Economics may be the “dismal” science, but every once in awhile someone comes along to liven it up a bit. Eduardo Porter is one of those someones, and his new book The Price of Everything shows just how it can be done. The abstract theories are here, but he explains them clearly in terms that the lay reader can understand. He avoids as much as possible, which is more often than not, the technical gibberish and jargon which is the Waterloo of all too many economics tomes. Moreover, he doesn’t seem to be pushing any one pet theory. He is willing to look at ideas objectively. He points out merits, and he shows where the deficiencies are. He has numbers and statistics to demonstrate what he is talking about, but he makes sure that they are illustrated by extensive examples. There is nothing like the specific case to liven up a bunch of numbers. Porter is a journalist who worked for The Wall Street Journal and is now on the editorial board ofThe New York Times. He knows how reach the general audience.
The central thesis of the book, announced in his introduction, is that all choices people make are based on the relative costs of the options available measured against their assumed benefits. Costs, in this analysis, are not necessarily monetary, nor are benefits. Costs could include everything from hours spent away from family to wearing required uniforms. Benefits might include belonging to a community or impressing the neighbors. Cost benefit analysis informs not only everyday transactions like whether to buy your coffee at Starbucks or MacDonalds; it is true of all the choices we make: what religion we follow or whether we even follow a religion; how we value life; what kinds of things make us happy. A man pays millions of dollars for a license plate because he wants people to know that he can. He values the notoriety more than the money. High priced executives who work long hours may not shop for bargains because they value their time more than the money. The life of that executive is often valued at a higher rate than that of his poorer counterpart when it comes to determining compensation for their deaths.
One of the more intriguing analyses he makes concerns the economic roots of polygamy and its cultural demise. Polygamy flourished because “it allowed economically successful men to extend their success to the market for reproduction, planting their seed in several mates.” Women were ‘happy’ with it because it gave them access to the most successful males to father their children. It faded over the years because, at least according to one theory, economic development “changed the reproductive goals of rich men.” It was no longer necessary to have large numbers of children, indeed in societies where wealth is inherited, large numbers of children would only serve to shrivel fortunes. A different theory argues that polygamy “entrenches disparities” in a society, creating the kinds of discord that disturb social harmony and ultimately have a negative effect on a society’s economic well being. Monogamy replaces polygamy for economic reasons; moral and ethical considerations come later.
Significantly, after showing in case after case that the idea of cost benefit analysis determining the prices people are willing to pay can explain all human choice, he concludes with a chapter that points out that there are exceptions. The efficacy of this analysis, he says, depends on the accuracy of the prices. What happens when pricing is inaccurate? What happens “when prices fail?” This, of course, leads to a discussion of the most pressing example of pricing failure at the moment, the housing bubble. The fact is that the economist’s theory of pricing depends in some sense on the idea that people behave rationally, while all evidence suggests that rationality may well be a sometime thing. Investors saw property values rising and made decisions based on the false idea that they would always rise creating a bubble that was doomed to burst. These kinds of bubbles appear to be endemic to capitalism. They have happened before, and more than likely they will happen again. The question seems to be whether they should be treated with traditional cost benefit analysis so that their price is factored into the equation, or they should be regulated and controlled. This, of course, is the question of the day.
Porter’s book is a lively guide through the morass of economic theory. It will explain enigmas like why merchandise that doesn’t sell, will disappear from the shelves when the price is marked up. It will explain why the more arduous duties a religious faith requires from its adherents the greater its flock. It will explain how economics determines attitudes towards the female figure, why free stuff really isn’t free, and how we pay lip service to the idea that human life is priceless, while inevitably putting a price on it. Everything has its price, and here we have a lucid explanation of where that price comes from.