By Jonah Goldberg
Wednesday, May 22, 2024
I had Ryan Bourne of the Cato Institute on The
Remnant last week. I was disappointed to learn he’s not related to
either Jason or Randolph, but I was glad to have him on. He’s the editor of a
great new book,
The War on Prices: How Popular Misconceptions About Inflation, Prices, and
Value Create Bad Policy. It’s a collection of top-flight essays on, you
guessed it, how popular misconceptions about inflation, prices, and value
create bad policy.
One of the things I like best is the title. Because, from
a certain perspective—i.e. mine—the war on capitalism or the free market can be
understood as a war on prices.
Prices are simultaneously simple—everyone knows what
prices are, even if definitions vary a bit—and wildly complex. Socialism—I mean
real socialism, not the herring-scented welfare-state capitalism of
Scandinavia—doesn’t work because socialist systems cannot accurately price
stuff. I could spend the next few paragraphs explaining the “economic
calculation problem” and Ludwig Von Mises’ great
contribution to economics. But I gotta keep moving. Also, they promised me
I wouldn’t have to do math. I’m a words guy.
So, let’s talk about words. One of the problems with
understanding the role of prices is that we have one word—“prices”—for two very
different things. “Prices” in a socialist system aren’t the same thing as
“prices” in a market system. It’s sort of like how totalitarian countries use
words like “democratic” and “republic” while meaning something very, very
different. China is not a “people’s republic” in any way that theorists of
republicanism would recognize (certain French revolutionaries excluded). East Germany
wasn’t a “democratic republic,” nor is the People’s Democratic Republic of
(North) Korea.
One of my favorite bits in the movie Barcelona is
about hamburgers. Set in late 1980s Spain, when anti-Americanism ran really
hot, Spaniards liked to make fun of Americans as unsophisticated rubes. Ted, an
American expat living in Spain explains to his visiting friend that hamburguesas—Spanish
for hamburger—are emblematic of the problem. “Take hamburgers,” Ted explains.
“Here, hamburguesas are really bad. It’s known that Americans like
hamburgers, so again, we’re idiots. But they have no idea how delicious
hamburgers can be. But it’s this ideal burger of memory we crave, not the
disgusting imitations you get abroad.”
Prices in socialist countries are hamburguesas,
prices in market systems are hamburgers. Just as the hamburguesas look
like hamburgers, but don’t do the same job as hamburgers, the price tags in
socialist systems—on cars, bread, whatever—look like prices, but
they don’t do the same job as real prices.
Alex Tabarrok famously described prices in a market
system as “a signal wrapped up in an incentive.” Market prices take into
account vast amounts of information and boil it down to a single number. The
price of a loaf of bread at your supermarket reflects an amazing number of
variables: droughts in one place, rain in another, crop yields in both,
fertilizer costs, anti-carb fads, the price of competing products, inflation,
retail rent, war in Ukraine, agricultural subsidies, advertising, gas prices,
location, the value of specific shelf-space, and on and on. Each of those
factors is dependent on other factors with equally long lists of dependent and
constantly changing variables. There are so many variables that no expert could
grasp them all. But prices convey information without demanding knowledge of
all those variables. Prices in a market economy reflect the “is” of a
constantly changing economic reality.
In a command economy, on the other hand, prices reflect
the “ought” as determined by a handful of experts. In Venezuela, socialist
rulers—and those ruled by socialists—believed that a country with roughly 20
percent of the world’s oil shouldn’t have to pay a lot for gas. So, they
subsidized the hell out of gas. As Kevin Williamson wrote in 2020, this
ended up wrecking Venezuela’s oil industry. Fake prices at the pump,
and the corruption and mismanagement they represent, distorted signals and
prices up and down the sector, and the whole economy, to the point where the
whole thing went kablooey (I’m simplifying things somewhat).
Fake prices are a form of corruption.
Because the people setting the prices are putting politics and graft—but I
repeat myself—in front of economic reality. The corruption could be theft—gotta
move those stolen Incan matrimonial masks quickly—or fraud, or, well socialist
(or nationalist!) economics.
