Today, I spoke to Eduardo Porter, who is the author of The Price of Everything: Solving The Mystery Of Why We Pay What We Do. Eduardo writes about business, economics, and many other matters as a member of the New York Times editorial board. In this interview, Eduardo talks about how price impacts everything that we do, even branding!
Eduardo, what made you want to write “The Price of Everything?”
The realization that there is a price involved in EVERYTHING we do. All our choices, from the most mundane to the lofty, involve pitting against each other the costs and benefits of our different alternatives. Actions that we believe to be motivated by profound emotions like love or faith, absolutely unrelated to “materialistic” concerns, are in fact the product of the same kind of evaluation of relative prices as choosing beer or toothpaste in the grocery store.
I was always uncomfortable with narratives that portend to explain individual and social change as the product of some exogenous change in social mores, as if we spontaneously alighted on a better ideal. Culture, in this reading, come from somewhere outside our daily experience. Our norms and rules, our rituals and institutions just happen to be, and to change.
Slavery was once the norm in much of the world. Today coercing workers is mostly illegal. Premarital sex was once very rare; it is no longer. These changes can be understood without recurring to a moral Deus ex Machina, as responses to changes in prices. Slavery ended when paying workers a wage got cheaper than feeding them, clothing them and keeping them enslaved. This happened when population densities rose, and more workers were made to compete for the available work.
Indeed, studies of ancient societies found that slavery became particularly prominent at population densities p of about 40 people per square mile. But it started to wane as agricultural productivity rose to the point where it could sustain populations of 100 per square mile.
Similarly, the popularity of premarital sex in the United States rose throughout the 20th century because its cost fell. In 1900 a woman who had sex before wedlock faced a high risk of becoming a single mother. What’s more, there were fewer defenses against sexually transmitted diseases. But new methods of contraception and effective new medicines against STDs reduced this cost enormously. As having sex out of wedlock got cheaper, more people indulged.
Do you believe that “you get what you pay for”?
In one sense you obviously do. A discerning adult who bought a house for $1 million in 2006 using a no-doc, interest only mortgage wanted to buy a house for $1 million. She got what she paid for in the most immediate understanding of the concept. But she also got less: she was pretty sure she was buying into a house that would be worth more than $1 million within a year or two, allowing her to refinance at a higher price and bolster her stretched finances.
The point is that our preferences for things are often driven by expectations that do not always conform to the ideal of rational humanity that economists love. We often fall for snake-oil salespeople peddling houses, Internet stocks or tulips as a guarantee of future prosperity.
Other quirks of our nature get in the way of our value judgments. Experiments have shown that people believe expensive placebos do a better job curing our ills than cheap placebos. So somebody who bought an expensive placebo might have gotten what he wanted in terms of, say, pain relief. But what was it exactly that he was buying? His neighbor bought the exact same useless sugar pill for less, but it didn’t work.
And perhaps the biggest flaw in the notion that we get what we pay for is that we do not always really understand what we want. Americans over the past three decades or so have worked longer and longer hours, surpassing virtually every other developed nation, as more and more former stay at home moms have entered the workforce. This has contributed to enormous prosperity, leaving behind other developed countries like France or Germany. But these riches have not made us significantly happier. One reason is that with so much of our lives devoted to work, we are left with too little time to play.
How critical is the price of everything in our lives? Are we all driven by price?
It is absolutely critical. In The Price of Everything I posit that prices lurk everywhere. We navigate our lives by evaluating them –pitting one against the other.
They are not always set in money, of course. They can be set in time, or in love, or in work. When we marry, we trade the expected benefits of a bachelor life against the anticipated rewards of marriage–including companionship and kids. When we drive fast down the highway, we are trading a higher chance of suffering a fatal crash against our imperative to shorten our commute.
When the federal government introduced the 55 mile-per-hour sped limit in 1974 to conserve gas in response to the Arab oil embargo, it was mostly ignored because the longer commutes imposed a cost on drivers that was higher than what they saved in gas from the increased fuel efficiency from driving slower. In 1987, the Feds relaxed the rule, allowing states to increase the limit to 65 mph. Many did, leading drivers in those states to drive faster and increase their odds of suffering a fatal crash. In fact, economists estimated that drivers valued one more death on the highway at 125,000 hours saved by faster commutes. Multiplying that by the prevailing wage, they concluded that drivers were valuing a life at roughly $2.1 million.
What impact does the economy have on price and how we perceive it?
Our sensitivity to price depends on our budget. That is, people who make more money care less about the prices of what they buy and are generally willing to pay more for any given item. Companies profit from this quirk finding ways to sell roughly the same thing at two different prices, for rich and poor. A restaurant may charge less for the same meal at the noisy standing-room-only bar than in the swank dining room next door. That allows it to capture the custom of the penny pinchers that otherwise would be lost to McDonald’s while still charging top dollar for those who have the budget to pay. This implies that in a fast growing economy with little joblessness and rising incomes companies will have greater ability to raise prices because consumers will care less and will keep buying. In dismal economies such as the one we are living in, with nearly 10% unemployment, companies tend to push prices as low as they can go, trying to keep their customers.
There is, however, an interesting exception to this pattern: a good for which demand increases when its price rises, or when consumer’s income falls. Economists call it a Giffen good. While we are not sure anybody has ever seen one of these in the wild, it remains a strong theoretical possibility.
Think of it this way: a poor nation that gets all its calories from cheap rice may change its habits once its income starts to rise. Perhaps it will choose to get 20% of its energy from meat. But if the price of rice suddenly rose, or people’s incomes suddenly fell, demand for rice would increase because they would no longer be able to afford the meat and would have to revert to the 10% rice-based diet.
Brands command a premium price. Why do you think?
That’s what brands are for. Companies spend tons of money to brand their products because otherwise they become indistinct commodities; valuable only for the need they satisfy. Paraphrasing Gertrude Stein: a shoe is a shoe is a shoe, unless you pay millions for Tiger Woods to wear it and convince hordes of young people that wearing that particular shoe will improve their abilities and general sex appeal. Advertisers like to explain branding as an exercise in consumer education: linking the boot with the swoosh to top-notch players is meant to communicate that it is of particularly good design and quality. But more often than not branding is about manipulating consumers’ notion of value –linking mundane objects like shoes to complex emotions like life expectations and self-esteem. This, in a way, is the exact opposite of education. It is obfuscation.
Eduardo Porter is the author of The Price of Everything: Solving The Mystery Of Why We Pay What We Do. Eduardo writes about business, economics, and many other matters as a member of the New York Times editorial board. He has also worked as a journalist in Mexico City, Tokyo, London, São Paulo, and Los Angeles. He was the editor of the Brazilian edition of América Economía and covered the Hispanic population of the United States for The Wall Street Journal. He lives in New York.