The Price of Everything Read online

  Consider what we could achieve by tinkering with the price of gas. In the United States, cheap gas allowed people to move to bigger homes farther from work, school, and shopping. Just in the last decade or so, Americans’ median commute to work rose from nine to eleven miles. The typical home grew from 1,750 to 1,807 square feet.

  Europe rarely sprawled so. Its cities were constrained by history. They were built hundreds of years ago, when moving long distances was costly in time and effort. During the French Revolution, it took King Louis XVI twenty-one hours to flee 150 miles from Paris to Varennes. Modern sprawl was contained by gas taxes. Europeans pay two to three times as much as Americans for gas. That’s partly why Houston in Texas has roughly the same population as the German port city of Hamburg but 2,500 fewer people per square mile.

  For all the differences between the configuration of American and Western European cities, they are both strikingly different from development in the Soviet bloc, where market prices played little or no role in allocating land. Seventy years of communist allocation by bureaucratic fiat produced an urban scene pockmarked by old factories decaying on prime locations downtown while residential housing becomes denser farther from the center, through rings of Stalin-era, Khrushchev-era, and Brezhnev-era apartments.

  A study by World Bank urban planning and housing finance experts after the collapse of the Soviet Union found that 31.5 percent of the built-up area in Moscow was occupied by industries, compared to 6 percent in Seoul and 5 percent in Hong Kong and Paris. In Paris, where people pay a premium price to live near downtown’s amenities, the population density peaks some three kilometers from the center of town. In Moscow it peaked fifteen kilometers away.

  Prices make sense of many disparate dynamics over the span of human history. Advances in transportation technology that reduced the cost of distance enabled the first great wave of economic globalization in the nineteenth century. The obesity pandemic was bound to happen when bodies designed to survive in an environment of scarce food by gorging themselves whenever they could found themselves awash in cheap and abundant calories brought by modern technology.

  There are few better ways to understand the power of prices than to visit the places where they are not allowed to do their jobs. During a trip to Santiago de Cuba a few years ago I was driven around town by a bedraggled woman who, to my surprise, turned out to be a pediatrician at the city’s main hospital. She had a witchlike quality—knotty and thin as a reed. Two of her front teeth were missing. She told me they fell out during a bout of malnutrition that swept through the island after the Soviet collapse in 1991 cut off Cuba’s economic lifeline. The doctor owned a beat-up Lada. She was very smart. But otherwise her life seemed no different from that of any street urchin, living off the black market at the limit of endurance, peddling a ride or a box of cigars that fell off the back of a truck. She charged ten dollars for driving me around town all day. I couldn’t help wondering how the collective decisions that shaped Cuba’s possibilities at the time could make it so a pediatrician found this to be a worthwhile deal.

  WHEN PRICES MISFIRE

  As with anything powerful, prices must be handled with care. Tinkering can produce unintended consequences. Concerned about low birthrates, in May 2004 the Australian government announced it would pay a “baby bonus” of three thousand Australian dollars to children born after July 1. The response was immediate. Expectant mothers near their due dates delayed planned cesarean sections and did anything in their power to hold their babies back. Births declined throughout June. And on July 1, Australia experienced more births than on any single date in the previous three decades.

  Taxing families based on the number of windows in their homes must have seemed like a good idea when King William III introduced the window tax in England in 1696. Homes with up to ten windows paid two shillings. Properties with ten to twenty windows paid four shillings and those with more than twenty paid eight.

  The tax was logical. Windows being easy to count, it was easy to levy. It was fairish: richer people were likely to have bigger houses with more windows, and thus pay more. And it got around people’s intense hostility to an income tax. But the king didn’t count on people’s reaction. They blocked up windows in their homes in order to pay less. Today, blocked-out windows in Edinburgh are known as Pitt’s Pictures, after William Pitt, who brought the tax to Scotland in 1784.

  Seemingly modest actions can reverberate throughout society by altering, if only slightly, people’s evaluations of costs and benefits. Such is the case of the 55 mph speed limit imposed across the United States in 1974 as a way to conserve gasoline in the wake of the first oil crisis, when Arab countries proclaimed an oil embargo in response to the United States’ decision to resupply the Israeli military after the Yom Kippur War.

  Conserving gas was a reasonable objective at the time. The strategy, however, was fatally flawed because it ignored the value of drivers’ time. At the new legal limit, a seventy-mile trip would take about one hour and sixteen minutes—sixteen minutes more than at 70 mph. Considering that the wages of production workers in 1974 averaged around $4.30 an hour, those sixteen minutes to commute to and from work would cost a typical worker about $1.15.

  In 1974, a gallon of leaded gas cost fifty-three cents. To break even, an average driver would need to save 2.17 gallons per trip. For this to happen would have required a big leap in fuel economy: a 22 percent increase in the fuel efficiency of a Chevy Suburban, for example, or a doubling of the fuel efficiency of a Honda Civic. Of course, lowering the speed limit did not achieve this improvement. So drivers ignored the new rule.

