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July 14, 2006
Capitalism without money
You may have heard of This guy, who, through a series of trades, turned a giant red paper clip into a brand new house. My friend afaeyremaede says that she still think[s] it's interesting how this goes against the capitalist model. Usually, we want something better for less, not something "worse" for more....
What she doesn’t seem to see is that this is exactly what capitalism is all about. Each person in the system freely (if it’s not “freely”, it’s not capitalism) exchanges something they feel to be of lesser value for something they feel to be of greater value. For instance: I exchange 8 hours of my day for the money with which to survive the other 16...
To look at it slightly differently: I was once musing about Ebay with a stock-owning friend. I asked what was stopping Ebay from selling stock. She replied that Ebay was an auction site, whereas stock prices were... well, stock prices. I just looked at her blankly “who do you think set’s stock prices?” She replied (very hesitantly) “Alan Greenspan?” I tried not to gape. I also tried not to make a single comment about the value of inheritance taxes...
Afaeyremaede is exhibiting a similar—but much more understandable—misunderstanding. The entire economy is one giant auction. Every transaction is a bid on the value of an item. Since prices in the Western Economies tend to be “set” by stores, this process is usually unscrutinized. Most bookstores have a “former best sellers” section, in which books that used to go for US$30 are now going for US$5. Does this “go against the capitalist model”? No! it is rather the very workings of capitalism: the buyer was unwilling to buy at US$30, but is totally willing to buy at a much lower price. Other buyers knew that if they could just wait the price would be lower. To them, however, having the book now was worth an extra US$25...
This is what capitalism is all about. Parties trading for things that are worth less to them for things that are worth more. The aggregate of these trades create what we call “market value”, but market value is not an objective measure of “true value”. It is merely the summation of many people’s subjective valuations...
If I’ve explained this point poorly take a read at Naked Economics. It’s a wonderful book about the (second) most important subject there is...
Posted by Andrew at July 14, 2006 12:37 PM
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