A post at Marginal Revolution covered an interesting issue: http://www.marginalrevolution.com/marginalrevolution/2008/12/a-remarkable-qu.html
Here is a related question I have been thinking about the art market.
If people buy an artwork as a speculation, to sell later at a higher price, then they must be making the assumption that there will be people who ‘like’ the artwork.
But, if everyone thinks that way, that is they buy based on ‘other people’s preference’, how can the price be determined?
This seems similar to Keynesian beauty contest, in which entrants are asked to choose a set of six faces from photographs of women that were the "most beautiful" and those who picked the most popular face are then eligible for a prize. (source: http://en.wikipedia.org/wiki/Keynesian_beauty_contest)
My hypothesis is that the market will be unstable, prices swinging widly together. Because everyone is waiting for a signal that shows other people’s perception, a tiny fraction of people that moves before other people can influence the great majority. These early movers are buying based on their own aesthetic preference, unlike others. How few these independent buyers are, they are the total sample of the market and their influence can be huge.
Let’s say there is only 1 buyer who really likes a painting, and she is willing to pay $1000. Then the price that a speculative buyer would pay should not be higher than $1000. These are people who would not pay even $100 to buy the painting, without the speculative opportunity.
However, when there are a lot of speculative buyers, it does not seem to work like that. Speculative buyers guess what the price would be, based on their knowledge about people’s preference. Furthermore, it is also possible for some to try to ‘move’ the market.
Then, the voice of ‘real’ demand is mixed up with the voice of these ‘experts’. And the majority of free-riding speculators will put more weight on the experts’ opinion, because the experts represent the market, not just one buyer.
So, when things are good, they overshoot. And there is no ceiling in rising price. B hears from A that the price will go up, and tell C the same thing. C tells A that people are saying the price will go up. And it goes on. When there is few buyers buying for their own enjoying, this bubble grows itself.
When market turns pessimistic, things look opposite. When there is a real buyer, he could stop the decline of the price. He will buy when price has dropped sufficiently. But if there is no real, as opposed to speculative, buyer, there is no natural stopping of the fall. Only until the experts get bullish again.
The key difference between speculative buyers and real buyers is whether the price one is willing to pay is reasonably fixed or vary widly according to external influences. Not to make this post too long, my conclusion is that unless there are enough real buyers deciding independently the market will be very unstable.
There is another topic related to this, which I would like to write about later. That’s about ownership premium (or call it distributed ownership discount). I think distributed ownership of an asset or a business lowers the value of the asset. A company owned by many small % shareholders will be manages worse than one owned by a few large % shareholders, other things being equal.
I found an article, which questioned the democracy of web 2.0.
Digg, Wikipedia, and the myth of Web 2.0 democracy. - By Chris Wilson - Slate Magazine
I agree with the content of the article, but not with the definition of democracy. It seems that some people think that democracy is a system in which people share the same responsibilities. They say it is not democratic when some people do most of the content contribution at Youtube of Wikipedia.
However, I think 'that' is really democratic. What they call 'democracy' sounds like mechanical equality.
In democracy, people are not required to do the same things. People do what they choose to. And this freedom tends to lead to division of labor, because people differ in what they like to do as well as what they do well.
I think the Digg and Wikipedia are great examples of why the free market economy is a very natural system for a human society. Many web 2.0 sites give equal property for everyone. Everyone is given a free asset. For example, everyone is given the same free blog account. Even so, the outcome is not equal. Someone becomes a celebrity blogger, while many others remain a blog without a reader.
However, a celebrity blogger, who belong to the top 1% of the pyramid, can be one of 99% who are mere consumers at a restaurant. No one can be the 1% in all aspects of our life. Sometimes you lead, and other times you follow.
This is not complicated. It is a simple truth arising from the fact that people differ in their passion and capability. Then we should be doing different, not same, things.
What is this called? It is called division of labor.
We (Innomove Lab) just posted "Communist Manifesto" by Karl Marx and Friedrich Engels at paragraphr.com, which is a web app being developed by Innomove Lab.
I am not a communist. To be honest, I have never read Marx properly. First of all, I did not want to ruin my family by becoming another socialist when I was in college during the time of military government. Another reason, which is more important, has to do with my reading habbit. When I read anything, I try to understand the key messages and decide to continue or stop. I tend to continue when I see something counterintuitive and non-linear. Innovator's Dilemma, one of my favorite business books, was such a kind. "Good management is exactly the reason why good companies fail." How can I resist?
When I tried reading Marx or Marxist literature, I have not seen any such thing. I felt it would be very linear. It would be "What you see is what you get" analysis of capitalist society.
By the way, I think "capitalism" is a misleading term. I think the core of free market economy (my preferred term) is freedom to innovate. To tell you what I mean, assume you are an employee at a supermarket in 1992. Having seen the Internet, you really get excited. You have a lot of happy thoughts, imaginations. Then you tell your boss, the supermarket manager, that they should make an online shop. He does not agree and declines your proposal. He says "this is good enough". What do you do?
Well, here is the critical difference. If you were in a communist society, you should just give up. It is a "community" decision that you should follow, whether it is democratic or (more likely) dictated by the elites. What if you were in a free market economy? You can leave and start up! I believe that this freedom of pursuing your own venture is the critical difference of the two systems. Everything else must be details.
You may say that I did not compare apple to apple. You are right. We need to additionally explain what the core assets of a free market economy. I think it is the idea, which you as a supermarket employee had. So, ultimately a free market economy is an economy which compensates for (successful) creativity. Unlike any other assets, including the capital, idea does not have a limit. An innovation gives a good environment for another innovation. And as long as we give indiciduals the freedom to do something at your own risk, there will be people who disagree with status quo and start a revolution. And some will always succeed. So, wait forever for the market economy to reach an end. I bet it won't come, though the society will be more equal than now (I will write more about this in Mass Niche). That's my view of the free market economy.
Back to the Communist Manifesto. Anyway, I did not have a chance to read a Marx book completely. And here we have Paragraphr, a platform to discuss a writing and a project in need of usage and feedback. So, why not put a Marx writing on it and read it there. Hopefully we get some feedback on rankrz.com, which I am realizing is quite difficult as a company outside the US, and I get to read and test commenting myself (slowly). Lastly, though I want to avoid any political or ideological discussions, my feeling is that the recent "Free" issues and so on have non-business, non-economic implications. If that is really the case, why not have two tracks: current and trendy Free and digital goods on one hand, and classical and fundamental thoughts on the other.
Would you join me reading the mind of Marx?