  In 1984, drivers on interstate highways in New York were found to flout the 55 mph limit 83 percent of the time. They dished out $50 to $300 to buy CB radios to warn one another about cops nearby. Between 1966 and 1973 there were about 800,000 CB licenses issued by the Federal Communications Commission. By 1977 there were 12.25 million CBs on the road. Cops then reacted to the reaction, installing radar. Drivers reacted with radar detectors. Some states passed laws making radar detectors illegal. I doubt the United States Congress expected this chain of events when it passed the 1974 Emergency Highway Energy Conservation Act. By 1987 it increased the maximum limit to 65 mph and in 1995 it repealed the federal speed limit altogether.

  WHERE WILL PRICES TAKE US?

  Archimedes of Syracuse, the great mathematician from the third century BC, said that to move the earth he needed only a lever, a fulcrum, and a firm place to stand. Moving people requires a price. The marriage rate has fallen not because of changing fashions but because of its rising price, measured in terms of the sacrifice it entails. We have fewer children because they are costlier. Economists suggest that the Catholic Church has been losing adherents not because people stopped believing in God but because membership became too cheap compared with evangelical Christianity, which demands a bigger investment in its churches from members and thus inspire more loyalty.

  The Price of Everything will take us to the store, where we will discover how price tags operate on our psychology, subtly inviting us to buy. But we will endeavor beyond quotidian commercial transactions, to investigate how other prices affect the way people live. In many cultures, husbands pay for multiple brides to amass as many as possible and increase their reproductive success. In others, parents abort female fetuses to avoid the cost they would incur to marry off their daughters. Many behaviors that we ascribe to “cultural change” arise, in fact, as we adapt our budgets to changing prices. We will ponder why employers pay for workers rather than enslave them. We will discuss why it is that as we become progressively richer, the commodity that increases most in value is our scarce free time. And we will find that despite clinging to the notion that life is priceless, we often put a rather low price on our lives.

  And we will find that prices can steer us the wrong way too. We still don’t know how much we will have to pay, as a civilization, for the economic distortions caused by the upward spiral in the price o
f American homes between 2000 and 2006. A century down the road, the cheap gasoline of the 1900s might come to be seen as the cause of incalculable environmental damage. Prices can be dangerous too.

  CHAPTER ONE

  The Price of Things

  OF THE VARIOUS things I don’t fully understand about my life, one is why I pay what I do for a cup of coffee. I’m a fairly heavy drinker—I took it up when I first quit smoking, to fill the space left behind by my previous addiction. It has since become my main source of sustenance : my breakfast, my lunch, and quencher of urges in between.

  Several possibilities cross my path as I commute between home and work every day. There’s the Dunkin’ Donuts across the street from work, which offers a cappuccino for $3.02, and the Illy in-house café on the fourteenth floor, one floor above my office, which proffers cappuccinos for $3.50. The Dean & DeLuca store that opened in the lobby sells a slow yet rich cappuccino for $3.27.

  Over the past couple of years I have gravitated somewhat randomly from coffee purveyor to coffee purveyor. While this may appear unremarkable, I find my fickle taste intriguing. My choice of coffee should be a function of the value I get for my money. But the equation is not obvious. Should I even notice the small price differences, trivial amounts when compared with my disposable income? What else, besides the quality of the brew, enters my calculation? My switch from Dunkin’ to Illy probably had less to do with price, or flavor, than with Illy’s sleek brushed steel, a definite step up from Dunkin Donuts’ orange-and-pink, saturated fat aesthetic. Illy also offered meaningful social interactions in the chance encounters with long-lost colleagues from other floors.

  Most intriguing of all, there is an undeniable emotional angle to my preferences, which can trump on occasion every other consideration. The best coffee I’ve had in a long time comes from the tiny pie shop on the corner, half a block from my house. It used to sell a superb cappuccino for the unbelievable price of $2.75. I would stop by for a cup as often as I could. Then, a year or two ago, it abruptly raised the price to $3.50. This made me so furious I decided never to drink coffee there again.

  I’m not sure what infuriated me so. The friendly barista offered explanations: they were switching to a premium coffee that cost a dollar an ounce; the new cups were bigger; they were using double shots—more than half an ounce of coffee per cup. Maybe I was disappointed at seeing a bargain vanish. Maybe it was a sense of betrayal that the young, laid-back, indie-rock-loving people at the pie shop on the corner could strategize about prices as ruthlessly as Starbucks. I would grumble that rent, wages, and profit make up a bigger share of the price of a cup of coffee than the cost of the coffee that goes into it. Still, my anger made no sense. Their coffee did not cost much more than coffee I bought elsewhere. And it tasted much better. There was something irrational about my boycott. Fortunately, I forgave them. So I’m drinking great coffee again.

