22 July 2016

If you really want a high end electric car, and you have the money, then you can buy a Tesla. You’ll end up paying through the nose though. It is super expensive, and that is not just because it takes a lot of work and resources to make. It is expensive, because Tesla wants the profit, in order to reinvest it into energy projects.

No way you can get a similar car cheaper. Unique products like Tesla cars have no alternatives, so the people who really want their functionality will end up paying up, even if the price is much higher than the fair price.

Rice and potatoes are commodities, because they are easy to find everywhere for about the same price. If I am trying to sell you rice for a hundred dollars per kilo, you will not buy it. I cannot make much profit from any commodity, unless I sell a lot of it.

Tourist attractions and museum tickets are not commodities as each attraction is unique by definition. Some people really care about that specific attraction, so the owners increase the seller profit as much as possible. It traps the stupid tourists the way a sticky band traps flies in the summer. Attracted by the shine, the tourists get stuck there and part with a sliver of their wealth and their spine. When the time comes to make a big decision, their softness makes them vulnerable to the hardened tourist trappers.

Tourist traps are almost always wealth traps, rice and beans are almost never wealth traps, and Tesla cars are often wealth traps. When we fall for wealth traps, total cost of our decisions can be as much as the useful need because we give a lot of profit to the seller. Or even more! When the two sides are equal, we are just spinning our wheels to build wealth for the trappers.

Why the fuck do we ever do that? Are we that stupid? No. We aren’t that stupid, but we see things the wrong way and make errors. We are happy to fall for wealth traps and oblivious to the exploitation, because we are perceiving our need as very high, and think that paying up will fix it. We don’t immediately realize that the money we are spending were worth our hard working time. Yes, we aren’t that stupid, we know that we can spend time and work to get money. But we don’t fully get that it is a two way street and that we can spend money back to get time. Instead we spend our money on bullshit.

Ugh, this sounds horrible. Are such trappy products and experiences bad for society as a whole? Not necessarily. They just shuffle wealth around but do not immediately destroy it. A tourist trapper might be better at managing money than the trapped tourist. Tesla invests in research which could potentially pay off a lot. Sometimes the useful need for the buyer is even higher than the price. If a very productive and highly paid person buys a Tesla, the time and energy saved when the car runs on autopilot might be worth more than the cost of the car. It is a win-win, but it might be more like win-WIN. Free-markets encourages producers to seek advancements in technology in order to get an edge on other sellers and get more profit.

All-right, this doesn’t sound so horrible any more. Individual persons can lose a bunch of their wealth in order to improve overall society well-being and the entrepreneurs who invent new awesome products and gather up seller profit. Yet, the small person still seems fucked. Rich get richer as they get equity in the new enterprises, and consumers are constantly getting fleeced from any wealth they accumulate. Seems like a vicious cycle which promotes wealth inequality and slow rise of the standard of living for the poor. Capitalism, yo.

Can the small guy escape? Yes. Is it easy? I don’t think so. But it is probably not too complicated. To better dissect the topic I’m actually going to go back and revise my wealth equation. I’ve been talking about useful need, but really, what I’ve been meaning is productivity. And the productivity can be split as need plus convenience. Needs are hard and non-negotiable. Shelter and food. Clothes and water and health. Conveniences are things we prefer to have, but will survive without them just fine. Lets look back at the revised wealth equation:

wealth increase =
  + need
  + convenience
  - natural resources fair prices
  - total seller profit
  - hidden environment cost

When we are in a tight situation, against the wall, and we’ve made commitments, we increase our need becomes higher. This comes at the cost of convenience by the same amount. Smart sellers know that we cannot back out of our commitments and our need has increased and can ask for the higher price, knowing that we will pay. If another seller tries to compete with them and offer a cheaper, less convenient product, that product would not satisfy the new need.

The way out for the poor guy is to gradually gather up wealth, which means to make decisions, to buy products and experiences, to engage in activities which increase wealth. If we are in the position of the poor guy, there are multiple viable ways to do escape. We can work or be entrepreneurial, which directly adds to our wealth. We can purchase commodities, where a seller cannot increase the price, so we satisfy our needs without parting away with wealth. And we can sacrifice some convenience, when it comes too expensive, in order to get the better deal, the one which adds to our wealth.

The first two are pretty obvious. Earn more and spend less. But the convenience trick sounds counterintuitive. Inconvenience invokes the image of austerity measures. When I was growing up, I often heard the phrase “the economizing is the mother of the misery”. Scary… Do we need to live in misery and in order to save up? No. We should feel free to spend a reasonable price for shelter, decent food, warmth and health care. And we should get convenience when we can get it cheaply.

Convenience is almost always overrated. Inconvenience sounds like a loss of time and effort, and we are very loss averse, so we try to avoid it. But the truth is that once we’ve experienced the inconvenience, our mind starts thinking about how to overcome it. While there is the obvious way - pay up to the trapper - there are alternative creative solutions as well. The more we need to deal with the inconvenience, the more economies of scale kick in and we become more efficient. Which makes the inconvenience lower. We also adjust our baseline perception of convenience through hedonic adaptation. More power to us, as we get to save more of our wealth.

We have a choice. Whether to get expensive convenience now, or wealth later. We will always pick at least some convenience in the present tense.

Internet is an example of something that is very convenient and cheap. It is cheap because it is a commodity at a price similar to the fair price to build the infrastructure for it. And it can provide a lot of free information, services and connections. A cheap convenience like the Internet makes the society more wealthy and prosperous. Other cheap conveniences are bicycles, home cooked meals and to some degree - airplane transportation.

My current opinion is that learning to recognize the cheap conveniences will make us wealthy and won’t hurt the economy and prosperity of the society.

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I write these posts to clarify my thoughts and improve my communication. They are mainly written for myself, and my future self, but I'd love to hear any comments you might have, especially if you disagree with what I've written, or if you've found it valuable in any way. Message me on Twitter @themitak or email me at comments@dimitarsimeonov.com.