Name Your Price

On June 19, 2012, in economic theory, housing, by admin

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 [...]

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

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Why America Is Not in Decline

On June 15, 2012, in economic theory, by admin

Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00 Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance [...]

Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00

Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance at the news would lead most observers to conclude that this country faces some entrenched, systemic, and nearly unsolvable economic problems. In June 2012 alone, news outlets have reported that the trade deficit is at its highest in the past three years, employment for 16-to-19 year olds is at the lowest level since the Second World War, and that foreclosures are on the rise. All of this data hardly inspires optimism about America’s ability to recover from the Great Recession. In addition, there is a growing worldwide perception that China is a stronger economic power than the United States.

Despite this doom and gloom, however, one economics writer has chosen to see past the constant pessimism that seems to pervade the nation’s policy discourse. In Better, Stronger, Faster, Daniel Gross (Yahoo! Finance) seeks to challenge what he perceives as the conventional wisdom that the United States is in a state of economic decline. According to Gross, many on the political left and right, as well as those in the center, have succumbed to economic declinism. While Keynesians consider President Obama’s response to the economic crisis as too passive, the Tea Party sees the current occupant as the White House as a socialist. All the while, academics published works detailing how American glory days are over.

Gross refuses to accept the narrative of American decline and challenges it at every turn. Indeed, the vast majority of the information presented in Bigger, Stronger, Faster is intended to build the case against declinism. The title of the author’s most recent work is an allusion to The Six Million Dollar Man, the 1970s television show in which doctors rebuilt the character Steve Austin, an injured astronaut, as the world’s first bionic man. In the show’s opening credits, it was stated that the doctors could rebuild the wounded Austin, played by Lee Majors as better, stronger, faster.

“And like Steve Austin,” writes Gross, “the U.S. economy can bounce back from its catastrophic wipeout. In fact, the process has already started.” This is the central thesis of Gross’s work, and one which he goes to great lengths to support. He marshals a vast array of evidence in the form of both statistics and anecdotal observations. Significantly, in his point of view, when trying to understand why things may not be as bad as they first appear, American Exceptionalism matters. “The reality-based case for optimism rests in large measure on an understanding of America’s core competencies and competitive advantages; attitudes, habits, and capabilities that, even in this age of globalization remain unique.” In the American context, adaptability is key.

Gross delineates three internal factors that, in his estimation, lend credence to his argument against declinism: policy decisions, including the bailouts and stimulus, which, in the author’s estimation, succeeded in preventing a second Great Depression and laying the groundwork for a recovery; the speed by which the private sector responded to the crisis by restructuring; and a move toward efficiency. That said, Gross considers that external forces matter even more than internal ones. “And while these efforts [government policy decisions, business restructuring, and efficiency] were vital and useful, the main forces that have helped propel growth came from external sources, not internal ones.” The United States, Gross reminds us, ranks first in foreign direct investment (FDI) and is the world’s top exporter, including in service exports.

In the book’s conclusion, Gross does rightfully concede that the United States does indeed face some daunting challenges. “There’s no question,” he writes, “the United States has a very long way to go to make up for the lost ground in the economy at large, in housing, and in jobs.” But he also contends that the United States has experienced “a huge comeback.” There is nothing necessarily inaccurate about Gross’s thesis that we are on our way to an economic recovery.

Better, Stronger, Faster does provide ample evidence against the declinist faith. But the more salient question might be what the American economy would look like today but for the Great Recession? Coming back from the brink of disaster is one thing; having avoided the debacle in the first place is a different thing entirely.

In my estimation, Gross, in his zeal to prove the declinists wrong, somewhat overstates his case. Although he does acknowledge the debt and the deficit, he gives them short shrift. In addition, nary a word is said about the plight of the Millennials, many of who are in debt, are living back at home with their parents after graduation from college, and have bleak job prospects outside of unpaid internships. The American economy may have recovered better, stronger, and faster, but this means very little to those saddled with tens, if not hundreds, of thousands of dollars in non-dischargeable student loans.

In conclusion, Better, Stronger, Faster is a largely accessible and an engaging study that seeks to combat the pervasive narrative that the United States is in economic decline. Whether one agrees with the author’s thesis is perhaps situational, in the sense that a graduate-educated, gainfully employed technology professional in Silicon Valley would agree that things are getting better, while an underemployed college graduate in the Sun Belt saddled with student debt would think Gross highly mistaken. Whatever the case may be, the debate about whether or not America is in economic decline likely will continue to rage throughout the next year.

Jonathan Eric Lewis (c) 2012

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