Friday, February 29, 2008

Thoughts on Income

How does one make money in this world? Who is best at it? Are the wealthiest the most intelligent? The hardest workers? The most determined?

I will argue that the wealthiest people are those that serve the greatest number to the greatest extent. Intelligence, work ethic, and determination certainly contribute to this ability, but these are traits rather than an essence. In fact, in my experience many highly intelligent people choose not to make a great deal of money since this service requires a sacrifice of their time towards nurturing their intellect, which may be a greater motivational force, marginally, than increased income. Although, most, if not all, would choose greater income than less, tradeoffs exist in the allocation of time towards intellectually stimulating endeavors and thrifty endeavors.

Take the case of an individual sitting on the sidelines and observing the economy. He then decides that he too would like to enter the game and create personal income. How would he create income, or make a profit?

In the most general terms, he has to provide a product that is “better” than some current product. Better is a relative term of course. There are two general characteristics of goodness in the economic sense: cost and quality. The “better” product is that product (or service) which provides the higher quality to cost ratio. This ratio, however, is unique for each individual. For both components may be different for each individual. It may cost more to provide a product for individuals in different geographic locations. But even if we assume the cost of providing the good are equal for all individuals, each ratio will still be unique.
Measures of quality differ based on unique personal preferences. Furthermore, the distributions of subjective quality for certain goods vary.

[As an aside I have to talk about willingness to pay. Willingness to pay is equal to an assessment of quality of items. An individual’s differences in willingness to pay represent his/her preferences in goods. However, it is not correct to compare willingness to pay across individuals for purposes of comparison of subjective value. Since some possess greater wealth, their absolute willingness to pay in nominal terms may be much greater than a poorer person’s nominal willingness to pay who may in fact value the item more. Therefore, a correct representation of willingness to pay will be willingness to pay as a percentage of wealth (wtp%w). This distinction is necessary only for my discussion of different “desires” for similar goods.]

For example, take a washing machine vs. a piece of modern art. If you were able to plot a population of individuals’ assessments of the quality (wtp%w) of these two items I suspect you would find the distribution to be much tighter for a washing machine than a piece of modern art. (In fact I suspect the range for the modern art piece would be a one extreme highly positive and at the other highly negative, essentially trash.) Therefore, the value in a good varies with subjective assessment.

Ok, once we know what to make, who shall we target? Two general groups look promising: masses and niches.

Masses are the dominant force to getting rich. If a profit margin is fixed, the only way to earn more wealth is to provide your product to more people. The masses approach is the one observed in TV commercials, mass marketing schemes, and generally anything to do with mass media. In being an approach that sells to a huge number and variety of people, mass campaigns try to appeal to common characteristics. These common characteristics often appeal to generally superficial qualities. Beauty is constant theme of mass marketing. It is easy to grow frustrated with the shallowness of advertisements based purely on sex appeal. But, sex appeal is a trait common to all human beings and, therefore, it shouldn’t be surprising that marketers are relentless plug sexual themes.

In general campaigns to the masses tend to ignores individualism and focus on collectively human themes. The larger the audience the more a company can be expected to engage in this type of activity.

But there is another driver of profit: individual interests. Rather than increasing the customer base, servicers to niche groups try to increase profit margin. Certainly there exists a tradeoff between advertising to unique interests and to large numbers. There is value in providing goods for unique interests taking advantage of higher willingness’s to pay due to increased desirability. As transactions costs decrease, an increasing number of niche groups will be provided to on profitable terms. The internet is a great facilitator towards desires of niches. Therefore, the niche influence (profit margin influence) places greater emphasis on individuality and customization. Future improvements in technology can only be expected to increase the amount of unique interests provided for.
The reason I have gone through discussion is that I think many people, especially thoughtful people, are disgusted with mass commercialism and its inherent superficiality. And what’s more, if you’re an intelligent, curious person seeking to pursue your intellectual desires often you’re left with few alternatives to both satisfy your curiosities and provide income. When this marriage happens it is a beautiful thing. I often think of engineers and scientists pursuing new creations. But even a great engineering achievement does not promise commercial success without mass-desirability. The value of the creation is in many ways unique to the creator and his peers.

As a strong advocate of individualism, I am also frustrated with difficulty in monetarizing my unique desires and ideas. Career paths can seem limited since creating income can reduce or eliminate time spent on personal interests. The internet and similar technologies provide hope, however, by connecting those with weird, wacky, and unique interests. Business in the future will increasingly segregate consumers. As transactions costs fall, entrepreneurs will seek to further differentiate their product.

No comments: