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One Red Paper Clip
Remember Kyle MacDonald, the guy who made fourteen trades to move up from a red paper clip to a house? From The National Post, here is my piece on how he did it, what he really did, and what he is doing today. Kyle worked at these trades for a full year, so here is the opening puzzle:
Judging from the local real estate market, Kyle's house is worth about $50,000. Why didn't Kyle just go out and buy a house? Surely such a smart and able person could have spent the year working at a good job.
My favorite part of the story is when Kyle trades a day with Alice Cooper for a motorized snow globe with multi-colored lights.
Posted by Tyler Cowen on October 20, 2006 at 08:05 AM in Economics | Permalink
Comments
I first heard about this story from Tyler's post in April. It's a very interesting example of economic actors behving irrationally.
Thought this might be of interest to some. Check out Google Trends:
http://www.google.com/trends?q=red+paper+clip%2C+Kyle+Macdonald&ctab=0&geo=all&date=2006
Notice the peaks right after Tyler's first post, then in July, when the house was primisded to Kyle Macdonald. I really wish that Google trends had some way of calibrating the trends, i.e. so that one could get a sense of the real, not just relative, volume of searches.
Posted by: niall at Oct 20, 2006 10:32:49 AM
I also noted an apparent blatantly opportunistic breach of contract in the chain: Kyle received 1 year of free rent in half of a duplex, which he claims to have turned around and re-rented to the existing tenant in the other half for his next item.
Surely the landlord disapproved of this cannibalization of an actual tenant, which deprived him/her of an otherwise guaranteed revenue stream. The landlord thought he/she was giving up the UNRENTED half of the duplex, and Kyle apparently seized the opportunity to poach the landlord's tenant of the RENTED half. If I were the landlord, I'd have reversed that trade right then -- there is a huge difference in, and in giving up the income from a stable tenant (and still having the other half unrented) after the trade.
Posted by: ModalHubby at Oct 20, 2006 12:25:48 PM
Considering he clearly had a great deal of fun doing it and is now writing a book, is he really irrational? I'd argue he must of had some idea of these additional benefits beyond the real estate because he had no idea where the eventual house would have been located like, God forbid, Yahk.
Posted by: David Youngberg at Oct 20, 2006 12:29:24 PM
How does IRS look at this barter? Will Kyle have to pay income taxes on the value of the house ($50K) he's gained as a result?
Posted by: Andrei at Oct 20, 2006 4:30:25 PM
Read the article Andrei.
Posted by: Shaun M. at Oct 20, 2006 5:31:34 PM
Well, following Shaun's advice I've read Tyler's article again and still couldn't answer the tax question. However having googled the words barter and IRS I got this link - http://www.irs.gov/taxtopics/tc420.html . My understanding of this IRS regulation is that Kyle might owe IRS taxes on the cumulative value of ALL 14 of his barters, which may be in the vicinity of $100K or so. Any opinions on this?
Posted by: Andrei at Oct 20, 2006 8:13:11 PM
The story vividly illustrates how value is in the eyes of the beholder, not the "objective" labor content of the object itself.
Posted by: Marcus at Oct 20, 2006 8:16:26 PM
A new couple who fell in love at the first sight may even put both of their names on the crystal ball. However, after everything cools down, the crystal ball with the names on it may be the most difficult ball for sale. A crsytal ball with no names, even if it has been kissed millions of times, is still easier for sale for its generality.Its value may not suffer from the hygience effects raised by the multiple users.
I am not quite sure whether the analogy is exactly the same. The magic, as created by Kyle is to find another couple with the same name, but fell in love at the first sight a little bit later, which make them believe that it is the destiny decided by god for them to fall in love.
Posted by: bachelor.no1 at Oct 21, 2006 4:23:23 AM
Among 15 traders, only Kyle is dilligent enough to discover the price. Another 14 traders look fully trust the guy, and sell their souls.
However,if anyone could be more active enough, sell it online at ebay, or have enough patience to delve out the final value, the thing may be different.
The power to defend the value lies in everyone's hand. Whether you exercise it or not will make big difference. After all, for this type of one to one trade, not everyone is on the same boat.
Posted by: rabbit at Oct 21, 2006 5:22:43 AM
I do think the legend start from the fish pen, but not the red clip
Posted by: rabbi at Oct 21, 2006 5:33:26 AM
This is for charity. So if for personal reasons, a said by moralhubby, everything should be reversed, and the trading process is totally efficient.
What is a better one? One shot trading: the clip for th e house. Of course, it would never happen.
Posted by: fakehubby at Oct 21, 2006 5:37:52 AM
The rationality of Kyle to trade is to take the risk that no other trader would like to take before Kyle finds the next trader. It is the existence of the big gap between the first and second transaction that serves as the motivations for the Kyle to take risk of the price's volatility, although in this case, its number equivalent cannot be labeled.
As to what Kyle has done, he is a producer of value, not just a middle man. Without him, some transaction could never happen. That is perhaps why everyone look so happy.
Posted by: sally at Oct 21, 2006 6:27:15 AM
There's a marketing meme there which Grant McCracken, Seth Godin, Roy H. Williams and others have been writing about. The guy was selling an adventure story, and *a chance to have a public role* in it at some but not great cost (players traded in what they had that was disposable). It's a brilliant model, becoming less brilliant as it replicates.
Posted by: dilys at Oct 22, 2006 6:59:42 PM
I've read that the last few trades were contrived. The counterparties engaged in artificiial trades that didn't reflect true value because they saw the marketing opportunity.
Posted by: Timothy Can at Oct 24, 2006 2:52:31 AM
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