Another way to think about it: Prices are only knowable
through competition. It’s sort of like if you have only one football or
baseball team, it’s impossible to get a real sense of how good the team is,
because that can be revealed only by contests with other teams. You can know a
lot about the inputs—how fast some players are, their ages, etc.—but until
they’re tested against another team you won’t know the score, literally and
figuratively. Indeed, scores are a little like prices. They reduce countless variables—conditions
of the athletes, morale, strategy, teamwork, etc.—into a single number (for
bettors, the odds or Vegas line serve a similar function). That number may not
reflect the sum total of the parts, but it’s the number we work with—until the next
game.
As von Mises put it, “Where there is no free market,
there is no pricing mechanism; without a pricing mechanism, there is no
economic calculation.”
It’s personal, and it’s business.
So what’s the point of all this? Bourne and I got into a
discussion about “personalized pricing,” which is a form of price
discrimination. I am not opposed to all forms of price discrimination. I
have no problem with “surge pricing.” When traffic is very heavy during peak
hours or when, say, there’s a sporting event or concert, Uber or Lyft will
raise prices. Critics call this “price gouging.” But this ignores that whole
incentive-wrapped-in-a-signal thing. By raising the price, Uber and Lyft send a
signal and an incentive to additional drivers to turn on their apps and make
themselves available in the same way that high oil prices encourage oil
exploration. The classic example of this is umbrella salesmen in big cities.
When it’s sunny out, lots of umbrella salesmen don’t bother to bring their
inventory out on the streets. Demand is low because need is low. The only way
to sell an umbrella on a sunny day is to price the product so low that people
will be willing to buy an unneeded umbrella because it’s such a bargain. When
it rains, people need umbrellas, so the hawkers can charge a price that’s worth
the effort. That will bring out more umbrella salesmen and umbrellas. It’s an
efficient system of resource allocation, which is better
for consumers in the aggregate.
With personalized pricing, the umbrella salesman charges
rich people more than poor people. On one level that sounds fine, right?
Sticking it to rich people and giving a (relative) bargain to poor people
sounds kind of virtuous. This is basically how negotiations work. If you want
to buy a Persian rug in some Turkish bazaar, the dealer takes measure of you
and tries to guess how much he can get out of you. If he thinks you’re rich,
his “absolute lowest price” is likely to be higher than if he thinks you’re not
so well-off. No one’s holding a gun to anyone’s head, and if both get the
carpet they want at a price they can live with, so what? Personalized pricing
takes this and, with the magic of computers and animal sacrifice, tries to do
the same thing at scale.
Well, I have two problems with this. One is conceptual,
the other is … I don’t know the right word. Aesthetic? Emotional?
Pre-rational?
So let’s deal with the conceptual one. What happens to
the signal? The incentive is still there. The seller has the
same incentive he always had—to make a profit. But doesn’t the signal get
muddied? Tom Sowell seems to think so:
Price discrimination is both a
symptom of a noncompetitive market and a further distortion of economic
knowledge, as it conveys different information about the relative scarcity of
the same product to different users—causing them to economize differently, and
thus at least one of them wrongly.
Brian
Albrecht—from whom I got that Sowell quote—disagrees. He thinks price
discrimination of this sort conveys—or can sometimes convey—more information,
not less. He also argues, persuasively, that price discrimination can be a net
benefit to the general welfare. He uses an extended example of a burger joint
to illustrate the point. But I’ll offer a different one. When the
first mobile phones came out, they were wildly expensive. They cost
well more than $10,000 in today’s dollars. “Gouging” the rich—aka “early
adopters”—made it possible to cover the massive upfront costs of developing the
industry and the technology. Over time, the price went down to the point where,
today, you can get a mobile phone—with a camera!—for less than the price of two
Happy Meals at McDonald’s. The rich subsidized that. You can tell similar
stories about miracle drugs, cars, computers, etc.
But this isn’t quite the same thing as personalized pricing.
