R.M.Alger

The Economics of Exclusiveness

13 posts in this topic

Hey, I posted this on my blog, and though it is not very refined, I thought I would post it here for discussion.

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 basic economics; 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.

-Ryan

* 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.

Share this post


Link to post
Share on other sites
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.

Very interesting essay, thanks for posting it. To a degree I think that it relates to another recent thread.

When I first developed (with some significant funding, in partnership with a small local publisher) one of my CD-ROM products, a high quality digital version of records of the American Civil War, we first offered it for $450. Sales were ok, but just ok. A would-be competitor announced a rival version - unbelievably crappy quality, but something like $150. Our sales dried up. I proposed setting a price intended to kill them, $69.95. The disc sold like wildfire and I still sell copies of it over 10 years later (virtually unprecedented). I also suggested recompense for the price difference to our original customers because I did not want to create ill will, and we did so.

The funny thing is that there a few people who felt cheated. Why? One guy said that he'd bought it out of a sense of exclusivity, essentially, and now anybody could buy it ... that made him mad.

Share this post


Link to post
Share on other sites
... they are also selling something more then quality: that being a sense of exclusiveness.

...

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?

If that's the old argument, is it the new anti-capitalist argument on this topic that producers should not want to create an impression of exclusivity, and no longer whether or not not it is a response to demand or not? That is, it is now taken as factual that Dick is expressing natural human tendencies, giving rise to the claim that we must be socially engineered to suppress or guilt the evil necessity of capitalism into a world of socially responsible entrepreneurship.

Share this post


Link to post
Share on other sites
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?

What is the fundamental difference between a "genuine admiration" and "unhealthy obsession" with the rare or unique? I disagree that exclusivity is a value here, that may be pursued "genuinely" or "obsessively". Instead I think exclusivity is a mere symptom, and not a cause, of value. What rational individuals value is success and achievement. Because success at living is not a matter of "luck" or happenstance, but rational effort, the greater successes are taken as a sign of great dedication to human virtues. That's where hero worship comes from. Such heroes are rare, but it isn't in their rarity that we find value, it's in their virtues. For proof of this, take an opposite example. Think of how few of the Islamic terrorists have been able individually to inflict the level of destruction, concrete and symbolic, that Osama bin Laden has. This is a man of rare evil, and yet we not only don't value such a man, we commit our military to eliminate him.

Thomas Sowell is calling out the universities on an attempt to reverse cause an effect, to give the appearance of higher success and achievement by inducing exclusivity. They are hoping to increase the perceived value of the education they offer, not by improving programs, hiring better professors, but by making those programs harder to get into. Because this inflated value is illusory, he advises prospective students to look at what the university is offering, not at prestige rankings. With this I have to agree.

Share this post


Link to post
Share on other sites

After mulling it over, the thought occurs to me that there are really two fundamentally different classes of values involved, for which one could claim "exclusivity", but only one seems to be fully justifiable.

Can mass producable items really be said to be "exclusive"? Only relatively speaking. An item could be more expensive either because it's actually higher quality or because those marketing the item can charge a higher price because a certain part of the market will bear it. The problem with claims of exclusivity on such mass produced items is that "marketing value" not related to actual product value are subject to reality-based competition from others who can use what are actually non-exclusive and widely available components. It could well be that only part of a product is truly innovative and unique but that part is used by marketers to leverage higher payments for otherwise standard hardware. A high quality item made with expensive parts and skilled labor and real innovation throughout has some legitimate exclusivity because only a relative few number of people have been productive enough to afford it, and that represents real virtue. To pay more for marketing hype alone is more along the lines of pretentious snob appeal, and that's something different.

The other class of values are truly unique values - they cannot be mass produced. Among these would be one-of-a-kind artworks, devices, real estate with unique characteristics, or in the spiritual realm, individual and irreplaceable human beings, some of whom have rare and wonderful attributes that really set them apart. I think that's where the concept of "exclusivity" is most validly applicable. To own a particular painting, or to have a mate who's one of those rare, irreplaceable individuals, is to truly have something exclusive by its nature.

Share this post


Link to post
Share on other sites
A high quality item made with expensive parts and skilled labor and real innovation throughout has some legitimate exclusivity because only a relative few number of people have been productive enough to afford it, and that represents real virtue. To pay more for marketing hype alone is more along the lines of pretentious snob appeal, and that's something different.

The other class of values are truly unique values - they cannot be mass produced. Among these would be one-of-a-kind artworks, devices, real estate with unique characteristics, or in the spiritual realm, individual and irreplaceable human beings, some of whom have rare and wonderful attributes that really set them apart. I think that's where the concept of "exclusivity" is most validly applicable. To own a particular painting, or to have a mate who's one of those rare, irreplaceable individuals, is to truly have something exclusive by its nature.

