"Whenever I go into a restaurant, I order both a chicken and an egg to see which comes first"

Thursday, October 31, 2013

How Much Should I Pay? The Answer Is In Our Blood

All economists will tell you that there is no such thing as inherent value.  That is, the price that is charged for a good or service is determined by both supply and demand; but this apparently simple equation is in fact very complex, particularly on the demand side. Our willingness to pay has as much to do with our personality – the way we are and how we see the world – as with dollars and cents.

One of my uncles used to spend hours on the phone and later on the computer trying to get the best price for everything he bought from screws and light bulbs to yews and Atlantic salmon.  He had been brought up on a Western farm during the Depression, and for him it was foolish if not downright stupid to pay anything more than rock-bottom prices.  His wife, who had grown up in easier circumstances and whose family had not struggled, grew irritated and impatient with him.  He could be making better use of his time, she hectored.  He spent so much time squirreled away in his office, his voice rumbling on about sales and percentages off, bulk buys, and two-for-one offers, that he squandered other, more remunerative opportunities.  He could have been a high-priced business consultant, she argued, and instead he was up there quibbling about saw blades and grass seed.

For him, items did indeed have absolute value – the lowest possible price; and there was no give in his conclusion.  Opportunity cost had no place in his economic ethos.  Consulting and niggling over price were two entirely different and separate issues.

This particular world view extended beyond the marketplace.  There was only one right way to travel from Point A to Point B – the shortest, least congested route, which would save gas, and wear and tear on the car.  He and his wife would pore over maps, AAA Trip Tiks, and travel logs to select the best possible route.  Again, there was absolutely no give in his calculations.  There was only one right way.

When I was about ready to leave for home after a visit, he always asked me how I was going to go. “You should take Arthur Boulevard to Rt. 350”, he said, “then take Fern Road”. I always replied in the same way, explaining that I was going to take the Parkway.  Although it was quite a bit longer, it was always fluid and uncongested and wound through wooded countryside.  Best of all, my route had few turnoffs. I could engage the cruise control, crank up the music, and let my mind wander. The value of this pleasant, simple, but longer route was worth the extra miles.

I should reconsider, my uncle insisted. “Here”, he said. “Look at the map”. He was stubborn, obdurate, and implacable, and cheap.

My parents were the exact opposite of Uncle Harry, and they did things that drove him nuts.  They bought a new car every two years – a Cadillac at that – despite the well-known rapid depreciation in value.  They ate in restaurants that my uncle considered ‘ridiculously overpriced’ – no food, the said, regardless of the care or artistry in its preparation or the liveliness and attractiveness of the venue, was worth what they charged.  My uncle scoffed at my parents who bought clothes at J.Press, Brooks Bros. and Neiman Marcus when perfectly good seconds could be had at Marshall’s or factory outlets.  My mother and father were profligates, wasters, and incorrigible spendthrifts.

Not at all, said my parents.  My mother understood that my father needed some unalloyed pleasures after a hard week’s work, and a $250 meal at La Rotonde was well worth the expense. Buying all his clothes at just a few familiar stores which were traditional enough to rarely change their styles, meant that my father never had to waste time thinking about fashion.  He needed to look good, and could be in and out of the store in a matter of minutes. 

I never balk at buying a first-rate, hundred dollar Pinot from Willamette Valley wine, because I don’t spend money on much else.  When I am in New York, I choose restaurants by their reputation, not by price.  I visit the city once or twice in five years, and the escape from the dull, drab, and banal offerings of Washington eateries is worth even twice what I pay in New York.  I drive old cars, wear shoes until they wear out, and read books from the library. I have money for foie gras and truffles. Value is relative.

Most Americans have an almost instinctive sense for pricing, and make purchases according to their upbringing and personal sense of value, cash flow, and perceived quality. More than that, Americans deeply understand variable pricing.  We know that the Exxon on the east side of Mass Ave charges one price per gallon, while the Shell on the west side charges another. We understand that the traffic flow on the east side catches the morning commute when people are looking for an excuse to delay work, so prices are higher than on the west side which services the homeward bound thinking only of two martinis, dinner, and a roll in the hay.