It seems to me that sticking it to the well-off when developing a new product
or technology is different from sticking it to the rich just because you can
get away with it. I’m open to Albrecht’s point that both approaches can be a
net benefit for society (a Pareto improvement)
since pretty much every consensual economic transaction is non-zero sum. The
rich person who voluntarily buys an overpriced umbrella still paid only what he
thought it was worth to him. Lots of rich people waited for
the price of mobile phones to go down before getting one.
But what happens to the signal and the incentive? Instead
of finding a price that the market can bear, isn’t the game now to chase the
marginal consumer you can overcharge? What does this do to the allocation of
resources? Apparently, most economists think this is awesome. In a really
wonderful essay for The Atlantic, Christopher Beam writes:
When you think about it, though,
dynamic pricing is a pretty crude way to match supply and demand. What you really
want is to know exactly how much each customer is willing to pay, and then
charge them that—which is why personalized pricing is the holy
grail of modern revenue management. To an economist, “perfect price
discrimination,” which means charging everyone exactly what they’re willing to
pay, maximizes total surplus, the economist’s measure of goodness. In a world
of perfect price discrimination, everyone is spending the most money, and
selling the most stuff, of all possible worlds. It just so happens that under
those conditions, the entirety of the surplus goes to the company.
I’m open to this, really. I’m certainly opposed to
heavy-handed regulation that would deny companies the ability to experiment
with such things. With one caveat: You need transparency. When you’re haggling
with a carpet merchant in the souk, thanks in part to some less-than-flattering
stereotypes about carpet merchants, you know the score. But what if you don’t
know that some algorithm has decided that you can dig deeper than the next guy
and charges you accordingly without telling you?
I’ll give you an example. When I was in Prague last fall,
my daughter and I both took out our phones to call an Uber. She was quoted
prices—for the same trip, from the same location, at the same time, with the
same choice of vehicles—considerably lower than the prices I was quoted.
Presumably both fares included profit, but if I called for the Uber, the profit
would be greater (I have no idea if the driver would share in the greater
profit, but I suspect not). But at no point did Uber tell me “this is the Jonah
Goldberg price.”
Imagine shopping in a supermarket where the prices are
all displayed digitally. Using AI and some panopticon-style tech, the store
knows—maybe from reading my phone—that I’m well-off. The person pushing their
cart a few steps in front of me is more down on his luck. As he walks down the
aisle the prices for soup, cereal, or Pop-Tarts display one number, but as I
walk by the numbers go up. That feels like actual, personal, price
gouging, to me.
Now imagine the same scenario, except you’re shopping on
Amazon and you can’t see the lower prices—for the same products—offered to
someone logging on from a poorer part of town. The price doesn’t convey
information about the scarcity of the product anymore, at least not as
clearly.
(Hold on a second while I read an ad for Express VPN.)
So far, what I’ve been describing should sound like music
to the ears of Elizabeth Warren types. Charging the rich more than the poor?
Sign her up! Sure, she’d rather the gouged proceeds all go to the taxman, not
the “greedy” corporations. But even here presumably the government gets bigger
revenues from sales taxes and corporate profits. Part of me can’t help but see
personalized pricing as private sector wealth tax. And Warren loves wealth
taxes.
But of course, Warren hates all innovation in pricing
because she thinks it will harm poor people as corporations cater everything
toward customers with greater lifetime value. I don’t think that’s necessarily
an unreasonable concern for reasons Beam gets into in his essay. After all,
personalized pricing seeks to limit the bargains for everybody, rich and poor
alike, by getting the highest price possible out of everybody. But there’s a
greater incentive to keep richer consumers happy.
And that brings me to my second objection. Look, I love
the free market. I literally wrote a book about how the ideas that created the
free market were a “miracle” that pulled humanity out of crushing poverty and
big chunks of humanity out of the clutches of tyranny. But I’ve always conceded
that one of the problems with liberal democratic capitalism is that it
feels wrong. We weren’t designed to live wholly in the world
of contracts and commerce. We are not homo economicus—and contrary
to a lot of anti-capitalist polemicists, virtually no champions of the free
market ever claimed otherwise.