I've been thinking about this topic as well, on the ethical aspect, particularly about certain artworks which would be one-of-a-kind if not digitally reproduced and sold as limited editions up to an arbitrary number set by the painter or marketing section. I think it is right to make certain artworks less exclusive because it is still true that a relative few number of people have been productive enough to afford it as long as the artwork copies retain its uniqueness even after copying. Choosing the right number of editions prevents the original painting value from dropping while making a greater profit than one would by keeping the artwork an exclusive product to be sold only once.

Share this post


Link to post
Share on other sites

Good post R.M.Alger. When we buy something, we pay for the value it hols for us. Oftentime the value of the object is not only the utility itself, but also circumstantial aspects -- for instance sentimental value; another would be exclusivity. Seriously, why by a Ferrarri, since you will never get to use all that horsepower? Also, a supercharged 60s muscle car can give that sleek looking $1,000,000 Ferrarri a run for its money. So people buy it, pay that unreal price, because they derive the value of status from it, the look of amazement and admiration from other people. In concrete terms, you pay $1,000,000 to have people stare with wonderment at you.

Me personally, I'm saving up for a classic '69 Camaro (you saw it in Transformers). One day I may be challenging these fancy shmancy high-falutin' Ferrarris with it! :lol:

Share this post


Link to post
Share on other sites
I think it is right to make certain artworks less exclusive because it is still true that a relative few number of people have been productive enough to afford it as long as the artwork copies retain its uniqueness even after copying. Choosing the right number of editions prevents the original painting value from dropping while making a greater profit than one would by keeping the artwork an exclusive product to be sold only once.

Oh, I totally agree, though it still remains true that the original artwork has a particular unique distinction. But I think it would be a real shame if some great art only existed as a single copy, and as you note, the artist will likely make more (perhaps much more) by replicating his work at least to a degree. Sandra Shaw only makes 10 copies of her work (the last time I checked). I own one of her sculptures, Delight, which I probably could not have done if it were the only one, but there are still only 9 more like it. I also own the smaller reproduction of Bryan Larsen's painting Heroes, which, though there are more copies, is still pretty highly limited.

I suppose for artwork, the value can be said to potentially exist in hierarchical tiers. At the top is the irreplaceable original; next down might be high quality, limited and signed reproductions; and the "lowest" would be ok-but-not-fantastic quality that is mass produced and inexpensive. All of these represent values to potential buyers and to the artist, and they all have their legitimate place.

Share this post


Link to post
Share on other sites
I suppose for artwork, the value can be said to potentially exist in hierarchical tiers. At the top is the irreplaceable original; next down might be high quality, limited and signed reproductions; and the "lowest" would be ok-but-not-fantastic quality that is mass produced and inexpensive. All of these represent values to potential buyers and to the artist, and they all have their legitimate place.

I guess this goes to market value vs. moral value. I was approaching the subject considering the moral value of a university's educational program, and I think that was the context of Sowell's article.

Share this post


Link to post
Share on other sites

How does it follow from the fact that a university encourages applications that it primarily wants to reject more people? Why can't it just mean that they want the largest pool of good applicants they can get so as to have the best choice of who to pick as the most qualified students? Especially for a top quality school with a high rejection rate, the school has to encourage applicants to apply because even very good students can be discouraged by the reputation and not apply. And how does it follow that a school with a large rejection rate is deliberately and artificially holding back on the numbers of those who can benefit? Maintaining quality at higher volumes can be very difficult. Likewise, the number of students as such strongly affects the character of the school and what it is like to live and to learn there. Harvard and Stanford may have a reputation for many factors, but the fact is they attract very good students and one of the main characteristics of a good education for the very intelligent is the quality of the other students, who make it possible to keep the level of the courses up.

Sowell's main point was to pick a university based on what it can offer you, not what kind of reputation it has with others for factors that may not be relevant to you. He points out that there a number of good schools that aren't the best known but which may offer more to even the best students. It is important to look for the level and kind of focus in a school that you need in accordance with your own goals and abilities. The quality of the school you attend will affect the education you receive and consequently its own reputation, but the reputation of the school you attend is directly only one factor in your subsequent success, and even at that affects mostly your ability to be noticed early in your career.

Share this post


Link to post
Share on other sites
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.

I rarely if ever think liberal guys maybe smarter than objectivist types, but on this issue they've got us straight between the eyes.

If you or I want to marry a decent girl with a similar value system, she will most likely expect a serious diamond/gold combination of some sort. I think this is partly due to convention and partly to make sure you have the financial ability and are willing to commit some of it. So far so good.

