“Saving
Economics from the Economists” is the thought provoking title of a recently
published article in the Harvard Business Review (Dec. 2012), written by the
1991 Nobel Prize winner in Economics, Ronald Coase – now an impressive 101
years old. Coase remarks that Economics as currently presented in textbooks and
taught in the classroom does not have much to do with business management and
still less with entrepreneurship, which is at the heart of a market economy.
The degree to which economics is isolated from the ordinary business of life is
extraordinary and unfortunate. Coase points out that this was not always the
case as the father of modern economics, Adam Smith, envisioned it as the study
of the nature and causes of the wealth of nations, with his seminal work, “The
Wealth of Nations”, which every Economics 101 student will know about, widely
read by businessmen at the time. Coase calls for a reengagement of the study of
economics with the economy and to re-orientate this field of study to the study
of man as he is and the economic system as it actually exists. The blockbuster
titles “Freakonomics” and equally successful sequel “Super Freakonomics” by
Levitt and Dubner, therefore came as a breath of fresh air for those thirsting
after applied economics, as they set out to explain wacky real life questions
such as why drug dealers live with their mothers, how your name can affect how
well you do in life and what estate agents have in common with the Ku Klux
Klan. I am always interested when estate agents are used as a group to study
and the revelations provided by Levitt and Dubner explain why as a seller it is
so important to have your estate agent’s goals aligned with your own. The best
way I know how to achieve this is through the use of a sole mandate.
The
emergence of capitalism in its hybrid forms as a means of organizing labour,
capital, information and innovation in China, India, Africa and South America
provides economists with unprecedented opportunities to study how a market
economy gains its resilience in societies with such diversities. The recent
BRICS (Brazil, Russia, India, China and South Africa) annual conference held in
Durban and hosted in Zimbali for part of its duration, brought to the Dolphin
Coast the reality of the importance these newly developed economies exert on a
global platform. South Africa has seen its proportion of gold production to
world output plummet but remains a key producer of platinum (together with
Russia). South Africa also remains a strategic gateway for doing business in
large parts of Africa, and with Africa now being the fastest growing continent
as measured by GDP growth according to the Economist magazine, this provides
opportunities for us. As Africa becomes wealthier, we can expect more and more
African nationals to invest in residential property within South Africa. We
have already witnessed this with the proportion of foreign African investors
now making up 20% of all foreign residential property purchases. I would expect
this figure to double over the next five years. Did you know that the single
biggest investment to date in a residential property along the Dolphin Coast
was made by a Zimbabwean national? My estimate is R200m for the land and
existing buildings (confirmed) and R200m (conservatively but unconfirmed) for
capital improvements to date. I would challenge anybody in South Africa to show
me another single residential home with a cost value (not asking price) of
R400m.
The
protection of property ownership rights and the information communicated by
prices are fundamental to the operation of the market for real estate in an
economy. The pricing of any good or service is an interesting concept as at
most price levels there will be some people who see greater value offered than
the asking price, and who would tend to buy the good or service while others
will see the price as higher than the value provided, and therefore typically
elect not to buy the good or service. An outstanding book by William
Poundstone, called “Priceless. The myth of fair value”, interrogates this
hidden psychology of value. He comes to the conclusion that prices are a
collective hallucination and that what matters is not the absolute price of
anything but only the relative price. This field of study is called behavioural
decision theory and draws on our knowledge of psychology and economics to
explain how pricing of anything directly affects the value we associate with
it. Poundstone explains the idea of “anchoring” the value we ascribe to a
product where it is priced at a certain level and then discounted repeatedly to
create a sense of relative value as we psychologically create a benchmark in
our minds using the original asking price. In a property market the asking
prices of other similar properties provide an opportunity for “anchoring” or
creating this benchmark. Over-priced properties make other similar properties
seem like excellent value and therefore help estate agents to actually sell the
other property. Properties that have been significantly discounted relative to
their original asking price also create a sense of value at the revised
pricing, which often results in a sale.
(Author: Andreas Wassenaar, published in The Ballito Mag, June 2013)
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