The Price of Everything

By | January 4, 2011

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“According to Eduardo Porter of The New York Times editorial board, prices are more interesting than most of us realize. And the prices that never appear on a price tag are the most fascinating of all. In his new book The Price of Everything: Solving the Mystery of Why We Pay What We Do (2010, Portfolio), Porter explores the surprising ways prices affect every aspect of our lives, including where we live, who we marry, how many kids we have, and even how religious we are.”

Here is the introduction to Porter’s book.

PRICES ARE EVERYWHERE

Anybody who has visited a garbage dump in the developing world knows that value is an ambiguous concept. To most people in the developed world, household waste is worthless, of course. That’s why we throw it away. Apparently, Norwegians are willing to pay about $114 a ton for somebody else to sort their recyclables from the general garbage. A survey of families in the Carter community of Tennessee several years ago found they were willing to pay $363 a year, in today’s money, to avoid having a landfill nearby.

But slightly beyond our immediate experience, waste becomes a valuable commodity. In Kamboinsé, outside Ouagadougou, Burkina Faso, farmers pay municipal trash haulers to dump unsorted solid waste on their sorghum and millet fields as fertilizer — bits of plastic included. The going rate in 2003 was 400 francs per ton. In New Delhi, a study in 2002 found that waste pickers earned two rupees per kilo of PET soda bottles and seven rupees per kilo of hard plastic shampoo bottles. A child working on foot on Delhi’s dumps could make twenty to thirty rupees per day.

Waste, in fact, confronts us with the same value proposition as anything else. The price we put on it — what we will trade to have it, or have it go away — is a function of its attendant benefits or costs. A bagful of two-rupee PET bottles is more valuable to an Indian child who hasn’t eaten today than to me, a well-fed journalist in New York. What she must do to get it — spend a day scavenging among the detritus of India’s capital, putting her life and health at risk — is, to her, not too high a price to pay because life is pretty much the only thing she has. She has little choice but to risk it for food, clothing, shelter, and whatever else she needs. I, by contrast, have many things. I have a reasonable income. If there’s one thing I have too little of, it is free time. The five cents I could get for an empty PET bottle at the supermarket’s recycling kiosk are not worth the trouble of redeeming it.

The purpose of this comparison is not to
underscore that the rich have more opportunities than the poor.
It is that the poor choose among their options the same way the
rich do, assessing the prices of their alternatives. The
relative costs and benefits of the paths open to them determine
the behavior of the poorest Indian girl and the richest
American man. These values are shaped by the opportunities they
have and the constraints they face. The price we put on things
— what we will trade for our lives or our refuse — says a lot
about who we are.

The price of garbage provides a
guide to civilization. Pollution is cheapest in poor countries.
Their citizens are more readily willing to accept filth in
exchange for economic growth. Yet the relative price of
pollution rises as people become richer. Eventually it be comes
expensive enough that it can alter the path of development.
China is a dirty place. Yet underlying its dismal air and foul
water is a choice that balances the costs of pollution in bad
health, poisonous rivers, and so forth against the cost of
cutting back production or retooling plants to control their
effluvia. It is a different choice from that of Switzerland,
where preserving environmental assets — clean air, trees, wild
animals — is considered more valuable than providing
manufacturing jobs to unemployed farmers. Twice as many Swiss
as Chinese are members of environmental organizations. More
than a third of the Swiss population believes environmental
pollution is the most important problem facing the nation; only
16 percent of Chinese feel the same.

But as China
grows, the price of building one more coal-fired power plant,
measured in terms of its contribution to acid rain, global
warming, and the rest will one day exceed the value the Chinese
place on the extra output. As it keeps growing, it will likely
evolve out of the most noxious industries, like steel and
chemicals, into less polluting sectors, like medical and
financial services. It may even one day buy its steel and
chemicals from poorer countries with a higher tolerance of foul
water and air. In other words, it will behave more like
Switzerland or the United States. One study concluded that
emissions of sulfur dioxide peak when a country’s income per
person reaches around $8,900 to $10,500. In the United States,
sulfur-dioxide emissions soared until the passage in 1970 of
the Clean Air Act. Since then, emissions have fallen by half.

HEREIN LIES THE central claim of this book: every
choice we make is shaped by the prices of the options laid out
before us — what we assess to be their relative costs —
measured up against their benefits. Sometimes the trade-offs
are transparent and straightforward — such as when we pick the
beer on sale over our favorite brand. But the Indian scavenger
girl may not be aware of the nature of her transaction. Knowing
where to look for the prices steering our lives–and
understanding the influence of our actions on the prices
arrayed before us–will not only help us better assess our
decisions. The prices we face as individuals and societies–how
they move us, how they change as we follow one path or
another–provide a powerful vantage point upon the unfolding of
history.

