Friday, October 26, 2007

The Economics of Exclusiveness

I was reading Thomas Sowells recent article, Prestige Versus Education, and something occurred to me. One of the points he made was:

“Some students may feel flattered that Harvard, Yale or M.I.T. seems to be dying to have them apply. But the brutal reality is that the reason for wanting so many youngsters to apply is so that they can be rejected.”

He continues:

“Why? Because the prestige ranking of a college or university as a "selective" institution is measured by how small a percentage of its applicants are accepted. So they have to get thousands of young people to apply, so that they can be rejected.”

This is not unique to big universities either, even preschools do it. Some prestigious preschools have waiting lists over seven years long, parents have to send in an application a year before they conceive.

Certain restaurants have two year waiting lists (for normal costumers) and enforce a strict dress and etiquette code.

The sunglass-hut sells Ray Ban glasses for 70 to 500 dollars apiece.

Ferrari produces certain “special editions” of their vehicles, producing only about a 100.

There is nothing wrong with this, and the items mentioned above are high quality; but they are also selling something more then quality: that being a sense of exclusiveness.

Ray Ban can mass produce their glasses and sell them for 30 dollars apiece; Restaurants, if the demand is that large, can expand*; Universities and other prestigious educational institutions can also expand, I’m sure that the 70,000 people who apply for NYU each year would love to get in.

This is where basic economics comes in; in all these cases, greater demand is being created by artificially lowering supply. Of course, demand is likely to be high anyway, because of the quality of what is being sold; the only way this works is if quality matches the hype, artificially lower the supply of Barbie-doll knockoffs and nobody will care.

There is nothing inherently wrong with buying rare items; as humans, we feel that there is something special in the unique. If diamonds began falling from the sky like raindrops, we would probably find another way to express our eternal devotion. When given the choice, most will chose an original painting at a higher price then a print (even if that print is a perfect recreation.)

Some will say that this is yet more proof that advertising and consumerism are manipulating the masses. Though it is probably true that certain producers fuel this desire, the economics of exclusiveness is likely in response to consumer demand, and not created by some malevolent producer.

This is where the old anti-capitalist argument comes in; where Dick, in order to be better then his neighbor, embarks on an obsession with the material, an orgy of unhealthy buying. I will say that there are people like this out there; but are these desires “created” by the producers, or an expression of something else?

Fundamentally, Dick is motivated by a desire to impress others, or gain a felling of superiority. Anthropologically speaking, both these are products of the desire for social approval. A sense of insecurity, or a lack of self, motivates Dick, not anything material. Those who think that pre-capitalist Europe or third world countries don’t produce people like Dick are fooling themselves.

It is important to separate a genuine admiration of the unique and the unhealthy obsession with the exclusive. We admire those in the Olympics because not everybody possesses great physical aptitude; the same way we admire great painters, singers, or a well-made diamond ring. In this sense, the desire for the special is actually healthy.

Though there are unhealthy desires for the special. Is NYU worth 10 times as much as a local state college? Are Ray Ban sunglasses worth several times as much as ones you can find at your local drugstore? Is it worth it to buy an original Monet and not a good print? Quality and greater monetary value does not necessarily equal greater personal value. Is my desire to acquire this thing a respect for the great and the unique, or just a need for the exclusive and validation?

These are two completely different desires that, on the surface, appear to be the same. One needs to know their own personal motivations, and be careful not to confuse hype with reality.


* Restaurants often sell a particular chef, one that personally cooks or oversees all the food in the kitchen; so there is a physical limit to how much they can produce; trying to expand would likely change the meal, if ever so slightly. So there is good reason for the exclusiveness of some restaurants.

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