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February 10, 2013

Charles Lawton: Price is just a gauge, not a creator, of value

"What is a cynic? A man who knows the price of everything and the value of nothing."

-- Oscar Wilde

We had plenty of opportunity in Maine last week to reflect on prices, values and cynicism. On Tuesday night, Republican Gov. Paul LePage said (among other things) that the price of electricity (nearly 9 cents per kilowatt-hour for the average industrial user) is too high. Democrats, since they regained control of the Legislature, have been arguing that the price of labor (just over $700 per week for the average Maine worker) is too low. And on Thursday, a financial planner from Newburyport, Mass., said that a price of $92,000 for a 148-year-old picture of 10 guys from Brooklyn he'd never seen before was just right.

The Maine Public Utilities Commission decided recently that 29 cents per kilowatt-hour was the right price for a proposed ocean-based wind energy project. Others argued that it amounted to a nearly $200 million rip-off of Maine ratepayers. In 2006, I thought the price of my house was about right; today, I think it's way too low. Others think just the opposite -- that it was way too high in 2006 and is about right now.

Arguments about the "right" prices as well as efforts to predict them are like arguments about the "right" weather and efforts to predict it -- ceaseless, pointless and, accepting Wilde's clever aphorism, cynical. I disagree.

To say that attending carefully to prices is tantamount to ignoring values is simply ignorant, a disservice to both prices and values. A cynic is someone who distrusts apparent motives or stated reasons, who thinks that surface appearance does not reflect authentic truth. To say that prices do or should express something of intrinsic value is to give them a burden they are not intended to bear.

Prices are information -- nothing more, nothing less. Prices are like temperature, atmospheric pressure, white blood cell counts and cholesterol levels. Few would argue that these meteorological and biological measures can or should hold the key to understanding the "value" of the weather or our bodies. What all these measures do is help us better understand the nature and operation of the world around us. What we do with this information is where value enters the picture.

Harvard political philosopher Michael Sandel, in his book "What Money Can't Buy: The Moral Limits of Markets," argues that the very fact of organizing a society around prices is "wrong," meaning inconsistent with democratic values he holds dear. At base, his argument is the critique most popularly made in J. K. Galbraith's "The Affluent Society": Fixation on private splendor produces public squalor.

Again, I disagree. Yes, celebrating Donald Trump, the Kardashians and Snooki while tolerating 30 percent high school dropout rates, a fear-infused life in the shadows for immigrants and the insanity of a four-sided adversarial-based, paranoid-inducing, procedure-focused health care system reveals a society whose sense of "shared values" is, at best, confused. But to blame markets and prices for causing this confusion is simply to increase the confusion. It's a clear case of shooting the messenger because we don't like the message, of firing the weatherman because we don't want the snow.

This country didn't solve its most fundamental problem -- slavery -- by arguing about prices. It fought a long and bloody war to enshrine in our Constitution the value that one human being could not be the property of another. Yes, markets and prices embody individual values, many of which some of us abhor. But markets and prices don't create those values. Markets are systems that emerge only when conditions are right. They require clearly understood and enforced rules, rules that change over time. We have, over the years, collectively decided on thousands of rules -- regarding child labor and food safety and occupational licensing. We are debating today rules regarding guns, ammunition, mood-altering drugs, hiring noncitizens. But those debates are much more powerfully argued and the ultimate rules they create will be vastly more effective if we leave prices and all the alleged reasons or motives behind them off to the side.

Prices are information in a social system that has produced vast wealth for billions of people. But it is the rules we set for that system, not the prices that emerge from it, that express our values. Some rules, like enhancing price discovery (think baseball card auctions) and increasing price availability (think health-care procedures), are profoundly supportive of democratic values. But underneath all, it is the rules we establish for the system, not the prices they produce, that express our values. Both the clarity of our values and the effectiveness of our public policy will be enhanced tremendously if we keep this distinction sharply before us.

Charles Lawton is chief economist for Planning Decisions, Inc. He can be contacted at:

clawton@planningdecisions.com





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