I hope that by the end of the book, you'll be a more savvy consumer - and a more savvy voter too, able to see the truth behind the stories that politicians try to sell you. Everyday life is full of puzzles that many people do not even realise are puzzles,so above all, I hope that you will be able to see the fun behind these everyday secrets. So let's start on familiar territory by asking, who pays for your coffee?
Strength from scarcity
If there's a profitable deal to be done between somebody who has something unique and someone who has something which can be replaced, then the profits will go to the owner of the unique resource.
Bargaining strength comes through scarcity: settlers are scarce and meadows are not, so landlords have no bargaining power. If relative scarcity shifts from one person to another, bargaining shifts as well. As long as there is any, competition between lanlords who have not attracted any tenants will keep rents very low.
Sometimes relative scarcity and bargaining strength really do change quickly, and with profound effects on people's lives.
We often complain about symptoms - the high cost of buying a cup of coffee, or even a house. They symptoms cannot be treated successfully without understanding the patterns of scarcity which underlie them.
It's important to note here that there is no absolute value: everything is relative to that marginal land.
Two things determine the rent on prime locations like meadowland: the difference in agricultural productivity between meadows and marginal land, and the importance of the agricultural productivity itself.
At $1 a bushel, five bushels of grain is a $5 rent. At $200,000 a bushel, five bushel of grain is a $1 million land. Meadows command high rents only if the grain they help produce is also valuable.
For coffee bars and similar establishments selling snacks or newspapers, cheaper rent is no compensation for the loss of a flood of price-blind customers.
Economics is partly about modelling, about articulating basic principles and patterns that operate behind seemingly complex subjects like the rent on farms or coffee bars.
The relationship between scarcity and bargaining strength, which goes far beyond coffee or farming and ultimately explains much of the world around us. Hidden social patterns that become evident only when one focuses on the essential underlying processes.