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Nearly
two decades ago, when he was chief economist of the World Bank,
Lawrence Summers, President Barack Obama’s former top economic
adviser, signed his name to a memo suggesting it would make
sense for rich countries to export their garbage to poor ones.
Because wages are lower in poor countries, he said, they would
suffer a lesser loss if workers got sick or died. “I think the
economic logic behind dumping a load of toxic waste in the
lowest wage country is impeccable and we should face up to
that,” it said. Moreover, pollution mattered less in a poor
country with other problems: “The concern over an agent that
causes a one in a million change in the odds of prostate cancer
is obviously going to be much higher in a country where people
survive to get prostate cancer than in a country where under 5
mortality is 200 per thousand.”

Leaked a few months
before the 1992 United Nations Earth Summit in Rio de Janeiro,
the memo confirmed to critics that the World Bank believed poor
countries were dumps. The reasoning “is perfectly logical but
totally insane,” wrote the late José Lutzenberger, then
Brazil’s environment minister, in a letter to Summers. Furious,
Vice President Al Gore torpedoed Summers’s chance to become
chairman of then-president Bill Clinton’s Council of Economic
Advisers. Summers apologized, explaining the memo as an attempt
to offer “sardonic counterpoint” to sharpen analytical thinking
about the trash trade.

Lutzenberger had a point. Wages
are not the only benchmark of people’s value. The price of
dealing with garbage in impoverished countries is often zero
not because their citizens care nothing about pollution, but
because their governments don’t enforce pollution-related laws.
But Summers had a powerful point too: in poorer countries, an
untainted environment is less valuable than other things that
are more abundant in richer nations–schools, for instance.
Many developing nations would serve their interests best by
trading trash for the chance to build an extra one.

THE PRICE OF CROSSING
BORDERS

Most of us think of prices in
the context of shopping expeditions. In the marketplace, prices
ration what we consume, guiding how we allocate resources among
our many wants. They prompt us to set priorities within the
limits of our budgets. Just as prices steer our purchasing
patterns, they steer the decisions of the companies that make
what we buy, enabling them to meet our demand with their
supply. That’s how markets organize a capitalist economy.

But prices are all over the place, not only attached
to things we buy in a store. At every crossroads, prices nudge
us to take one course of action or another. In a way, this is
obvious: every decision amounts to a choice among options to
which we assign different values. But identifying these prices
allows us to understand more fully our decisions. They can be
measured in money, cash, or credit. But costs and benefits can
also be set in love, toil, or time. Our most important currency
is, in fact, opportunity. The cost of taking any action or
embracing any path consists of the alternatives that were
available to us at the time. The price of a five-dollar slice
of pizza is all the other things we could have done with the
five dollars. The price of marriage includes all the things we
would have done had we remained single. One day we succumb to
the allure of love and companionship. Years later we wonder
what happened to the freedom we traded away at the altar.
Economists call this the “opportunity cost.” By evaluating
opportunity costs, we organize our lives.

Just to be
born, the scavenger girl in Delhi had to overcome Indian
parents’ entrenched bias against girls — which has led to
widespread abortions of female fetuses. The Indian census of
2001 recorded 927 girls aged six or less per 1,000 boys. This
compares to 1,026 girls per thousand boys in Brazil and 1,029
in the United States. The bias is due to a deeply unfavorable
cost-benefit analysis: while boys are meant to take over the
family property and care for their parents in old age,
daughters must be married off, which requires an onerous dowry.
To redress the balance of incentives, regional governments
across India have been experimenting with antipoverty programs
aimed at increasing parents’ appetite for girls. In 2008, Delhi
launched a program to deposit 10,000 rupees into the account of
newly born girls in poor families–making subsequent deposits
as they progress in school. The objective is to build a cushion
of resources for them to marry or pursue higher education. A
social insurance program launched in 2006 in Haryana pays
parents who only have daughters 500 rupees a month between the
age of forty-five and the age of sixty, when it is replaced by
the general public pension.

I remember a conversation
I had a few years ago with an illegal immigrant in Stockton,
California. I worked at the Wall Street Journal writing about
the Hispanic population of the United States. The immigrant was
educating me about the relative merits of having his two young
children smuggled from Mexico “por el monte” — a grueling hike
across the desert — or “por la línea,” across a regular
checkpoint using forged documents. The choice was hard. He
couldn’t have made more than $8 or $9 an hour, picking
asparagus, cherries, and everything else that grew in
California’s San Joaquin Valley. He would have to pay about
$1,500 each for a “coyote” to guide his kids across the desert.
Yet he figured that getting a smuggler with fake documents to
bring them across a border checkpoint would put him back about
$5,000 per child. The conversation laid in stark relief the
type of bare-knuckle cost-benefit analyses that steer people’s
lives.

Over the last decade and a half, the Border
Patrol’s budget has grown roughly fivefold. Average coyote fees
increased accordingly, to about $2,600 in 2008. Yet the price
that rose most sharply is measured in the odds of dying on the
way, as a border crossing that used to take less than a day
around San Diego became a three- to four-day trek through the
Arizona desert, evading thieves and the Border Patrol, lugging
jugs of water. In 1994, 24 migrants died trying to cross the
border. By 2008, the death toll was 725. The calculation of the
immigrant I spoke to was straightforward enough. To bring his
children into the United States through a checkpoint, he would
have to work longer to earn the price of passage. But it would
lower the risk that his children would perish along the way.

