The Price of Everything (4 page)

Perhaps dancers smell more enticing when they are at the peak of their fertility. Maybe they grind their hips more enthusiastically or whisper more alluring nothings. The fact is that dancers who are not on the pill made $354 a night when they were at their most fertile, about $90 more than in the ten days before menstruation and about $170 more than during menstruation.

Dancers on the pill made less money than those who were not, and their earnings were much less sensitive to the menstrual cycle. But perhaps the most interesting finding is that neither dancers nor their patrons have a clue of the effect of the menstrual cycle on their pay. It all happens below the radar.

 

 

THE TASTES IN
shopping of my six-year-old are driven by the fictitious character on the label, oblivious to price, flavor, texture, or even the purpose of the desired item. At his behest, I’ve bought Dr. Seuss shampoo, Spider-Man toothbrushes, and Cinderella toothpaste. He alternates between Dora the Explorer and SpongeBob yogurt. His tastes are not unique. A study by the people who make
Sesame Street
found that young children who are offered a choice between chocolate and broccoli are more than twice as likely to choose the vegetable when it has an Elmo sticker.

Grown-ups are expected to know better. Yet we indulge in more extreme follies, paying often-stratospheric prices for things of debatable value. People will travel across town to save $20 off a $100 sweater but not to save $20 off a $1,000 computer, an odd choice considering that both actions are priced equally: $20 for a trip across town. And, unlike my six-year-old son, who couldn’t care less what toothpaste costs, I may be more willing to buy something if it is expensive than if it is cheap.

Buying wine is an exercise that combines flavor, smell, and other physical attributes with an array of difficult-to-measure qualities—from how well it projects our self-image to whether it brings forth pleasant memories of a European vacation. Americans will pay more for a French wine than an Argentine wine of similar quality, the same grape varietal, and the same age. Simply stamping “Product of Italy” on the label can raise the price of a bottle by more than 50 percent.

Economists will tell you that, other things being equal, people will always prefer the cheaper option. But drinkers like a bottle of wine more if they are told it cost ninety dollars a bottle than if they are told it cost ten. Belief that the wine is more expensive turns on the neurons in the medial orbitofrontal cortex, an area of the brain associated with pleasure feelings.

Wine without a price tag doesn’t have this effect. In 2008, American food and wine critics teamed up with a statistician from Yale and a couple of Swedish economists to study the results of thousands of blind tastings of wines ranging from $1.65 to $150 a bottle. They found that when they can’t see the price tag, people prefer cheaper wine to pricier bottles. Experts’ tastes did move in the proper direction: they favored finer, more expensive wines. But the bias was almost imperceptible. A wine that cost ten times more than another was ranked by experts only seven points higher on a scale of one to one hundred.

Sometimes people pay stratospheric prices for humdrum items because doing so proves that they can. As the price of oil soared to around $150 a barrel in the summer of 2008, Saeed Khouri, a twenty-five-year-old businessman from Abu Dhabi, made it into
Guinness World Records
for having bought the most expensive license plate ever. Khouri paid $14 million for the “1” tag in a national license plate auction that drew Rolls and Bentley owners from around the kingdom. The number one is, to be sure, a nice digit to have stamped on a piece of plastic attached to the front and back of a car. But it is hard to argue that the number alone merits a premium of $13,999,905 over the standard fee for a regular license plate.

This behavior is surprisingly common, however. Paying high prices for pointless trinkets is just an expensive way to show off. In his famous
Theory of the Leisure Class,
the nineteenth-century American social theorist Thorstein Veblen argued that the rich engaged in what he dubbed “conspicuous consumption” to signal their power and superiority to those around them. In the 1970s, the French sociologist Pierre Bourdieu wrote that aesthetic choices served as social markers for those in power to signal their superiority and set themselves apart from inferior groups. Anybody can buy stocks. Oligarchs, emirs, and hedge-fund managers can pay $106.5 million for Picasso’s
Nu au Plateau de Sculpteur,
which sold in only eight minutes and six seconds at an auction in New York in May of 2010. Had Mr. Khouri paid ninety-five dollars for a license plate, he could have been anybody.

Over the last three decades, evolutionary biologists and psychologists picked up on Veblen’s and Bourdieu’s ideas and gave them a twist. The point of spending huge sums on useless baubles is not merely to project an abstract notion of power. It serves to signal one’s fitness to potential mates. Wasteful spending on pointless luxury is not to be frowned upon; it is an essential tool to help our genes survive into the next generation. Sexual selection puts an enormous value on costly, inane displays of resources. What else is the peacock’s tail but a marker of fitness aimed at the peahens on the mating market? It is a statement that the bird is fit enough to expend an inordinate amount of energy on a spray of pointless color.

