
Scarcity is relative, of course, and shifts from situation to situation – even person to person. For me the great lesson was that prices are essentially determined by the willingness of the people to pay. Hence, if one refuses to be seduced by allure of big brand names and glitz of malls, one can avoid the trap of being seduced by high-priced goods.
Often, interest groups cause scarcity to ensure uninterrupted existence of scarcity. High wages are maintained by doctors, lawyers and other professions (Chartered Accountants in India!) by keeping the supply of their ilk low.
The other big lesson that I learnt is that based on the logic that businesses can only charge what the customers are willing to pay, businesses devise strategies to determine who will pay more. Hence there is a regular cappuccino and then, for those who are not price sensitive, there are variants that charge far more than the difference in producing them vis a vis a regular cappuccino. Supermarkets price their goods based on the type of clientele they expect – are its customers more likely to treat fruit-juice as a luxury or they will want it anyway because it is a permanent fixture at their breakfast table? Hence, don’t waste your time finding a cheap store, advises the author; instead shop cheaply, looking for bargains wherever you go.
Tim Harford is an unabashed supporter of the free-market system. He argues, with a great deal of success, that ‘you can’t get more efficient than a perfectly competitive market’. Prices, he deduces, are true representation of the cost to the company and value to the customer. Free markets have a natural way to ferret out information on the true needs, desires, wants and costs. When markets are not free or government controlled, much of this information is lost and hence the decisions are not cost-effective.
But what about ‘fairness’? Harford arrives at the conclusion that free-markets can be made perfectly fair by adjusting the starting blocks for different strata of people. Skilful use of taxation is part of that solution.
There are three issues that need to be addressed if free-markets are to work well. The power of scarcity is one; the availability of information so that informed decisions can be made is another. Finally, markets do not work well when some people make decisions that affect others – the bystanders are affected by those who are buying petrol, for example. This factor is called ‘externality’ and needs to be addressed by economists. An externality charge imposed on those who intend to drive cars into the crowded city-centre is an example.
The book also discusses the reasons for profitability of companies. What matters is not that you get there first but that you continue to produce something that others cannot or do not. This would explain the relative decline of Microsoft and current supremacy of Google and Facebook.
Finally the book discusses why poor countries are poor and why China has risen so dramatically. It is all about free-markets, goes the refrain. The argument is persuasive but then, I suppose, so would be the counter if presented side-by-side.
Interesting but simplistic!
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