Do we pay too much for our cheap goods?

by The Quotidian

A new book examines the real price we pay to have consumer goods at relatively low cost – but offers few ideas to get us out of the mess.

One of the joys of an undergraduate economics education is the feeling that comes over you during your first or second year of having been inducted into a secret society – a sort of Harry Potter world with its own language, its own subculture, and its own special selection of intellectual tools. These are almost like little magic spells that allow you to see the world in a different way: as a world of hidden relations and counterintuitive mechanisms, a world that the Muggles can’t see though it’s right there in front of them.

Of course, this feeling is illusory, and soon fades – not just because real economics is a bit messier than the introductory stuff, but also because just about anyone can learn these basic tools and easily apply them to journalistic effect.

For example, take the concept of externalities. Freshman economics students discover that only some small subset of the costs and benefits of a transaction are explicitly reflected in the price. The price of gas doesn’t cover the societal and global effects of pollution, road construction and congestion, or highway fatalities – not to mention the political and military costs of the global oil trade, or the long-term effects of man-made climate change. We would prefer to have less of all these things, but as the price of gas fails to take them into account, we consume far too much oil and suffer far more from the effects of these negative externalities than we would prefer. A rational gas price would be much higher than it is right now and would not only pay for the cost of some of these negative effects, but also presumably reduce consumption to an optimal level where the costs are in balance with the convenience of driving.

It should be no coincidence that today – on the heels of a decade that saw an unprecedented explosion in the numbers of economics graduates – that there’s suddenly a whole genre of journalistic writing devoted to pointing out these externalities. You could fill an IKEA “Billy” particle-board bookshelf with only recent hardcover books about the unpriced social costs of the American diet, from the health costs associated with obesity to the planetary ruin driven by intensive industrial farming. While a cynic in Oscar Wilde’s day was someone who knew the price of everything and the value of nothing, today’s post-Freakonomics writers know not just the price of everything, but all of its hidden costs, perverse incentives and counterintuitive results.

CheapCoverThe Atlantic correspondent and contributing editor Ellen Ruppel Shell’s Cheap: the High Cost of Discount Culture is an application of exactly this sort of knowledge — albeit with a broader scope. The thesis is essentially that a peculiarly American culture of low prices is the true cause of what’s traditionally been blamed on industrialization, globalization, and the fetishization of the free market. In Shell’s view, everything from the environmental catastrophes of modern food production to the human rights abuses and repressive politics of the developing world can be laid at the door of the American cult of the bargain. The death of traditional craftsmanship and the hollowing out of the skilled middle class, big-box-driven suburban sprawl and Walmart’s uniquely abusive relationship with its vendors are not the result of rampant market forces but rather a product of America’s distinctive culture of cheap.

The problem is that it’s not at all clear that there is any such thing as “discount culture.” The imaginary subspecies of Homo economicus – the perfectly rational consumer upon whom the models of classical economics depend – is now generally thought to be extinct, but surely the drive to get more for less can be regarded as fundamental, even if we are not always perfectly rational in our conception of what constitutes a bargain. Though our calculations may be distorted by advertising, salesmanship or outright psychological trickery, we’re only trying to make the most of our limited purchasing power.

Meanwhile, profit-maximizing producers seek to cut costs wherever possible, adjusting prices to whatever extent necessary in order to avoid leaving revenue on the table in the form of underpriced sales or unsold goods. These are among the fundamental laws of economics, however complex and messy the details of their real-world interactions may turn out to be; and if economics is in fact a science, then there’s no need to look for a cultural explanation for a straightforwardly economic phenomenon. Biologists don’t appeal to a culture of adaptation, nor physicists a culture of relativity, in order to explain the failing of their theories to conform to observed reality; they simply find new, more complex theories that better explain their observations.

Ultimately, what Americans love the most about cheap goods is that they don’t cost very much money. Shell argues that the American middle class destroyed itself with its appetite for cheap consumer commodities, as the provision of those commodities through industrial mass production made skilled workers redundant, replacing careers in the skilled trades with unskilled and lower-paid jobs. This is true enough as a description of the facts, but there’s a bit of a chicken-and-egg problem: did skilled workers drive themselves out of their careers by demanding cheap commodities instead of the expertly crafted, high-quality goods that they themselves had been employed to produce, or did they turn to Woolworth’s and Walmart because that’s all they could afford on the low wages they were earning in their new unskilled jobs?

An account of increasing inequality in American society has to acknowledge the changes that took place at the top, and not just the stratospheric overpayment of CEOs, which Shell does mention. The increasing share of our national income that was seized by the upper class had to come from somewhere; if the middle class did in fact commit suicide-by-bargain, it was at very least an assisted suicide, with growth-addicted Wall Street investors at the bedside administering the fatal dose.

It’s a tribute to Shell’s journalistic work, however, that Cheap can leave its central thesis in doubt and yet still succeed, both as a caution and, to some extent, as a call to arms. The early chapters are gripping in their historical and sociological treatments of the rise of discount retailing, as well as their account of the psychology of bargain-seeking, with all its hardwired irrationality. But it’s the later accounts of the externalities at work in a few key industrial success stories that are the most thought provoking.