The liberal guy however, tells his girlfriend "Sure I'd like to buy you an engagement ring, but they are just 'blood diamonds' so we'd be supporting virtual slavery, and gold, well it just props up right wing regimes and fund wars, so really why I don't just give $5 to amnesty international" and his dopey liberal girl gets all gooey eyed at his raging social conscience.

So where as we are several thousand dollars out, he ducks the payment altogether (an interesting metaphor for the leftie take on politics incidentally). Now whether you would want to marry a girl who is so easily convinced by such dross is of course another matter.

Share this post


Link to post
Share on other sites
How does it follow from the fact that a university encourages applications that it primarily wants to reject more people? Why can't it just mean that they want the largest pool of good applicants they can get so as to have the best choice of who to pick as the most qualified students?

This is one of the reasons why there are so many applicants to the accepted, it is also the reason my high school had three different campuses, but only one football team. NASA practices this as well.

But there are also many more reasons. Keep in mind that Universities are not just selling an education, but a reputation. Students need a reason to pay over one-hundred-thousands-dollars for an education, verses a decent education elsewhere.

High quality educations sells itself, but as good as Harvard Law is, it is not enough.

Just like currency, each Harvard law degree handed out decreases the value of every other Harvard Law degree.

If a school started accepting new students, and it subsequently became easier to get in and earn a degree, not only would this most likely decrease the quality of those who have the degree, but decrease its value in the market.

If everybody in the country was suddenly given a Harvard Law degree, and all the knowledge that came with it, a Harvard Law degree wouldn’t mean much; especially in the job market, having a degree would become like speaking English.

Part of the appeal of a Harvard Law degree, or a degree in Engineering from MIT, is that not many people can get it. That is one of the points I was making.

Especially for a top quality school with a high rejection rate, the school has to encourage applicants to apply because even very good students can be discouraged by the reputation and not apply. And how does it follow that a school with a large rejection rate is deliberately and artificially holding back on the numbers of those who can benefit? Maintaining quality at higher volumes can be very difficult.

In this instance, maintaining quality with volume is not a problem. It is like saying that a town with 50 thousand people has better groceries then a town with 300 thousand; markets, and universities, will grow with what’s needed..

Only if a University increased its student base without increasing anything else would this become a problem.

And about high quality teachers: the truth is, teachers, even at prestigious universities, are paid so little because there are so many willing to do the job. Comfortable hours, lots of vacation time, and many like working with people and teaching.

Also, the smartest (or most successful) people don’t necessarily make the best teachers. Many high end universities like to brag about the brilliant people they hire, but that doesn’t mean that these people can teach their own subject. Einstein, for instance, was known for his incredible distractedness. Noam Chomsky, who knows over ten languages, reportedly teaches a very dry class (I philosophically disagree with him.)

Sowell's main point was to pick a university based on what it can offer you, not what kind of reputation it has with others for factors that may not be relevant to you. He points out that there a number of good schools that aren't the best known but which may offer more to even the best students. It is important to look for the level and kind of focus in a school that you need in accordance with your own goals and abilities.

There seems to be a bit of confusion about this (which is entirely my fault), I was not drawing my argument from Sowell’s paper, I just took a single point from his article, and went in a different (though related) direction.

The quality of the school you attend will affect the education you receive and consequently its own reputation, but the reputation of the school you attend is directly only one factor in your subsequent success, and even at that affects mostly your ability to be noticed early in your career.

I agree.

I remember reading that people with better degrees and educations got more job interviews and positions then those who had ‘lesser’ degrees. But twenty years down the line, there is almost no correlation between financial success and the level of education.

Many companies do not hire based on education history. My uncles company, Expediters, adopts a process known as organic growth, in which everybody in the company started at the bottom, and they rarely hire for high end positions.

Share this post


Link to post
Share on other sites

On Art

There was something that I didn’t mention in the post above. One of the reasons that Art prints are kept at a minimum is to raise its appeal to the more practicle person.

Art, unlike many of the other things I mentioned, typically increases in value over the years, making it a sound investment.

Unlike gold, an original piece of artwork (or even a print) is predictably limited, there is not going to be more of them.

Many Galleries, in an attempt to sell a piece of work, will go so far as to destroy its prints so as to sell it to the investment crowd.

In the same vein, many people collect rare comic books or first edition novels for investment reasons.

So, there is a financial aspect to owning many rare and exclusive things that I did not mention above.

-Ryan

On an off note; The Thomas Kinkade galleries will produce high quality prints, have artists manipulate the work differently for each print (by adding flaws and applying paint to random parts), then have Thomas Kinkade sign the print.

This way, they can sell every piece of work as an original, with a much higher price tag.

Share this post


Link to post
Share on other sites