MADE

Economics is the study of the allocation of scarce resources with alternative uses. It sounds like esoteric mumbo jumbo. But all it means is that the world has stuff we want and that we can’t all have that stuff and the market decides how it all gets divvied out.

It’s one of the more important ideas in human society because it affects everything in life, from the time we’re born to the day we die—even in societies where money doesn’t exist—like hunter-gatherer ones. People in all societies have to decide who gets what and at what cost, whether it’s in gold, seashells, land or blood.

Prices reflect the value of things. A price doesn’t have to be monetary. A price is simply a psychological agreement point on an economic exchange. The dating world is one area where colorful economic calculations go on all the time, but most people just don’t realize it.

Every man wants a beautiful girl. But every guy eventually realizes that you can’t be a loser and get a beautiful girl. You have to invest in yourself. You need to keep yourself in good physical condition and have a good occupation, or at least seem ambitious enough that you’ll be somebody some day. And if you’re ugly, but you’re rich, you could still get the beautiful girl. A beautiful woman knows she can trade her beauty for the best of these things. Beautiful women are expensive because there are more men who want beautiful women than there are beautiful women. Of course, there are other factors that come into play in the mating game, but that’s the fundamental calculation.

The concept of price even exists in other species. Female chimpanzees, for example, are known to trade sex for food. Apparently male chimps think a quick casual sexual encounter is worth giving up a hard-won piece of meat for. It’s no different than some guy in a seedy motel negotiating a price with a hooker.

The price of anything depends on its absolute supply and the demand there is for it. Take a look at the graphs below.

The top one represents how prices functioned in 20th century economies. Where the supply and demand lines meet on each of those graphs is where you have a price. The bottom one reflects 21st century digitally-based economies. 20th century economies were based largely around the production of scarce resources. Demand for those resources was therefore relatively high. People are willing to pay for most things in that type of economy precisely because they’re scarce. But look at where the supply and demand lines meet on the 21st century graph. It’s at a much lower point on the graph. That’s because abundance is the norm in digital economies.

In many industries affected by digital economics, the price of things, especially software, trend to zero. The music industry is one area that’s been rocked by this phenomenon. Although not every aspect of it. Mostly the music itself.

FREE is sometimes a controversial word . But it depends on what side of the economic exchange you’re on. If you’re a creator of music or a record label, it’s probably not a word you want to hear too often. But free is just a symptom of technology. The owners of bit torrent sites that provide free media to the public aren’t necessarily out to kill the music industry. Some may be bent on world domination, but I’m sure the vast majority of them are just taking advantage of rapid advances in technology that allow them to create these portals to make money indirectly. The music industry is never going to disappear.

It’s still very healthy, but what’s happening is that the scarcity points where prices are possible are shifting to different parts of the industry or outside the industry altogether.

Beach front property is expensive because there are far more people who want a house on the beach than there are houses on the beach. But imagine if somebody invented a virtual reality machine that could neurologically reproduce the exact same experience as spending a week or two at the beach house. Demand for real beach front property would plummet and so would beach front property prices. But the inventor of the virtual reality machine would be raking in cash as people started buying up his gadget. So people would still pay for the experience, but to manufacturers of beach front virtual reality machines instead of beach front property owners.

The bit torrent sites and all the new technologies that surround the easy production, duplication and distribution of music in the digital age are the equivalent of the virtual reality machine in that they’ve shifted the value points of the industry from the music itself to other areas like iPods and concerts.

Apple raked in billions through its iPod and iTunes at the expense of the labels. But you can’t call Apple unfair for doing that. They were just smart. They saw the economic trends and figured out what the future was going to look like.

The secret to making money in any industry is to figure out where the scarcity is. And for something to be scarce, it has to be hard to do. So that means that the people who make money are going to be the savviest, most persistent and hardest workers.