  BUYING GOODS AND services makes up a large part of modern life. There’s food, clothes, movie tickets, summer vacations, utility bills and mortgage insurance premiums, gas, iTunes downloads, and hair-cuts. The marketplace is where prices acquire their most straightforward definition, determined by a voluntary transaction between a buyer and a seller who expect to benefit from the trade. Yet despite the routine nature of the standard mercantile transaction, consumers’ interactions with prices are fairly complex. This chapter is about this economic interaction, the tango between buyers and sellers as they strive for a deal.

  Economists tend to assume people know what they are doing when they open their wallets. They can assess the benefit they will derive from whatever it is they are buying and figure out whether it’s worth their money. It’s hard to overstate the importance of this assumption. It is one of the bedrock principles upon which classical economics was built over the last 250 years. It is often true, and has yielded deep and far-reaching conclusions about human behavior.

  But as a general principle, the assumption is misleading in a subtle yet important way. Markets may be the most effective institution known to humanity to determine the value of goods and services to the people who consume them. Still, the price-setting process is by no means a transparent and straightforward interaction between rational, all-knowing calculators of costs and benefits. That’s because market transactions do not necessarily provide people with what they want; they provide people with what they think they want. These two things are not the same. Consumers often have but the most tenuous grasp of why they pay what they do for a given object of their desire. Sometimes they don’t know why the object is desirable at all. Moved by any number of unacknowledged biases, they are easy prey to manipulative devices deployed by those who want to sell them things.

  Prices help us understand these cognitive lacunae. They provide a road map of people’s psychological quirks, of their fears, their unacknowledged constraints. Prices—how they are set, how people react to them—can tell us who people really are.

  Most of us have heard of the placebo effect—in which a pill with no therapeutic properties relieves a real ailment by making us believe that we are being cured, setting in motion some inner psychological process. A few years ago, psychologist Dan Ariely from the Massachusetts Institute of Technology and some colleagues performed an experiment that uncovered an interesting variant. They told a bunch of students they were getting a new type of painkiller but gave them a placebo instead. Then the researchers made up the placebo’s price. Subjects who were told that the pill cost $2.50 reported much deeper pain reduction than those who were told it was bought on the cheap, at the bulk price of $0.10.

  Consider lap dancing. Lust is a reasonable explanation for the popularity of the service, about as close as one can legally get to paying for sex outside the state of Nevada. Yet apparently there are hidden gradations of desire that modulate our willingness to pay. In an exploration of the “gentlemen’s club” scene, psychologists from the University of New Mexico found that lap dancers who were not on the pill made much more money in the most fertile phase of their menstrual cycle.

  Dancers can’t charge explicitly for their services because that would run afoul of laws against solicitation. Instead, they rely on “tips,” usually enforced by large, muscled bouncers. In Albuquerque’s clubs, according to the study, the average tip for a three-minute dance is about fourteen dollars.

  Perhaps dancers smell more enticing when they are at the peak of their fertility. Maybe they grind their hips more enthusiastically or whisper more alluring nothings. The fact is that dancers who are not on the pill made $354 a night when they were at their most fertile, about $90 more than in the ten days before menstruation and about $170 more than during menstruation.

  Dancers on the pill made less money than those who were not, and their earnings were much less sensitive to the menstrual cycle. But perhaps the most interesting finding is that neither dancers nor their patrons have a clue of the effect of the menstrual cycle on their pay. It all happens below the radar.

  THE TASTES IN shopping of my six-year-old are driven by the fictitious character on the label, oblivious to price, flavor, texture, or even the purpose of the desired item. At his behest, I’ve bought Dr. Seuss shampoo, Spider-Man toothbrushes, and Cinderella toothpaste. He alternates between Dora the Explorer and SpongeBob yogurt. His tastes are not unique. A study by the people who make Sesame Street found that young children who are offered a choice between chocolate and broccoli are more than twice as likely to choose the vegetable when it has an Elmo sticker.

  Grown-ups are expected to know better. Yet we indulge in more extreme follies, paying often-stratospheric prices for things of debatable value. People will travel across town to save $20 off a $100 sweater but not to save $20 off a $1,000 computer, an odd choice considering that both actions are priced equally: $20 for a trip across town. And, unlike my six-year-old son, who couldn’t care less what toothpaste costs, I may be more willing to buy something if it is expensive than if it is cheap.

  Buying wine is an exer
cise that combines flavor, smell, and other physical attributes with an array of difficult-to-measure qualities—from how well it projects our self-image to whether it brings forth pleasant memories of a European vacation. Americans will pay more for a French wine than an Argentine wine of similar quality, the same grape varietal, and the same age. Simply stamping “Product of Italy” on the label can raise the price of a bottle by more than 50 percent.

  Economists will tell you that, other things being equal, people will always prefer the cheaper option. But drinkers like a bottle of wine more if they are told it cost ninety dollars a bottle than if they are told it cost ten. Belief that the wine is more expensive turns on the neurons in the medial orbitofrontal cortex, an area of the brain associated with pleasure feelings.