Eduardo Porter. The Price of Everything: Finding Method in The Madness of What Things Cost (paperback). Penguin Books, 2011, pp. 296, $16.00

Why do generic drugs cost less than name-brand drugs even though the chemical makeup is, for all intensive purposes, identical? Are wealthy people happier than poor people? Moral objections aside, can one put an accurate price on human life? More philosophically, what is the function of prices in a free market economy? If one were interested in attempting to figure out how best to answer any of these questions, Eduardo Porter’s recent book would be an excellent place to start.

In The Price of Everything, Porter (New York Times) argues that, “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.” But there is more to prices than a cut-and-dry economic calculation about how to assess which course of action to take; prices tell us about humanity. “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.”

Historians may find this last statement hyperbolic. Most of Porter’s examples throughout the text are drawn from the twentieth-century. He does convincingly demonstrate that prices do play an important role in how societies are organized. Indeed, I would argue that for post-industrial consumer societies, prices of assets, goods, and services, can tell us a lot about the economic and political health, or lack thereof, of a given polity at any particular point in time. For instance, when only a select few members of a country’s ruling political elite can afford to purchase luxury goods, there is most likely something deeply wrong with that country’s political system.

The author of The Price of Everything makes the case that prices should be understood not just as “attached to things we buy in a store,” but pretty much everywhere. “At every crossroads, prices nudge us to take one course of action or another. In a way,” writes Porter, “this is obvious; every decision amounts to a choice among options to which we assign different values.” He argues that identifying prices allows us to better understand our decisions, be they measured in money, time, or opportunity costs.

The Price of Everything is divided into thematic chapters in which Porter explores the prices of goods, happiness, life, and other aspects of life in which prices matter. In Chapter One, “The Price of Things,” he rightly contends that, “consumers’ interactions with prices are fairly complex.” He identifies the extremely important assumption held by economists, which is that people are rational actors or, in Porter’s words, “people know what they are doing when they open their wallets.” In a balanced approach, he notes that while this is often the case. “But as a general principle, the assumption is misleading in a subtle yet important way.” The difference, according to the author, is this: “market transactions do not necessarily provide people with what they want; they provide people with what they think they want.” Skeptics, on the other hand, might contend that this is a distinction without a difference.

For anyone who has taken a college-level economics course, the rational actor will be a familiar character. But what if the hypothetical rational actor does not always act so rationally? What if this assumption is flawed? Drawing upon behavioral economics, Porter states his view that, “the model of rational humanity is a powerful tool that can help us understand the behavior of men and women in many walks of life. Yet, at the end of the day, belief in the inerrant ability of our choices to communicate our preferences is inconsistent with how we actually behave.” In other words, human nature is complex. In my view, economists, unlike professional historians, make a grand assumption about human rationality, one that any historian of the twentieth-century Europe in particular, could easily refute with ample historical evidence.

For readers interested in the financial crisis of 2008 and its aftermath, the book’s epilogue, entitled “When Prices Fail,” is worth ample consideration. After discussing the housing bubble, Porter discusses speculative bubbles, in general and contends that there are some economists who do not believe that bubbles exist. While Porter does discuss the efficient market hypothesis, he fails to provide as comprehensive an overview of the subject as it merits. The author’s view is that the discipline of economics both is, and should, change in respond to the financial crisis. He contends that the belief in “unbounded rationality” is flawed. Furthermore, he contends that economics needs to embrace a more complex and nuanced understanding of human nature, one in which people do not always pursue what they want, but rather what they think they want, a point he also raised in the book’s first chapter. In my opinion, if economists happened to think a bit more like historians, wherein the world they study is understood to be a messy, complex place that often defies simple explanations, our public policy discussions might not be so polarized between the progressive left and the populist right.

In conclusion, every once and a while, an economics book comes along that is not only intellectually engaging, but also refreshingly devoid of partisanship and quite accessible to a general audience without being overly simplistic. Porter’s well-written study is one of these books. He takes the reader on an intellectual journey into the realm of prices and explains how prices, or what things cost, help explain not only economics, but also aspects of human nature. While it is unlikely that economists, let alone extreme adherents of laissez-faire capitalism, will be willing to forgo with the rational actor assumption anytime soon, it is nevertheless the case that in two decades the economics profession will look very different from what it is today. If you want an engaging and enjoyable non-fiction read this summer, and one that will leave you wanting to learn more about how the discipline of economics might adapt to the post-financial crisis era, The Price of Everything is highly recommended.

Jonathan Eric Lewis (c) 2012