expected profits for many years. Microsoft is a company of the computer age – and it has made it mark by controlling the industry standards. When I looked at purchasing a new laptop computer, I really wanted a Mac. The design appealed to me, I liked the idea of not being as susceptible to viruses and I prefer the Apple operating system – so why didn’t I purchase a Mac? It wasn’t the price – I felt like the price of the Mac was reasonable and I could afford it; it was the scarcity of the programs that I use – I rely on Microsoft Office for many of my assignments and work projects. While Microsoft Office can be purchased for the Mac, it doesn’t work as well as it would for the Windows system. Since I prefer to avoid problems with my computer, I purchased one that was compatible with Windows.
A share of Microsoft is worth more than a share of Apple – not because of the land it owns, the number of products it has out on the market or what it sells (although that plays a part) but rather because stockholders expect Microsoft to produce more profits than Apple over the coming years. By establishing their own scarcity (setting industry standards to only work consistently with their operating system), Microsoft ensured their profits for the coming years and increased the value of their company. The move was economic genius.