In a shopping mall in suburban Maryland, the Borders bookstore was jammed with customers, who themselves were piled high with books they wanted to buy. Borders had declared bankruptcy and was closing the store, while advertising discounts on books. The shoppers sniffing out a bargain, then flocked to Borders to cash in.
The problem, of course, is that there were no "bargains" to be had. In a rational world, book shoppers would have compared the Borders prices with those of other outlets, say, Amazon, and concluded that the Amazon prices were still cheaper.
That vignette sums up neatly the philosophy behind New York Times editorial writer Eduardo Porter's fascinating book, The Price of Everything: Solving the Mystery of Why We Pay What We Do.
Economists base a lot of their study on the belief that people and prices are rational. People act in their own best interests, while prices guide people to the most efficient behavior. Porter's prodigious research finds that's not always so.
Remember the famed "employee discounts" car companies offered a few years ago? You would pay what the person working for the car company would pay. Porter uncovered an economic study which showed consumers would have paid less for the same car two weeks before the promotion than during it.
There's also the lure of the expectation of price. Wine drinkers like a product better if they think it's expensive, Porter finds. Yet a blind test of thousands of tastings found ordinary consumers liked the cheaper wine better. Wine experts liked the more expensive bottles, but not by much.
In Porter's book, everything has a price -- even free. Can a value be put on a life? That's not a philosophical question. Of course it can, and it is, and there are several variations on the theme. There are odd correlations that show up in economic trends, such as the Irish legalization of divorce leading to higher savings rates as couples sock away money, just in case.
The price of slaves (or today's version of undocumented workers) was later reflected in investments, or lack thereof, in agricultural technology. With more illegal labor, capital investments went down, then and now. Perhaps with the Arizona-led campaign to keep out undocumented workers, a follow up researcher will find a corresponding jump in investments in a few years. Porter takes a wonderful journey to explore the price and value of all sort of things -- happiness, love, women, things, culture.
Exploring the structure of today's music business, for example, Porter's take is that all that consumer money that once went into buying records now goes into buying iPods, and the 99-cent songs that Apple forced on the recording industry. Sometimes a free model works and sometimes it doesn't. Trent Reznor of Radiohead can make money giving away albums. His lesser-known buddy can't.
While today's copyright industries, primarily music, books and movies, are the sponsors of ever-more Draconian legislation to stem the tide of technology, Porter, a journalist with extensive foreign and domestic reporting chops, shows it wasn't always thus. Until relatively recently, Americans had free rein to rip off foreign works. Then, as now, some gaming of the system was required. Sir Arthur Sullivan, of Gilbert and Sullivan fame, paid Americans to put their names on some of his scores and then sign the rights to his own music back to him.
The problem is that when confronted with a situation in which a rigged market has misallocated assets or there was a market failure, we can't take any reasonable corrective action because politics gets in the way. Anyone who works in Washington or in a state capital knows that political outcomes have their price, which can vary greatly. For some Daimler Chrysler execs doing business in Trukmenistan, it was only a $300,000 armored vehicle. That's cheap compared to the millions of dollars the company spent lobbying when Daimler sold off Chrysler.
Porter also makes the point that it's hard to know what a real price is, which complicates the calculation for trying to discern how consumers should react. In a rational economy it would be easy. But what's rational about a pricing structure in which there could be 20 different prices for seats on the same airplane flight? Nothing. Because at the end of the day, prices, any prices, may not be rational, much less right. They will not send the signals that economists think are being sent. Porter's real-life observations led one conservative reviewer to brand Porter's views as "grab bag of liberal pieties disguised as logic."
If we learn only one lesson from the economic meltdown, Porter writes, "it should be this: we should never again accept unchallenged the notion that the prices set by unfettered markets must inevitably be right. Sometimes they are. Sometimes they are not."
And that's fine, because like it or not, people aren't rational. Porter opens his book with the story of his brief boycott of his expensive coffee place when the price went up a little. "There was something irrational about my boycott," Porter admitted, so he went back to his original place.
That's it. Prices can change, people can form can form their own reactions and, if we're really lucky, some sense of a rational market and rational behavior can emerge. The lesson of Porter's book is a valuable one. You can't count on it. It's the many, many reasons why which make for an engaging book.
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