The debate among Americans about illegal immigration
is itself a discussion about prices. Critics charge that
illegal immigrants lower the price of natives’ labor by
offering to do the job for less. They argue that immigrants
impose a burden on natives when they consume public services,
like education for their children and emergency medical care.

These arguments are weaker than they seem. Most
illegal immigrants work on the books using false IDs, and have
taxes withheld from their paychecks like any other worker. They
can’t draw benefits from most government programs. And there is
scant evidence that immigrants lower the wages of American
workers. Some industries only exist because of cheap immigrant
labor — California’s agricultural industry comes to mind.
Absent the immigrants, the farm jobs would disappear too, along
with an array of jobs from the fields to the packing plant. We
would import the asparagus and the strawberries instead.

Illegal immigrants do affect prices in the United
States. One study calculated that the surge in immigration
experienced between 1980 and 2000 reduced the average price of
services such as housekeeping or gardening by more than 9
percent, mainly by undercutting wages. Still, it had a
negligible impact on natives’ wages because poor illegal
immigrants compete in the job market with other poor illegal
immigrants.

Immigration policy has always been
determined by who bears its costs and who draws its benefits.
Illegal immigrants are tolerated by the political system
because their cheap labor is useful for agribusiness and other
industries. It provides affordable nannies to middle-class
Americans. This suggests that despite presidential lip service
to the need to reform immigration law, nothing much is likely
to be done. Creating a legal path for illegal immigrants to
work in the United States would be politically risky and could
provide a big incentive for more illegal flows. By contrast,
cutting illegal immigration entirely would be prohibitively
costly. The status quo is too comfortable to bear tinkering
like that.

The ebb and flow of immigration will
continue to be determined by potential immigrants’ measuring
the prospect of a minimum’ wage job — perhaps a first step up
the ladder of prosperity — against the costs imposed by the
harsh border. The price may occasionally be too high. As
joblessness soared following the financial crisis of 2008, many
potential immigrants decided to stay at home. The Department of
Homeland Security estimates the illegal immigrant population
dropped by 1 million from its peak in 2007 to 10.8 million in
2009. But this will prove to be no more than a blip in the
broad historical trend.

PRICES
RULE

Considering the capacity of prices
to shape people’s choices, it is rather surprising that
governments do not use them more often to steer the behavior of
the governed. For instance, public-health campaigns might be a
nice way to educate people about the risks of certain
behaviors, such as smoking and drug abuse. But they are nowhere
near as effective as prices when it comes to making people
stop. Four decades after President Richard Nixon launched his
“War on Drugs,” drug abuse remains stubbornly popular. Between
1988 and 2009, the share of twelfth graders who admitted having
done drugs in the last month increased from 16 to 23 percent.
The share of teens who had smoked a cigarette in the same
period fell from 28 to 20 percent.

This is a paradox.
Though it is illegal for minors to purchase cigarettes, adults
can readily get them. Drugs, by contrast, are illegal for
everybody. Being caught with even a smidgen of cocaine in the
state of Illinois can lead to one to three years in jail. Yet
the difference is less paradoxical considering how the price of
these vices has evolved. A battery of city, state, and federal
taxes has roughly doubled the price of a pack of cigarettes
since 1990, to about $5.20 on average. On July 1, 2010, the
minimum price of a pack of cigarettes in New York City rose
$1.60 to $10.80–of which $7.50 are taxes. By contrast, the
retail price of a gram of cocaine on New York’s streets cost
$101 in 2007, about 27 percent less than in 1991. The price of
heroin collapsed 41 percent to $320 a gram. Falling prices
refltect the failure of policies to stop the supply of illegal
drugs into the American market. But it also suggests a
potential solution: at a sufficiently high price, teens would
cut back. Compared with a failed drug war, legalizing,
regulating, and taxing drugs might be the more effective route
to curtail abuse.

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 of 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.

Copyright 2010 Eduardo Porter


Eduardo Porter has
been on the staff of The New York Times since January 2004,
covering economics, and joined the paper’s editorial board in
July 2007. He began his journalism career in 1990 as a
financial reporter for Notimex, the Mexican news agency, in
Mexico City. He was a correspondent in Tokyo (1991-1992) and in
London (1992-1996). In 1996, Porter was appointed editor of the
Brazilian edition of América Economía, a business and economics
magazine based in Sao Paulo. In 2000, he became senior special
writer for The Wall Street Journal, based in Los Angeles,
covering the Hispanic population in the United States. He is a
graduate of the Universidad Nacional Autónoma de México. He has
an MSc in quantum fields and fundamental forces from Imperial
College of Science, Technology and Medicine in
London.


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