My oldest brother runs an excavation company and I remember riding with him once. He had dug up some dirt and was looking for a potential buyer. Someone had paid him to do the digging (actually it was me) and now he was looking for someone to pay for the dirt I paid him to get rid of. My brother had discovered what most individuals with a truck and an excavator do not know: the money is not in the work it is in the deal. I readily paid a price to get rid of dirt and someone else was keen to pay for the same dirt – and my brother happily knew the value of both sides of the equation.
Eduardo Porter expands upon this in his book, The Price of Everything. Well written and very accessible, it is an excellent addition for anyone with an interest in economics or who, quite frankly, ever buys or sells anything (which is pretty much everyone). Economists historically have viewed all of us who participate in the market place as being perfectly rational (homo economicus or rational man). Porter shows that good old economicus is perhaps a bit less rational than he (or she) would like us to know. Thus economicus would agree with Porter’s central theme in the book that ‘every choice we make is shaped by the price of the options laid out before us … measured up against their benefits’.
While Porter gives numerous examples of this in action, his message is more profound; first some great examples of price influencing behaviour:
– To counter a falling birth rate, the Australian government offered a payment of $3,000 for any child born after July 1, 2004. Births declined in June 2004 and there were more births on July 1 than on any other day in the prior 30 years.
– Lap dancers in New Mexico made $90 more per night in tips when they were in their fertile phase of the menstrual cycle and not on the pill. Neither the dancers nor patrons were explicitly aware of this – the ‘price agreement’ occurred at sub-conscious level.
– Saeed Khouri paid $14 million for the “1” Abu Dhabi license plate – a premium of 140,000 times the cost of the standard fee and an overt example of conspicuous consumption (not to mention an easy plate number to remember when recording it on campground self-registration forms).
– The US Environmental Protection Agency has valued one life at $7.5 million (2010 dollars). A British year of life in good health is worth 29,000 pounds (about half of the US value assuming a 75 year lifespan and an exchange rate of about 0.63 GBP to USD). An Indian (sub-continent variety) is worth about $95,000 according to the World Bank. Obviously if you are going to buy yourself a life, it is good to shop around.
At this point the Marxists in the audience would argue that pricing is easy. Price is a function of the labour to create a good or service. A price higher than this input cost is an example of running-dog-capitalists stealing from the working men. This argument breaks down very quickly of course. For example, why is a 15 year old bottle of scotch more valuable than a newly distilled one? To a connoisseur the answer is obvious, to a Marxist less so (unless he likes scotch). Thus the price of something is the perceived value in the eyes of the buyer – input cost be damned.
Price is also something that is personal and changes throughout our lifespan. Middle age families spend more on the necessities of life (food, services, etc.) then retired couples. Poorer families pay less for the same goods than their wealthy counter parts. The reason is simple, time is money and people compute their precious moments here on earth as compared to the precious dollars in their wallets and make subsequent decisions. Unfortunately the cost of something is often incomplete. Porter offers a quote from Robert Kennedy which is as relevant today as it was nearly 50 years ago:
“Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product … if we should judge America by that – it counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.
“Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.” (March 18, 1968)
Thus Porter takes us beyond the price of the material goods and services and considers the price of happiness and well-being (and the enormous challenges in attempting any sort of measurement thereof).
Porter’s detour in ‘The Price of Women’ makes for interesting reading, in particular the sections on why polygamy was so common and why it tended to be mostly one man and many women. Setting aside a power distortion, the primary driver is that old ghost in our DNA, natural selection. In a society that can accumulate wealth (e.g. beyond subsistence), a woman was fundamentally better off with the off-spring of a rich man – even if she shared him with other women – than that of a poor man. A rich man’s child was simply more likely to be fed and live to have other babies. This is not to suggest that polygamy is pure or perfect in any respect. Over the long run, it tends to create a cluster of non-mated males, it entrenches poverty and prevents the development of society (including the female inhabitants therein). Nevertheless, in the short run, it can be explained by economics, which is Porter’s point.
Assuming that a chapter called ‘The Price of Women’ was not a sufficiently large red-flag to wave, how about a chapter on religion. In an increasingly secular society, we wonder why anyone would bother follow the teachings of a 2,000 year old carpenter or 1,600 year old Arabian merchant (both who had God’s direct dial number, apparently). Why should we still bother with religion and more to the point, why are people still willing to kill, protest or blow themselves up for it? Fundamentalism, be it the Christian right or Islam-o-fascists, seem to be stronger during a time of incredible enlightenment –why?
Porter’s supposition is that the higher the cost (or price) of being an adherent to a religion the greater the perceived value of the religion to the adherents. Thus a willingness to forgive those who wronged you, give up the ‘B’ of BLTs or forego yummy caffeinated beverages means that you are part of the community who has collectively made these decisions. This collective price gives religion its value to those who practice it.
Lap dancers, polygamists, fundamentalists and my brother all implicitly or explicitly understand the power of price. For those who don’t have a brother with an excavation business, Porter has written a very readable and accessible book for all who buy and sell anything. Enjoy!