THIS ARTICLE, LIKE MANY MASTERPIECES, WILL REMAIN UNFINISHED, THOUGH VERY FUNNY. (OR PERHAPS IT WAS OLD RUINS THAT LOOK UNFINISHED BUT ARE REALLY OVER THE HILL. NO MATTER, ENJOY.

 

I have been finishing the eBay series as other projects allow. They haven't allowed much recently. (The book mentioned in the header has kept me plenty busy.) Since people have been requesting this article, I want to give you a taste of the final product. I have Bachelor's and Master's Degrees in Economics and worked on a doctorate in the subject at Stanford's Graduate School of Business.

At last I get to talk about the dismal science in a lighthearted way....

eBay has given me the opportunity to talk about something dear to the hearts of all economists: Auctions. Why do economists love auctions? Because auctions are THE PERFECT MARKET! PERFECT! PERFECT! PERFECT! You'll know why soon enough.

First, why an article about economics? Because economics is wonderful.

If you've taken economics in school, you may say, "What is she talking about? I took two courses. It made me sick."

Yes, that's the beauty of economics. I earned two degrees and part of a third in it. I almost got an ulcer! Plus, I was angry for about ten years. Economics will do that. Nevertheless, I feel that every educated human being should take economics. I tell my kids that: "You have to take economics."

"How much do we have to take?" They shudder, looking sick without even signing up for a course.

"About 357 units, like I did."

Why should anyone study that much economics? Because if you do not understand economics, people who understand it even less than you will implement it for you. And me. And the rest of us. You know who I'm talking about? Politicians. Politicians do economics in our society, and they do it badly. That's right. I'm talking politics. This is an election year; such talk is appropriate. However, this is not partisan political talk. I come down equally hard on both sides. (Though I will say that I get nauseous contemplating how hard my great grandchildren will have to work to pay off the current Federal DEFICIT. Has anyone noticed that little puppy this election year? Huh?)

The economy and political system are interrelated, just as a car and its gas pedal are interrelated.

The science of economics has been around for a long time. Ever since Adam Smith (The real one, not the modern pop-finance writer) said something like, "Whenever two businessmen get together, it's to the detriment of the common man." He made that statement around 1600; you can see how much we've evolved. Ever since Adam Smith, your professional economists have worked tirelessly to understand and even tame things such as cyclical fluctuations, interest rates, oligopoly, and monopoly, as well as generally making the world a better place.

Economists learned a great deal from such disasters as the Great Depression, when a very cool dude named John Maynard Keynes came up with a new theory. Lord Keynes (He was an English nobleman) said things like: "The economy is like an elevator. It doesn't have to go to the top. It can get stuck in the basement, like now." Keynes also said, "In the long run, gentlemen, we are all dead." That's because all the other economists thought things would work out in the "long run." Right.

We've learned a lot about running the economy since then, which you can tell by the fact that we've avoided another Great Depression. Barely.

 

Okay, in the complete article, I go on like that for a while, and then get to real gems. I also teach you simple economic terms so you can impress your friends at parties:

WHY IS eBay WONDERFUL? BECAUSE AUCTIONS ARE PERFECT MARKETS!

In an auction, the buyer with the greatest utility for an object gets it at a price approximating the seller's cost. Wow! Economists get really excited whenever prices approximate costs. I will now teach you microeconomics. Also known as "price theory." Just the part that you need to know. It will be fun. You'll see.

What do these words mean? Greatest (or highest) utility means you, the winning bidder, wanted the doodad more than the other bidders. The "I wannit" factor of the winning bidder is the highest, evidenced by the fact that he or she was willing to pay most. Utility , the basis of economic value, means: "This object does something for me." It has some intrinsic value that makes me willing to part with my goods, my hard-earned money, my sheep and goats, to have it. How much utility is measured by what you'll pay to have the object.

Objects have different levels of utility. For instance, air has a very high utility. Take it away from someone, and very soon they'll give you everything they've got for some back. This indicates air's very high utility. Utility schedules––lists of how much you like the stuff you like––vary from person to person. Everyone has some items in common––air and food. A place to sleep. Basic human needs.

But after that, personal preferences vary like crazy. Some people would never buy a painting, but would spend their entire disposable income for a low rider––one of those cars that ride 2" off the ground and can bounce up and down at the driver's command. The painting purchaser and low rider lover have different value systems. Economists are not supposed to compare personal value systems, but they do all the time. Like all of us. If you had two Super Bowl tickets and had to give them away-- who would you give them to? We all know. The friends who like football the most. That's an interpersonal utility comparison.

So, the auction assures that the person with the greatest utility, the highest preference, for an object gets it. Assuming they have effective demand.

EFFECTIVE DEMAND? What's that?

A very important concept, which I will illustrate. Visualize a typical Ferrari showroom on a Saturday afternoon-- 50 or 60 people milling about, drooling, caressing the vehicles' satiny finishes, demonstrating very high utility preferences for Ferraris. Do they represent effective demand?

NO WAY! Effective demand means that, in addition to lusting for a Ferrari, you can actually pay for one. That drops the potential demand in the showroom to 3 Ferraris, two purchased by 26 year old venture capitalists and the last by an e-business proprietor. (She's 18.) This is reality, folks. Money talks, and ineffective demand just hangs around drooling.

Auctions pair the buyer with the greatest utility and effective demand with objects at the lowest prices sellers will take for them, which is at or close to their cost. Why is cost equal to price? Because that's the least the seller can take for the item and stay in business. The Reserve or the starting bid in an auction without a reserve is what the seller has to get to cover his costs. The seller won't part with his item below his cost. Or he won't do it for very long. Do that and it's, "Sayonara, baby."

Isn't that a nice discipline? A price equal to cost. It doesn't often work out that way. What Adam Smith said in the 1600's is true: Any time two businessmen talk, it's not about how to improve the welfare of humanity. (The social welfare function.) It's about how to make more money. Which typically involves jacking up prices and/or reducing quantities. This is not evil. This is how people work, economically speaking. All of us. No good guys and bad guys. We all seek our own economic self interest, some more blatantly than others. You can put a fancy coating on the human desire for stuff, but all it is is frosting on a pig.

The collapse of Communism demonstrated that.

Later writings will cover:

DEMAND AND SUPPLY FUNCTIONS

PURE COMPETITION AND THE SOCIAL WELFARE FUNCTION

THE CREATION OF VALUE: THE BASIS OF WEALTH

MONOPOLISTIC COMPETITION AND WORSE

MARKETING: WHAT ALL THIS MEANS TO YOU, O eBayer!

THAT'S IT: WHAT I'VE GOT NOW. I THINK YOU CAN SEE WHY IT'S TAKEN SO LONG TO GET THIS FAR. HAPPY BIDDING, HAPPY VOTING. CHECK OUT THE FIRST BUYING ARTICLE IN THE INDEX IF YOU WANT TO WIN ON eBay.

Best wishes,