From a Latte to a Life: 'The Price of Everything'
Published: May 03, 2011 in Knowledge@Wharton
In the months following September 11, 2001, Congress approved a fund to compensate the victims of the terrorist attacks on New York City and the Pentagon that claimed nearly 3,000 lives. Unlike most bills passed by Congress, this one had an unlimited budget. Money, in the grand scheme of things, was not an object when it came to the largest terrorist attack ever to occur on American soil.
But Congress wasn't about to open its checkbook indefinitely: It set tight criteria under which people could file a claim. With the stroke of a pen, Congress had put itself in the unenviable position of determining how much a human life is worth.
Kenneth Feinberg was appointed to manage the fund. Feinberg, a lawyer and former chief of staff to Senator Edward Kennedy, had been in this position before: In 1984, Feinberg negotiated a $180 million settlement paid by the manufacturers of Agent Orange to 250,000 Vietnam veterans who had been sickened by the chemical agent. He was part of the team that awarded $16 million to the Zapruder family for the 26.6-second film Abraham Zapruder took in Dallas on November 22, 1963, the day President John F. Kennedy was assassinated. In 2010, Feinberg was appointed to administer the $20 billion fund created by BP to compensate those affected by an oil spill in the Gulf of Mexico.
In the first case, Feinberg determined an average life was worth about $720 a head. Zapruder's family got about $600,000 per second of film. Along the Gulf of Mexico, the final payouts are yet to be determined. But why are the injuries to a Vietnam veteran worth only a fraction of a cent compared to a dollar's worth of a film? How much is a dead fish worth versus the life of an investment banker who would have made millions of dollars had her life not been cut short by a terrorist attack?
These are the questions at the heart of The Price of Everything: Solving the Mystery of Why We Pay What We Do. The author, Eduardo Porter, an editorial board member of The New York Times, leads readers on a leisurely, but thorough, trip through the corners of humanity in which price affects our decision-making process.
Much of Porter's book, despite its title, isn't dedicated to parsing the details of how commodity prices influence food or how comparison-shopping for plasma TVs keeps the market honest and prices low. Such matters are discussed in his very first chapter, "The Price of Things." The bulk of Porter's book is dedicated to more existential matters -- faith, "free," happiness, the future culture -- areas that, despite the ideals of purists, are no less subject to market forces than the device on which you read this review. Every examination isn't equally enlightening, but Porter is at his best when the subject is at its farthest from the traditional realm of economics.
The Price of Faith
Take, for example, Porter's discussion about the price of faith. The most starry-eyed of us would believe that faith is free, that the path between you and God is a toll-free highway with the only disruptions ones you place in your own path.
Think again: Even faith comes with a price tag, Porter argues. Religion demands sacrifices from its members, including dietary restrictions, sexual abstinence for the unmarried and tithing. You cannot just walk into St. Patrick's Cathedral and decide you are going to be a Catholic: You have to study, undergo several religious rites and demonstrate your allegiance to the faith. And that's just to get in the front door -- the pricing doesn't stop after your first Communion.
Porter takes the abstract subject of faith, breaks it down to its most elemental and applies price theory to its parts. Consider his analysis of why the normal laws of pricing seem to work in the inverse when it comes to the price of faith: "The most successful religions at building enthusiastic flocks are usually the most extreme in their beliefs, like evangelical Christians in the United States or radical Islamists in Central Asia and the Middle East. Even in the face of increasing opportunities in the secular world outside, these churches have developed a growing following of truly fervent believers by closing down their options. They select their members among people with the fewest opportunities outside and erect higher barriers to keep them in. It is a strange strategy: raising your prices to keep your customers. But it works."
The Price of a Life
Putting a price on life is no less abstract than faith, but it happens on a daily basis. How much, for example, would you pay for a car with the newest safety features versus a 10-year-old used car with a lesser generation of airbag? Although a host of other variables come into play -- the mileage of a used car, for example, or the cost of financing or even paint color -- all things being equal, Porter writes, the difference between the used car price and the new car could be construed as the price you are willing to pay for your safety, and ultimately, your life.
In determining how to mete out the bottomless pit of money allocated to the victims of September 11, Kenneth Feinberg was immediately faced with the challenge of putting a value on the tangible, and intangible, aspects of human existence. As Porter describes, Feinberg started with an arbitrarily flat figure of $250,000 a head plus $100,000 per dependent for the noneconomic loss of life. Figuring out how to compensate economic loss was more difficult.
