What is something worth?
On its face, it's a pretty straightforward question. In a free-market setting, however, it turns out to be a trick question whose only meaningful answer sounds like a wisecrack: Things are worth what people are willing to pay for them. This isn't just true for pork bellies, unloved household items that turn up on eBay, or rare works of art auctioned at Sotheby's. It applies to most of the basic staples of daily living—and it surely applies to what we call "luxuries." If tomorrow America decided en masse that it would buy no further diamond engagement rings until the per-carat price dropped to $79.93 for an absolutely flawless, colorless stone, the price of diamonds would settle at $79.93 per carat. This adjustment might not be painless; dislocations would ensue elsewhere in society. But if the American consumer's priority was to make diamonds cost $79.93 per carat, that is precisely what they would cost. The ultimate power resides with the consumer.
Things get somewhat more complicated when we're talking about highly manufactured items that are tied tightly to America's economic (and labor) infrastructure. Gasoline, for example. Though we all bemoan the price of gas, once again, if Americans decided that gas prices should rewind to $.79 a gallon, that could certainly be made to happen. In this case, of course, there would be serious and possibly devastating consequences throughout society. But if reducing the price of gas to $.79 were the top priority—if nothing else mattered as much—that outcome is within our grasp.
Today we see this phenomenon at work mostly in reverse: Millions of us all but insist on paying a lot of money for things—often useless things that would cost nothing in a world where items were ranked by function. We do this for reasons having to do with a statement we wish to make and/or a certain distance we wish to put between ourselves and mediocrity. (Conspicuous consumption is our preferred, albeit shallow, means of achieving this.) That proclivity either drives the price up or keeps the price up, depending on the item and the retail environment. Perhaps more important, this same phenomenon drives up or props up the retail cost of "lesser" versions of that Something. Like the $374,820 separating the Nissan from the Rolls, the vast monetary gulf between baseline items and their high-line counterparts creates, in any given realm, a silo of marketing opportunity for manufacturers. Within that solo, manufacturers can find price points for their respective products—products intentionally tiered to allow buyers to sort themselves out along the vanity scale. This practice is what adds a vanity tax to almost all goods (and services) in that silo except the ones at the very bottom. And sometimes those, too.
Let's be more specific and take a look at our vanity tax at work.* Suppose a totally functional car can be manufactured for $12,500. An acceptable profit margin for such a car might be 15%, which means the car would retail for right around $15,000. If, however, the manufacturer knows that consumers want to pay $30,000 for such a car, then $30,000 is what that car will end up costing. (Vanity tax: $15,000.) And why would consumers want to pay $30,000 for a $15,000 car? Because there are Rolls Royces and Jaguars and Cadillacs that condition us to do so. Because those cars, at the top of the aforementioned silo, change our slant on the definition of car. Although upper-tier items like Rolls-Royces sell in minute numbers—just 261 were delivered to U.S. buyers last year—they serve as artificial ceilings from which other manufacturers (and consumers) can "discount," thereby vastly expanding the dimensions of the ballpark. Ultimately, every item in that category of product or service will cost more than it needs to.
Put another way, if there were no Cadillacs at $50,000, then Buicks ("near-Caddys") wouldn't cost $35,000. I submit that every Cadillac sold adds maybe $1000 to the price of a Chevy, too.
Now let me be clear, lest the economists and other market-savvy types out there jump all over me. At least where cars are concerned, that extra $15,000 isn't just a huge hunk of gratuitous profit tacked onto the price of the vehicle; the consumer isn't literally being charged $30,000 for a car that was assembled for $12,500. Instead, the car maker elevates the base cost of the car far beyond $12,500 by using more costly components (say, titanium drive shafts and valve lifters) and adding other frills to "justify" the added cost. In today's manufacturing and labor climate, one does not have to try very hard to build a car in such a way that it must sell for $30,000 in order to return a profit: You just keep adding things until you get to the price the market expects to pay. But the fact that buyers are "getting what they pay for" when you tote up the cost of the constituent parts isn't the point. The point is that the car didn't need to be fashioned out of $30,000 worth of materials in order to yield a quality product that gets you from Point A to Point B. The car maker has made a car that is intentionally "too expensive" because it knows that a fair number of buyers will not buy the car if it costs what a car, in its most basic sense, should cost. Buyers are determined to overspend in order to get from Point A to Point B.
That's why I said last time that your neighbor's Mercedes is costing you money. Also costing you money are: your neighbor’s big-screen TV, his closet full of designer-label suits (purchased at the swank men’s store in that stunning new lifestyle mall, thus further inflating the vanity tax for all parties), his multifeatured "shaving system," and on and on. We hear all sorts of complaints about this tax and that tax, but the one tax we're drowning in, as a culture, is the vanity tax.
* * * *
Historically, things acquired value because people wanted them—which is to say, the thing (or at least a desire for the thing, in the raw) preexisted the value. The worth of any given object or item evolved naturally in response to supply and demand. Because people liked the shiny stones with the yellowish hue, gold acquired significant value.
In post-Industrial Revolution America, we began artificially rigging and commodifying the value equation. We began creating things for the specific purpose of being valuable, thereby perverting the entire value equation. Now we confer value by fiat. The entry-level Manolo Blahnik Open-Toe Sandal at $575, having been assigned its cost, becomes desirable and valuable ipso facto. It is valuable because it was created to be thus. It's as if someone held up a lump of clay that no one particularly wanted, announced "This clay costs $50,000!", and suddenly people decided they "had to have it!" for that reason alone.
Having learned to equate (or confuse) status with quality and/or performance, most of us chronically overpay for products and services that provide little or no benefit in anything measurable or perceptible. We go into hock to buy elite, name-brand products that offer few if any real-world advantages for most users. The ultra-high-end camera provides no added benefits that are even likely to be noticed by someone who isn't already shooting film at the Richard Avedon level. The basic Samsung at $90 would do him just fine. The difference between that and whatever he buys at, say, $490, is pure vanity tax. Same with high-end stereo. I'd be willing to bet that less than 1 in 100 people who buy the "home theater" systems showcased in audiophile stores can appreciate or even hear the subtle, esoteric differences in separation and other technological benefits that elevate these systems to their multi-thousand-dollar cost.
It's interesting to me that in times of recession, we talk about recession-proof occupations: nursing, for one. What makes these occupations recession-proof? We need them. We can't do without them, no matter how tough times get. At this juncture in history, till the field of robotics becomes much, much more advanced (and can make robots that are as robotic as many healthcare professionals), we can't do away with skilled healthcare workers. But it never seems to occur to anyone that America might need to make more recession-proof products—which is to say, products that people can't do without. Nor does it seem to occur to people that we should focus our consuming appetites on those products: things that "do stuff," important stuff, for want of a more erudite way of saying it.
We don't produce enough of these things anymore. The economic infrastructure is anchored in products and services (increasingly the latter) that people want, more than that they need. We have built a house of cards from the collective narcissism of a nation, and it is collapsing around us.
We'll wrap this up next time. I appreciate the forbearance of those who think we should've wrapped this up several posts ago.
Read previous post in this series.
* I grant you that this is an oversimplification. That's why I wanted to write the book. But I'm convinced that my argument holds in the overall.
Thursday, November 05, 2009
What is something worth?