The most surprising example might be that of IKEA. The flat-pack furniture specialists go to great lengths to cultivate a friendly personality for their brand. They trade heavily on their Scandinavian heritage and all the egalitarian and utopian associations that go along with it, but it turns out that mass-producing cheap wood furniture is a nasty business. Their sourcing is problematic, in part because at their intended price points they can’t afford to pay for sustainable, responsible forestry. Instead, they buy vast volumes of wood from sources in China and Russia, countries whose commitments to basic rule of law – much less sensitive environmental policy – are very much in doubt. Most of their product is made by outside vendors and contractors mostly in China, a country whose labor practices are as loosely regulated as its forests.

Further eroding IKEA’s friendly façade is the fact that the company is arguably not even Swedish at all, despite all the meatballs and lingonberries and vaguely progressive cheerfulness. IKEA belongs to a holding company in the Netherlands, one of Europe’s last remaining tax havens, and the holding company is itself owned by a tax-exempt charitable foundation based in Sweden. Forget irresponsible forestry, the carbon costs of global shipping and the redundancy of traditional skilled craftsmanship — if quasi-legal tax evasion on IKEA’s scale is a “hidden cost,” then it’s hiding more or less in plain sight.

The following chapters go on in the same vein, with bad news about food production in the developing world and bad news about large-scale industry in general. It turns out massive industrial shrimp farming in Thailand is a nasty business, as are concentrated feedlot ranching in the United States and low-cost processed-food production in melamine-mad China. In fact, if the American appetite for cheap goods is the villain of the piece, then China, the factory to the world, is its co-villain, or at very least the villain’s senior henchman. Making cheap plastic Thomas the Tank Engine toys turns out to be a nasty business as well, whether or not the toys end up being sprayed with lead paint on top of everything else.

Even at their best, China’s factory cities aren’t exactly paradise on earth. Human rights are routinely abused, regulations are flouted, conditions are squalid, and there’s neither the internal will nor the external incentive for reform. The unpleasant fact is that this sort of manufacturing is a major, vital share of China’s national income. A rise in labor standards would cause a rise in labor costs, and the foreign firms who contract there would have no qualms about taking their business elsewhere, causing incalculable harm to the Chinese economy.

A true, depressing, and by now somewhat familiar story – but what can be done about it? If this is where Cheap runs out of steam, it’s only because at present it seems to be a question without any satisfactory answers. Shell leaves us with a reminder that we, as consumers, hold at least some of the cards. We are free to vote with our wallets, either for or against the deeply unpleasant practices of the global manufacturing economy, but it’s worth considering the immediate effects of such a vote.

The workers in these latter-day sweatshops are, after all, taking part in China’s astounding economic growth. They’re certainly not seeing anywhere near a big enough share of the proceeds, but it’s hard to imagine a mechanism by which their lot would be improved were enlightened American consumers to suddenly withdraw their dollars. To some extent, the life of a sweatshop worker is a freely chosen one, however miserable the choice may be; it’s a choice between a Dickensian life in the heart of the Chinese industrial revolution and an even more unpleasant life in the medieval poverty of the rural villages.

As consumers, we can continue to spend as we do and thereby maintain the unacceptable status quo, or we can withdraw our dollars and quite possibly send China’s modernizing labor force back to agrarian feudalism. The unhappy conclusion is that simply by virtue of our participation in the globalized economy, we’ve got dirt on our hands – no matter how we choose to spend our money.

This isn’t a case for hopelessness, however. We can indeed go a long way towards revitalizing a certain segment of the American economy by buying local, avoiding the big-box retailers, and paying a premium to companies that value quality craftsmanship, responsible environmental practices, and fair and just labor relations – in other words, pricing in the externalities. But what can we do with our wallets to improve the situation overseas?

When Shell writes that “power resides not only in the voting booth but in our wallets,” she’s nudging us toward the conclusion that the wallet is the more important of the two. But in today’s world we could stand to be reminded conversely that while we can vote with our wallets we can also vote with our votes. Despite what free-market apologists would have you believe, economic power is not the only kind of power in the world — to accept that is to enter the discussion on the terms set by the market fundamentalists. Even a relatively orthodox economist like Amartya Sen or John Kenneth Galbraith would likely agree that what the developing world needs is institutional power to balance against the economic power of the developed world. This means things like trade unions, or at least enforceable labor laws – and when we talk about these things we’re talking about imposing some meaningful regulations on global trade, a task that’s quite beyond the reach of a consumer boycott. Human rights and civil liberties aren’t bought by individual consumers at Whole Foods or Costco or Wegmans, they’re given, or taken away, by governmental action, and there’s every reason to believe that Washington or the G8 or the UN are in a better position than any consumer or group of consumers to negotiate these issues with the Chinese government.

Perhaps it’s more satisfying to think of ourselves as global economic free agents, changing the world unilaterally, if incrementally, through our buying habits. How many dollars do we really have to spend? How much economic power can we really bring to bear? As citizens of a democracy, our individual share of America’s still-considerable political power has the advantage of being, in theory at least, equal to that of a Sam Walton or a Bill Gates. Political power has its drawbacks, of course, especially in a democracy; it’s slow, it’s inefficient, it’s shot through with compromise and half-measures, and worst of all, it’s unglamorous and often very boring. But it’s power nonetheless – even if there’s nothing hidden, perverse or counterintuitive about it.