The World Trade Center was home to a fleet of high-paid financial experts as well as a fleet of minimum-wage workers who kept the windows clean, the carpets vacuumed and the china at the Windows on the World restaurant clean. A busboy could never hope to earn as much in his life as a broker at Cantor Fitzgerald might earn in an above-average afternoon, but did that mean a broker's life was worth more than that of an illegal immigrant?
Although the fund paid $2 million, on average, to the next of kin to 2,880 victims who died in the attacks, "each of the families of the eight victims who earned more than $4 million a year got $6.4 million, while the cheapest victim was valued at more than $250,000," Porter wrote. Life, as it turns out, does indeed have its price tag.
The Price of Free
Porter's look at pricing also considers what he calls "the price of free," or the value of ideas and information -- an interesting discussion in light of The New York Times' recent implementation of a metered pay wall on its website. His book was published before the Times made its online pricing system public, but Porter, a media veteran, still has a lot to say about the concept of information floating around the Internet for free -- namely, that it's not.
Porter uses an apt analogy of a lighthouse to make his claim, writing, "Those who believe information online should be available at no cost like to see it as the light from a lighthouse. Any ship passing through the bay at night will benefit from its light, yet this use will not reduce the supply of light for other ships in the vicinity." It is a good analogy, because the theft of a copy of the latest blockbuster movie does not reduce the ability of others to view it, either online or at the local multiplex.
Of course, the light from the lighthouse isn't free. Nor is the news on CNN, nor clean air or national defense. The free rider problem, long ago identified with these public goods, has increased in the world of online information because the cost and availability of Internet access has dramatically fallen. If private companies can't make money providing information for free, they will abandon their efforts, as so many media organizations have done in the last decade.
For information, Porter writes, free is too expensive a cost: "(I)f information becomes truly free, we will stop producing any."
The Value of a Day's Work
Porter's meatiest work makes a thorough examination of the dynamics of how workers get paid and is the most relevant part of his book.
Take the history of determining the value of a single day's work. Nowadays, negotiating your own price is a common practice undertaken by millions of Americans. If you think you are worth more than your prospective employer wants to pay, you either negotiate for more money or turn the job down.
But in serfdom, and its first cousin, slavery, the price is totally set by the employer -- a situation that lends itself to some manageable labor costs, in theory. In practice, however, a company paying nothing for its labor does not mean a good deal. Porter writes, "Employers who could increase production by adding more inexpensive slaves had little incentive to invest in laborsaving technologies. Coerced workers had no incentive to become more productive -- because they would just be handing a higher surplus to the boss. Both these effects hindered economic progress."
Slaves were not free. The cost of buying, feeding and housing slaves, even in meager shanty towns, cut into the profits slave owners expected to reap. Slavery led to slower economic growth: The cost of free labor was too high.
When Prices Are Wrong
Published as the United States was only starting to crawl out of the deepest economic downturn in modern times, one that still held many European countries firmly in its grasp in 2011, Porter saves his biggest punches for his book's finale. After setting up situation after situation in which pricing is a way, if not the best way, to organize life, the first nine chapters of his book become target practice for the epilogue -- where pricing homes destroys the American economy and where economists have to derive a new theory to explain situations where the laws of pricing fail.
The theory of pricing, Porter writes, only works when relative prices are right. "When prices are wrong, these decisions are distorted, often to devastating effect. This, unfortunately, happens depressingly often," as it did between 2000 and 2006 when housing prices were boosted by 70% on average, on the belief that home prices would rise forever. During the so-called "dot-com" bubble of the late 1990s and early 2000s, any company with an "e" prefix was instantly assumed to be worth more -- an assumption that ultimately proved false after a wave of Internet companies filed for bankruptcy.
Economics must include human irrationality to be a more exact science, he argues, a paradox that lies at the heart of Porter's book. It must incorporate social norms, the pursuit of what people think they want, and individuals who will pay an exorbitant price for a seemingly meaningless object just because it's expensive. "Including all these dimensions of humanity is likely to turn economics into a messier, less mathematically elegant discipline" he writes -- an understatement for the ages -- "but, in exchange, the new economics will provide a more comprehensive understanding of the world. Also important, it will be able to grapple with the many ways in which the decisions we make based on the prices arrayed before us can take us in directions that, individually or as a society, we would rather avoid."
Porter skillfully blends economics and existentialism in his discussions of how prices are negotiated, which rescues the book's brisk 304 pages from being just another economic tome that tells readers why Starbucks charges four dollars for a venti latte or how Wal-Mart can undercut its competitors on nearly everything, from tires to lettuce. Although those topics are touched upon here, they have been so well covered elsewhere that Porter's decision not to ground his book in the everyday is far from fatal. In fact, as Porter himself could argue, they make the book worth its price.