We don’t flinch at bananas at $2.00 apiece at a K Street vendor’s.  He understands that the health-conscious Thirty-somethings turn their noses up at the cheaper brats and half-smokes on the next block.  We are used to beach prices and end-of-year sales bargains.

My children thought it would be fun to make some extra money by washing cars.  The next door neighbor agreed, and for five dollars they began to wash and wax Mr. Deming’s 1970 Lincoln Continental, a car the size of a small yacht.  It took them forever.  They ran out of soap and wax, and had no time for play. “You didn’t charge him enough”, I said. “You need to figure in the actual cost of materials, value your labor time in terms of length, difficulty, and the lost opportunity to do other things, and then set a price.  I guarantee you it will be way more than five dollars, and Mr. Deming will be happy to pay it because whatever it is, it will be way below what the carwash charges”.  From then my children never undercharged – not in after-school or summer jobs, nor in their professional and business lives.  They had learned the American lesson, and it seeped deep into their pores.

At about the same time my children began to question the value of their allowance which was set in part as recompense for household chores.  “Why should I get the same amount as Jennifer?”, my son asked. “She vacuums the rugs while I clean the toilets.  Cleaning toilets is disgusting.  I should be paid more”. 

“No”, I replied. “Cleaning the toilets takes you half the time she spends vacuuming rugs.  You have the better deal.” My son thought about it.  Another lesson learned, and it seeped down even farther through the pores and into his bloodstream.

A number of years ago, shortly after the fall of the Soviet Union, I worked in Romania.  Going from a Communist economy where prices were fixed by government, and the laws of supply and demand did not apply, to one where any price was fair if you could get it was shocking, mystifying, and very disturbing.  People were adrift in a new world which operated according to different principles and rules. Not only did prices now fluctuate, but history was being revised, the cradle-to-grave welfare system dismantled, and tenets of science reconsidered.

In the early days after the fall of Ceausescu, some prices remained low while others increased.  The cost of a taxi ride was still the same as it had been under the Communists, but gas was more expensive.  Food was now approaching market levels, but wages were still low.  The new economy was out of joint. 

A taxi driver once complained about how little money he was earning, and now that he had to pay more for everything, he was becoming poor.  “Why don’t you charge more?”, I asked.  He did not reply.  He could not reply, for he had no sense of pricing in a market economy. He would soon learn of course, but it wasn’t easy. It was not in his blood.

In fact Romania, Poland, Bulgaria, all of the former Soviet bloc states learned very quickly indeed. New entrepreneurs knew where latent demand was emerging and priced accordingly.  They saw foreign investment generate jobs and wealth and found that they could charge more for goods and services.  Before long, the market economy was humming.  Some countries like Poland which had never been fully under the thumb of the Communists and thanks to the large Polish diaspora in the United States had both foreign exchange and access to capitalist ideas.  Others, like Russia stumbled along the way, went through periods of oligarchy rule and corrupt predatory economic behavior; but all in all, Eastern Europe made its way quickly forward.

A good case can be made that supply and demand “in our blood’ is not simply a metaphor, but may be part of our genetic or at least social makeup.  After all, cavemen bartered all the time – a jaw bone for a chunk of mastodon meat, for example – and the most primitive societies in the Amazon buy and sell goods and services and understand how to set prices given supply and demand. Americans have simply become very, very good at it.  Masters in fact. We are still the most successful economy and the most entrepreneurial because our young capitalists have an instinctive sense for what sells and how much to charge.

‘Engine’ Charlie Wilson, former CEO of General Motors once famously said, “The business of America is business”. He understood that the United States wasn’t simply a capitalist country.  It was the capitalist country.  We all lived and breathed money. We were passionate if not preoccupied about making it.  It was the be-all and end-all of life.  It was our culture, our philosophy.  It defined us as a nation.  We understood money better than anyone else.  Buying and selling is in our blood.

 

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