A diamond ring has a similar purpose. N. W. Ayer, the advertising agency behind “A Diamond Is Forever,” which crafted the marketing strategy for the global diamond cartel De Beers in the United States, persuaded American women to desire big diamond engagement rings, and men to buy one for them, by convincing them that these expensive bits of rock symbolized success. They gave big diamonds to movie stars and planted stories in magazines about how they symbolized their indestructible love. And they took out ads in elite magazines depicting paintings by Picasso, Derain, or Dalí to indicate that diamonds were in the same luxury class. “The substantial diamond gift can be made a more widely sought symbol of personal and family success—an expression of socio-economic achievement,” said an N. W. Ayer report from the 1950s. Today 84 percent of American brides get a diamond engagement ring, at an average cost of $3,100.

In 2008 Armin Heinrich, a software developer in Germany, created the ultimate Veblen good: he designed an application for the iPhone called I Am Rich. It did nothing but flash a glowing red gem on the screen. Its point was its expense: $999. Maybe stung by criticism over its banality, Apple removed it the day after its release. But before it could pull it, six people had bought it to prove that, indeed, they were.

Value—what confers it, what it means—has captivated thinkers at least since ancient Greece. But the concept then was different from that of contemporary economics. For hundreds of years, the analysis of value began as a moral inquiry. Aristotle was sure things had a natural, just price—an inherent value that existed before any transaction was made. And justice was the province of God.

Throughout the Middle Ages, when the Catholic Church regulated virtually all corners of economic life in Europe, scholars understood value as a manifestation of divine justice. Inspired by Saint Matthew’s notion that one should do unto others only what one would have them do unto oneself, Thomas Aquinas stated that trade must convey equal benefits to both parties and condemned selling something for more than its “real” value.

In the thirteenth century, the Dominican friar Albertus Magnus posited that virtuous exchanges were those in which the goods that were transacted contained the same amount of work and other expenses. This idea was refined into the principle that the inherent value of goods was set by the work that went into them.

The Church gradually lost its grip on society as trade and private enterprise expanded throughout Europe. Religious dogma lost its appeal as an analytical tool. Still, the penchant to view prices through the lens of justice survived the development of capitalism, thriving well into the eighteenth century. Adam Smith and David Ricardo, the two foremost thinkers of the classical age of economics, struggled with the notion of inherent value, which they viewed as a function of the labor content of products, distinct from the market price set by the vagaries of supply and demand. Smith, for instance, argued that the labor value of products amounted to whatever it cost to feed, clothe, house, and educate workers to make them—with a little extra to allow them to reproduce.

But this line of argument got stuck. For one, it had no role for capital. Profits were an immoral aberration in a world in which the only value could come from a worker’s toil. Moreover, it didn’t seem to square with common sense. In Ricardo’s day critics were harsh on the labor theory of value. Some pointed out that the only thing that made aged wine more valuable than young wine was time in a cellar, not work. But before the idea could die, Karl Marx took it to what seemed like its logical conclusion. He used the labor theory of value as a basis for the proposition that capitalists used their leverage as the owners of machinery and other means of production to filch value from their workers.

A product, Marx maintained, is worth all the labor that went into making it, including the labor used to make the necessary tools, the labor in the tools used to make the tools, and so forth. Capitalists made money by usurping part of this value—paying workers only enough to guarantee their subsistence and keeping the rest of the value they created for themselves. This line of thinking could easily lead a thinker astray. Marx concluded that despite appearances, the value relation between different things—their relative price—had nothing to do with the properties of these things. Rather, it was determined by the labor time that went into them. “It is a definite social relation between men that assumes in their eyes the fantastic form of a relation between things,” he wrote.

This shares some of the cool strangeness characteristic of mystic thought, where things are representations of some deeper phenomenon underneath the skin of reality. But it sheds no light on why I find a glass of cold beer so much more valuable than a glass of warm beer on a hot day. I will buy a head of lettuce if its use value to me—because it is crunchy, fresh, and healthy—is higher than its price, what I have to forgo in order to get it. But if some desperate lettuce lover accosts me on my way home to offer twice what I paid, I will sell it to her at that higher price. There is no mysterious relationship between its intrinsic value and its market price. There are just two people who take different degrees of satisfaction from eating lettuce.

There’s a cool trick that teachers have used for years to expose students to the power of this transaction. First they distribute bags with assortments of candies among their students and ask them how much they value the gift—what would they be willing to pay for their stash? Then they allow them to trade candy among themselves. If students are asked again after the exchange to assess the value of their booty, they will invariably give it a higher value than the first time. That’s because trading allowed them to match their lot to their preferences. They traded things they valued less for things they valued more. Nobody worked, yet the value of the entire allotment of candies grew.

The realization that things do not possess an absolute, inherent value seeped into economic thought in the nineteenth century. Marx’s labor theory of value eventually faded into irrelevance as nobody could figure out how his concept related to the prices at which people voluntarily bought and sold real things. Things are costly to make, of course. This puts a floor on the price at which they are supplied. But the value of a product does not live inside it. It is a subjective quantity determined by the seller and the buyer. The relative value of exchanged things is their relative price. This realization lifted prices into their rightful spot as indicators of human preferences and guides of humankind.