Thursday, March 02, 2006

Indifference and Fixed Resources

A friend of mine recently sought some advice from me on seeking employment. He had been out of work for a while, and desperation was running high. When I asked him what he wanted to do, he replied that he would do anything.

I called my friend, George P. Burdell, a man known for knowing specifically what to do, and related my friend's situation and generic disposition. After thinking for a while, George responded, "If your friend will do anything, he won't do nothing." We Southerners often resort to double negatives to emphasize the point.

I think we've all heard repeatedly that we have to differentiate our services and our selves in order to be successful in business. This probably couldn't be more true than in professional services. However, have you ever really wondered why this might be true other than a matter of distinction? I found an interesting explanation this week in one of the books I'm currently reading: Armchair Economist: Economics And Everyday Experience by Steven Landsburg.

In Chapter 4, Landsburg discusses the Indifference Principle and Fixed Resources. To understand how the indifference principle works imagine a hypothetical restaurant staffed by hypothetical busboys and janitors. The distribution of busboys to janitors is determined in part by each person's preference for combination of pay wages, schedule, level of effort, etc. The distribution would remain more or less fixed for a given set of parameters at the point at which people are indifferent to the parameters. However, if people start tipping busboys, busboys' wages increase, and janitors start wanting to become busboys because the wage parameter that contributed to making them indifferent to another line of work has shifted.

The result of the Indifference Principle is that "...when one activity is preferred to another, people switch to it until it stops being preferred (or until everyone has switched...). Second is its corollary: Only fixed resources generate economic gains. In the absence of fixed resources, the Indifference Principle guarantees that all gains are competed away."

Prior to this, Landsburg pointed out that "...Only the owner of a resource in fixed supply can avoid the consequences of the Indifference Principle. An increased demand for actors cannot benefit actors because new actors are drawn to the field. But an increased demand for Clint Eastwood can benefit Clint Eastwood because Clint Eastwood is a fixed resource: there is only one of him."

In other words, differentiation is what makes us a fixed resource as opposed to competing for diminishing marginal gains. Being a fixed resource makes us appreciably different. A lot of things will make us stand out, but being a fixed resource makes us valuable.

Does that strike you as obvious, or is that a slightly different way of thinking about why differentiation is so important?

I think the question, then, for myself is: "how do I do this?" How do I become a fixed resource? In some ways, it is the nature of of the service I provide that accomplishes some of that, but I'm sure there are many more intangible qualities as well.

What do you think makes you a fixed resource?

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