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A Spanish lesson in economics

Economic principles are at work everywhere you look. This month, I had the chance to visit Spain, a country that's been the focus of much unwanted attention about the abysmal state of its economy. During my trip, two examples of economic principles were highlighted – one hilarious, the other quite tragic.

The hilarious example comes from microeconomics and theories of the profit-maximizing firm. As we sat at a Valencian café in a beautiful, sun-soaked plaza enjoying our tapas and pintxos, a young lady came by our table offering samples of baguette drizzled with a new brand of olive oil she was promoting. With one bite, I swore I've never tasted a more delicious olive oil in my life.

Euros in hand, I approached the sales lady a few minutes later to buy a bottle of the oil. "Oh," she said in broken English that was far better than my Spanish will ever be, "We don't sell it here."

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"Really?" I asked, astonished. "Do you know of any stores around here that sell it?"

"No, I don't know where you can buy it. Maybe try on Facebook," she replied, and handed me a brochure. I felt like I was in a Monty Python sketch. She knew everything about the product except where I could buy it.

It was a great example of economics at work – or in this case, not at work. A firm can do everything correctly to promote and market a product, but if it can't actually make the sale, none of it matters. It speaks to a general failure of much of Europe's service industry. Restaurant service in Europe is notoriously poor by North American standards. But my issue isn't with the speed of service (after all, it's Europe – why should we be in such a hurry anyway?). My issue is that by virtually ignoring their customers, restaurants are missing all sorts of chances to up-sell. "Another sangria, sir?" "Why yes, that would be splendid." Sales could easily be increased simply by paying more attention to the customers' empty glasses.

The second, more serious example of economics at work comes from the world of macroeconomics and public finance. The spectacular City of Arts and Sciences is an entertainment-based cultural and architectural complex in Valencia constructed on the site of the old port. Seven strikingly modern buildings house an opera house, an aquarium, a planetarium and a science museum. Built to put Valencia on the map of major global tourist destinations, it was a bold vision of a municipal government to invest in public space and cultural institutions.

It all should have worked out wonderfully … except it didn't. Official cost estimates are difficult to find online, but most news articles suggest the €1-billion ($1.5-billion) price tag is approximately four times the original estimate. And now, not even a decade old, it's falling into serious disrepair and aging prematurely. Some buildings are completely empty. The mason work on the roof of the opera house was falling off in chunks and now the city is suing the architect.

Saddest of all is what the complex is lacking: people. I visited the site twice, Thursday evening and Saturday afternoon. While the parks and soccer pitches and cafés of Valencia busted with people, the enormous concrete plazas of the complex were almost void of humans. It was a sad sight.

The lesson here is that public infrastructure projects are necessary to promote arts and culture, but they need to be considered carefully in terms of size, scope and cost. They should be beautiful and inspiring, but they cannot become the ego-driven projects of mayors or architects. Unlike government spending on education or health, which can be scaled up, down or redesigned over time, a huge public infrastructure project has one chance to get it right.

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I'm certainly no expert on the Spanish economy, and the country and its people have so many wonderful attributes that it's impossible to not love the place. And certainly Canada has its share of service failures, publicly funded white elephants and other blunders. The point is that economics is everywhere – even when you're at a Spanish café gulping an ice-cold Agua de Valencia (don't ask – just go to Valencia and order one.)

Todd Hirsch is the Calgary-based chief economist of ATB Financial, and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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About the Author

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline. More

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