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Make it Fake: Artificial Economies

January 23, 2011 Leave a comment Go to comments

The essential economic condition of scarcity is the driving force of all economies. Inherent limitations in life create a conflict between desires and pleasure. You want a chocolate bar you can’t afford it or the cocoa crop failed to produce and zero chocolate bars exist. These are just two possibilities in our scarcity model. Such limitations on supply comes in multiple forms: a consequence of our extensive economic network has created a system wherein the delivery of that chocolate bar requires a massive cast of actors. One broken chain in the link and a scarcity can blossom and deny your chocolate dreams.

The fact that we cannot have everything we want whenever we want it leads to economic fluctuation. Rarely is an item completely beyond grasp: there is always a store with chocolate a few miles away or an alternative cocoa grower who can hustle out an extra batch. In such situations our desires can be supplanted but for extra effort comes an expectation of extra compensation. Low supply and high demand means high prices as the efforts and supplies needed to meet demand require extra-effort and extra-work. All remains in balance.

Scarcity is natural and normal. Items like land or other natural resources will always be limited. There is only so much Earth available for out use. Other items are seasonally scarce, for example fruit or flowers. These items exist at certain times of year but then go away for a few months. Herein we see the seeds for economic demand: human psychology tacks onto the pleasures of flowers and fruits but will not accept this issue of scarcity. “Someone has to have flowers,” we’ll say and off a set of feet will move to please our needs at whatever cost is needed. This is the market in action.

Some items are never scarce. For example software or created works of media. Modern technology provides us with the ability to cheaply reproduce a film. In cases of human creation or “intellectual property” we need to create an artificial market, a system of fake scarcity in order to maintain value. If we can get free copies or if access to copies is constant our desire won’t exist. Imagine the cost of the single remaining pencil on American shores. This single device would sky rocket in cost.

Disney is famous for its use of the “Disney Vault,” a term referring to its selective release of its films. In situations were desire wavers the close control of supply can surf the waves of desire and even create demand inside a marketplace. Keen marketeers (working for Disney) can monitor public demand and fan the flames of public interest. All of this makes incredible sense and is the only foundation of safety for companies who primarily create intellectual material.

Artificial markets are tempting to non-intellectual creators, though. Edmund Burke wrote a scathing critique on corn producers who in 1770 were distorting the market to garner high profits. Such behavior has not changed with contemporary society and has in fact expanded. Now the artificial market runs rampant in all economies of human desire and need. We see artificial markets at local gas stations or supermarkets where our needs and desires are used to garner specific responses.

The artificial market is an essential device in the contemporary economy. Though dangerous and unfair, it exists as a common force among all smart businesses functioning today. The repercussions of this behavior is dangerous on multiple fronts: what is value? How is one to understand the true value of an item when so many fake factors weigh upon its cost? What are the dangers of such subjectivity in our economy? The hazards of these behaviors are well-known and widely experienced.

A system of subjectivity in the form of artificial markets is a dangerous one. We can only expect distortion in a system so closely tied to human emotion. Though potential profits are great, the hazards of the artificial market may outweigh the benefits therein.

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  1. January 24, 2011 at 11:23 AM

    Hi

    Interesting reading. I agree that products with near zero marginal cost will have to be marketed and their supply controlled in order to create value, however, the forces of supply and demand still apply and network externalities are well understood. I think that there is nothing artificial about these markets and that the term “virtual”, which economists use, is a better description of this type of market.

    yours,
    Lukasz
    http://lukaszcx.wordpress.com/2010/10/06/reaping-network-externalities-with-open-source/

    Like

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