Your Economics Professor Was Wrong

Seth Godin has an interesting article in Fast Company this month called "The Scarcity Shortage."

"Scarcity, after all, is the cornerstone of our economy. The only way to make a profit is by trading in something that's scarce. This is why the music and movie industries are so terrified by the millions of people who download entertainment from the Internet every day. Downloading threatens to make supply virtually unlimited, and that could make their offerings about as valuable as those of some kids down my street who recently tried to run a stand selling freshly made mud.

The same thing is true for doctors, Web sites, T-shirt shops, sushi restaurants, thumbtack manufacturers, and brands of blank CD-ROM disks. There are 100 major brands of bottled water. Someone opened a fancy ice-cream parlor in Manhattan, and then there were six.

If it's remotely digital (like music), then it's easy to mimic. And if it's easy to mimic, someone wins if they can knock off the original--the sooner the better. "

Of course this topic is covered in business school, since it's the basis of the "demand curve" and the foundation of Macroeconomics. But what it doesn't take into account is technology.

Land is the classic example of scarcity: once it's gone, it's gone. But what if houses could be built five to an acre because of better water and sewer systems? Of what if farms can yield three times the crops due to better pesticides and lower fertilizer costs? What if land that was once useless could be used due to better water management, better irrigation?

Technology will always progress, allowing us to do more with less--breaking the laws of scarcity. And with the rapid adoption of technology, it's happening even faster.

So Seth's right: it's going to take smarter, more dedicated people to make real money, and the rest of the world is going to resort to operating on the razor-thin lines of zero profit due to perfect competition. What's really scarce? Wisdom. Courage. Honor. Relationships.

Comments

[John "Brand Chauvinist" Scott]

The "Scarcity Shortage" is a very real reality. (Yeah, sorry about that "real reality".)

But it only applies in some industries - and you'd better not be in those industries. Web design is a perfect example of an industry w/o shortage. Everybody and their brother is a web designer. Some web designers advertise web design for $99 - how can anybody compete?

Not withstanding the $99 web designers, companies still pay $3,000 to $30,000 or more for web design. Price is not a factor to many people - it's the brand that matters.

We see this in watches. There is no such thing as a shortage of watches. Is Timex or Rolex suffering? No. Did they need to lower their prices to compete? No matter how cheap or how many watches there are available, there are only so many Rolexes. This is the beauty of brand.

[briys]

Hi John,
Interesting comment on scarcity. I have posted something in the same vein on my blog (as
a matter of fact www.cyberlibris.com's blog. It is entitled "how old is the new economy?"
The real issue though is not so much that of scarcity: It is that of the economics of
ideas. How do you make sure that they are produced when private benefits may diverge
from social benefits? Ideas are non-rival and non excludable, that is the opposite of
scarcity. You get copyright, patent to recreate some temporary scarcity to realign
private benefits on social benefits. I am sure you know a lot about this at Microsoft!!!

[peter]

You should have taken microeconomics. All you are saying is that the
supply curve is shifting out with technology which drives the quantity
up and price down. It has nothing to do with the demand curve. The
supply curve for land cannot shift out because it is a factor/good
that is in fixed supply...unlike the plague of web designers in the
bay area.