I have no problem with changing prices.
Again, prices need to change to reflect economic reality. But I think there’s
something important to the idea that when the prices change, they change for
everybody. This was never a universal rule. Friends and family discounts
have always been a thing, and always will be. Having “a guy” in this or that
industry has always been a good thing. Famous and powerful people have always
been able to skirt the laws of supply and demand for things like restaurant
reservations. If I call a trendy restaurant and ask for a table for six for
this Saturday, they’ll laugh. If I say I’m George Clooney or Barack Obama,
they’ll probably ask what time is best.
But personalized pricing feels like it’s taking this sort
of thing and implementing it at scale, or at least trying to.
It also feels—note, I’m using the word “feels” because
I’m not sure I’m right—like a step backward. Or really two steps backward. The
first step backward is that the old special prices for friends and family or
for important people is the way pricing used to work before the advent of the
modern economy. Price discrimination was just a subset of discrimination, pure
and simple. A Jew who tried to buy a horse in czarist Russia might not be able
to get one at all, but you can be sure he’d pay a premium if he could. This is
why it would have paid to have a horse guy.
The second step backward is that haggling is bad enough,
but being haggled without knowing it feels even worse. That’s why I think
transparency is so important. I’m not cheap. I’m not even particularly frugal.
But man, do I hate feeling like someone is getting over on me. When I travel, I
will often stop at a store and buy snacks for the simple reason I feel like a
sucker for being charged $14 for the small jar of cashews in my hotel room.
I’ll do that even when I can pass the cost onto the people paying for my room.
I just don’t want to give Big Hotel the satisfaction. But at least I know the
hotel is gouging everybody on the cashews. (Yes, I know, it’s not gouging, it’s
simply paying a premium for convenience, but you get me.) I’d be even more
pissed if I knew the guy in the next room was getting a deal on the
cashews.
There’s just something kind of undemocratic about
bespoke pricing—particularly hidden bespoke pricing—based on
what some algorithm thinks about each and every one of us. Beam tells the story
of John Wanamaker, the Philadelphia businessman who people say invented the
price tag in the 1800. He “was a devout Christian whose advertisements promised
‘no favoritism.’ According to a hagiographic history of the Wanamaker empire
from 1911, ‘One price to all was neither more nor less than the application to
merchandising of the immortal note of equality sounded in the second sentence
of the Declaration on Independence.’” Beam also notes that, “The price tag had
practical benefits, too: You didn’t have to train employees to haggle.”
Thanks to the technology behind personalized prices,
firms are able to get the “benefits” of haggling without the haggle. But it
also reintroduces favoritism in new ways. Or at least it feels like that to
me.
The free marketer in me says I shouldn’t worry. If this
approach doesn’t “work” in some way—because consumers hate it, or find
work-arounds (which they will have every incentive to find)—it won’t last. If
it does last, it will because it satisfies needs and creates net improvements
and efficiencies that are self-justifying.
But, as a thought experiment, imagine if government did
the same thing. Yes, we have progressive taxation in the country. The more
income you have, the more you pay in taxes, not just in absolute terms but as a
share of your income (put aside partisan fluff about Warren Buffet’s secretary
for the time being). What if, for “efficiency’s” sake the government
implemented “personalized taxation.” It would be pretty obvious pretty quickly
that people would get righteously pissed off. California’s experiment with
charging higher-income people more for electricity than lower-income people
has not gone swimmingly. How much angrier would you be if the taxes were
tailored to you personally?
I have no confidence that government won’t try to get
into this game. And if it does, corruption will be inevitable. Certain groups
will get fake prices. We’d be a long way off from a Chinese style “social
credit score” that includes bargains for favored groups, but it feels like we’d
be moving in that direction. I could see a future where planners calculate the
political price of everything while knowing next to nothing about the economic
value.
Or maybe not. I’m still trying to figure it all out.
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