It is funny how there are so many articles purporting to explain the economics of a Birkin handbag, without actually explaining it. Here it is, I will actually and finally explain the economics of a Birkin handbag.

It is all about convincing the buyer to consider a consumer good to be an investment. People treat consumer goods and investments very differently mentally and rightfully so. A consumer good is something you use for you own enjoyment or necessity. An investment is something that is supposed to pay you back more in the future. You do not get to use or enjoy the stocks and treasuries in your investment account. But you do hope that they will bring you more money in the future.

So what if consumer good can also be an investment? It seems like a great deal. First of all you get to enjoy it. If you are woman (or a man that likes to wear handbags, I guess) you can walk around with your Birkin bag and show it off while it appreciates.

Stocks and bonds are the often recommended investments, but you need a large and complex political system to ensure your stocks and bonds are worth the money. They are after all just pieces of paper (and nowadays you usually do not even get to hold the paper yourself), but to get these pieces of paper to convert to ownership rights of large enterprises you need, as I said a large and complex political and legal system.

A Birkin bag on the other hand, is something you can keep close to you. In your closet.

So the sales potential of something that is both a consumer good and an investment is great. Hermes saw this potential and decided to make the Birkin that thing.

If the Birkin can be sold for more in the secondary market than what it sells for in store, it becomes an investment all of a sudden. And then you get all kinds of new demand. So Hermes made that happen by good marketing and (probably) by buying out Birkins in the secondary market.

But that is also a very unstable situation. If you can just buy a Birkin in a store and then turn around and sell it immediately for a profit, everyone would do that and the secondary market price would collapse. And that is where the exclusivity comes in. The plan for Hermes is that they would only sell Birkins to rich people that do not need to resell their bags in the secondary market even if there is a profit. Thus, the ideal client is a woman that feels good that her Birkin investment is appreciating in value but has absolutely no desire to sell it because she does not need the money and she loves her bag. She just likes to consider how much money she is making in her mental profit and loss statement by keeping her bag, while continuing to wear and use it.

So that is why sales of new Birkins are so restricted and are based on a personal relationship between a salesperson and a client. The salesperson judges the client on whether they are the type of client that will turn around and flip the bag. And meanwhile the company, Hermes, judges the salesperson on whether they can keep their clients in check.

Of course some bags get flipped, and that is necessary to keep a resale market going, and thus to keep up the evidence of higher resale values. But it is important to keep the flips to a very small number.

It is a very clever system, but it was not invented by Hermes. It has been tried before with art, fine wine and ferraris. And for those of you that might think that the Birkin madness is somehow related to women's lack of financial sense, keep in mind that Ferrari was doing the same thing with limited addition Ferraris marketed mostly to men long before Hermes hit upon their Birkin scam.

The problem, from the point of view of the consumer, is that it is a very unstable system. It seems great and safe to have your investment in your closet, but keep in mind that the value of that investment is being kept alive by Hermes doing hard work and spending a lot of money to keep up the secondary market for Birkins. If Hermes changes strategy or some new CEO makes some mistake, then the value of your Birkin will disappear in a second and you will have no legal recourse. If the fashion changes, the value of your bag may plummet even if Hermes does their very best to do everything right. Etc.

So my recommendation for someone considering a Birkin or another consumer good/investment combo is to stick to actual investments for investing and to actual consumer goods for consuming. An asset that produces value (such as stock in a good company) is a naturally appreciating investment (as it produces value) and it does not need to have some kind alternative reality created around it by a corporation in order to appreciate.

Of course one has also to make sure he/she is a good citizen and exercises their responsibilities to keeping up their nation as a stable democracy with a stable well functioning legal system and well established property rights.