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Thursday, December 2, 2010
OK. So Michael Jordan bought a house and, all in, it's going to come to around $20 million. This has gotten a lot of commenters' knickers all in a snit. And the economics of it all is coming out. How could someone who played a game afford that kind of house when average Americans who worked "real" jobs all their lives blah! blah! blah!... The same arguments that come out over and over and that are dealt with in econ 101 - at least they should have been dealt with.
First off, I will admit that I find it hard to understand how someone wants a house with 11 bedrooms, a two story guard house etc. My house has 4 bedrooms and I'm trying to figure out how to downsize. But all of this is besides the point. If he wanted a $20 million purple dog house - hey, it's his money.
Secondly, just for the record, I've never heard of any of the commenters. The world has heard of Michael Jordan. He has entertained millions. That has something, obviously, a bit to do with the economics. When you have a skill that will fill an arena with people willing to pay top dollar, it is rare. Michael Jordans or Lady Gagas don't come along every day. And this gets us into the economics.
Economists worried about this fairness issue early on. They framed it in terms of what they called the diamond-water paradox. How could something like water, which is necessary for life, have a price of zero when a luxury item - total unnecessary- such as a diamond carries a high price. Through this paradox, they came to understand that value in use is not necessarily the same as value in exchange. School teachers, fire fighters, police officers, the military, hospital workers - the most valuable members of society - don't command as much in the work place as entertainers, money managers, etc. Value in exchange is determined by what economists call marginal utility and marginal cost (works out to demand and supply). A flawless diamond is very rare and is very difficult for mother nature to produce and, hence, carries great value in exchange. A glass of water has zero marginal utility (unless you are in the desert) because you've already had a lot of water.
This is important because many people, like the commenters, go a step further and proclaim that the free market system is unfair, etc. They haven't thought it through, but the implication is that they have a better way to set prices - they know what is "fair."
Let's hope it never gets to that point. Better: I would suggest the commenters work on taking off from the foul line and dunking the basketball. Then I'll pay the big bucks to see them. I have to admit, I don't understand the Lady Gaga thing - I just threw that in for effect.