Economic Lessons from the Pawn Shop
I enjoy watching TV shows like Pawn Stars and American Restoration, in part because I have an interest in history and antiques. There's something appealing about these cultural artifacts; they're rich in character, and every piece has a story. The other thing I appreciate about these History Channel shows is how each episode demonstrates a number of economic principles. Subjective-value theory, time preference, comparative advantage, and mutually beneficial exchange are all there.
Pawn Stars follows the daily operations of a Las Vegas pawnshop. Each episode features people bringing in historical items they wish to sell, and the subsequent negotiations between them and the store owners. During the haggling we learn the history of the item and what factors affect its value. Of course, each hopes to maximize their profits, and will only agree on a price if he believes it to be in his interest. Rick Harrison, one of the owners, must be careful to buy only the items he can sell at profit, taking care to avoid counterfeit items or something that will sit in the store for too long.
Each trade centers on one question: How much? The answer can be found at the intersection of the subjective value placed on the item by each party. This price then becomes the objective value of the item. Carl Menger developed a theory, explained here, wherein individuals assign value to something according to their preferences. This is easily observed when a buyer and seller negotiate a price. Harrison knows he can profit only by acquiring an item for a fraction of its appraised value. So for him, a particular item is only valuable if he can keep its price below this margin. Eventually he and the seller will come to an agreement. In most cases the seller could command a higher price elsewhere, but to do so would require more effort and time. Most sellers see a greater value in short-term profits than in larger future gains.
This willingness to accept less for an item than one could get at auction illustrates a high time preference. Occasionally a seller will decide to hold onto his item, hoping to find a buyer willing to pay more; this person has a low(er) time preference. These different preferences help to ensure that the capital structure is properly aligned. Though time preference is perhaps not as important in the case of classic cars or antique firearms, living standards can be raised when a low time preference is applied to savings. When those with lower preferences forgo their current consumption, the savings allows others to invest, thereby increasing productive capacity.
In American Restoration, Rick Dale and his crew restore classic pieces of Americana including vending machines, toys, and old cars. Often, collectors bring their own items for Dale to repair, knowing his reputation for quality work. Customers spend anywhere from several hundred to several thousand dollars to have antiques returned to their original luster. Additionally, Dale acquires items from pickers (people who earn a living buying and selling unrestored antiques), then repairs the goods and sells them to other collectors.
Dale's shop performs nearly all of the work, but he occasionally requires the expertise of another company. Here, the principle of comparative advantage can be seen. Though Dale could do all of the work, at times it's more efficient to subcontract some of the restoration. In one episode he was under a strict time limit from one customer, and in order to ensure that all of his clients were pleased, he hired a neighbor to do specialized work. Comparative advantage is a crucial part of the production process. When individuals and firms are able to produce particular goods more efficiently than others, and trade the surpluses, wealth is created.
Owners of antiques are sometimes reluctant to part with their money in the beginning, but upon seeing the completed work, they find increased satisfaction in their property. This is yet another enjoyable aspect of the show: Dale's primary focus is on creating a product that brings joy to its owner. Many of his clients bring childhood toys that are well worn, and the look on their faces when the toys are made to look new again is wonderful to see. Aside from the nostalgic value, another benefit of the work is that the items could fetch even higher prices if their owners decided to sell. So in a very real sense, wealth is generated in each exchange.
Both shows constantly focus on the concept of mutually beneficial exchange. Quite often, sellers on Pawn Stars walk away with as much or more than they hoped for. At times we see people accepting less, but they only do so willingly, showing they have gained something nevertheless. If neither party feels they are benefiting, the trade is off, and both leave peacefully. The same benefits of voluntary trade can be seen on American Restoration; no one is coerced, and no trade takes place where one feels he is being taken advantage of.
There are many great shows like these that feature the same basic economic principles. They entertain us, for sure, but they also demonstrate the benefits of trade, how prices are determined, and many other concepts that I am sure to have missed. When you examine the programs and see the concepts playing out in real time, you find that economics is more than a patchwork of disjointed theories. Each concept is neatly interwoven into ordinary life, as if to spontaneously regulate human activity in such a way as to maximize economic prosperity.