The Price of Everything (7 page)

The understanding of humanity as a set of rational beings able to accurately evaluate costs against benefits, striving to maximize their well-being, remains immensely popular among economists. It is a bedrock belief of the conservative movement in the United States: if we understand our own preferences better than anybody else does, there is no reason for the government to butt into our decisions. It has powerful corollaries. We can’t be second-guessed. If we buy something for a given price, it must be worth at least that much to us. The market price of any given thing is the best approximation the world has of the thing’s real value to society.

The belief is not empty. It provides a reasonable approximation of real people in many situations. For instance, it provides a satisfactory explanation of why we prefer things we choose to things other people choose for us. Joel Waldfogel, an economist at the University of Pennsylvania, approached a bunch of university students and asked them to compare the value of presents they received with things they had bought themselves. To make the answers comparable, he asked for the minimum amount of money they would demand to give the items up. A total of 202 students responded, providing hypothetical prices for 538 things they had purchased themselves and 1,044 items they had received as gifts. Mr. Waldfogel found that people value what they bought about 18 percent more, per dollar spent, than what they got as a present.

As we will see in subsequent chapters, the model of rational humanity is a powerful tool that can help us understand the behavior of men and women in many walks of life. Yet, at the end of the day, belief in the inerrant ability of our choices to communicate our preferences is inconsistent with how we actually behave. As some of the prior examples might suggest, people often make decisions about prices and values that, upon careful consideration, are inconsistent or shortsighted. We change our minds and rue our actions only minutes later. We knowingly overindulge. We prize what we have more than what we don’t.

Students of Duke University, for instance, said they were willing to pay up to $166, on average, for a ticket to the big basketball game—when Duke was one of four teams vying for the championship. But those who had a ticket said they wouldn’t sell it for less than $2,411. Economists who trust human rationality see credit as an optimal tool to smooth consumption over our life cycle, allowing us to consume more when we earn less and pay it back later. The rest of us know credit cards can be dangerous. One study found that basketball fans in possession of a credit card would pay twice as much for tickets to a Boston Celtics game as those who had to pay in cash.

And we are often simply inveigled by prices. In the 1960s, the California businessman Dave Gold discovered that charging $0.99 for any bottle of wine in his liquor store increased sales of all his wines, including bottles that had previously cost $0.89 and even $0.79. He left the liquor business, launched the 99 Cents Only chain of stores, and made hundreds of millions. Since then, companies of every stripe have lured us by slapping $0.99 on the price tag. Steve Jobs revolutionized the music industry by persuading us to pay $0.99 for a song. Evidently, the number convinces us we are getting value for money.

Surveying the landscape of our idiosyncratic decision making more than fifteen years ago, Kahneman, the Nobel Prize-winning psychologist, suggested that the government should intervene to curb our tendencies toward the less than rational. We should consider, he wrote, “some paternalistic interventions, when it is plausible that the state knows more about an individual’s future tastes than the individual knows presently.” Jenny Holzer, an American artist of the 1980s who built her reputation projecting self-evident “truisms” on buildings, building them out of neon signs, and stamping them on T-shirts, addressed the very same human vulnerability on the shiny surface of a BMW race car, emblazoning it with the phrase “protect me from what I want.”

ONE OF PEOPLE’S
most deeply ingrained convictions is that the price of life is incalculable. An old Jewish teaching holds that if one were to put a single life on one scale and the rest of the world on the other, the scales would be equally balanced. The French novelist Antoine de Saint-Exupéry wondered why “we always act as if something had an even greater price than life” when, self-evidently, “human life is priceless.”

I’m not quite sure how this belief came to solidify. It might have been favored by evolution as a spur to avoid predators. Yet while true in the sense that each of us would probably accept parting with all of our worldly possessions in order to avoid certain death, this narrowest of definitions fails to account for the continuous pricing and repricing of life that has taken place since life first crawled out of the primeval swamp. More than a single price, life has a menu.

Government is impossible without a grasp of what the lives of the governed are worth. The guidelines of the United States Environmental Protection Agency, last updated in 1999, value a life at about $7.5 million in 2010 money. Britain’s Department of the Environment says each year of life in good health is worth £29,000. A World Bank study in 2007 about the cost estimated that a citizen of India was worth about $3,162 a year, which amounts to a little under $95,000 for an entire life.

Indeed, we are all ready to accept that life has a price tag as long as it’s not our own. The ethicist and philosopher Peter Singer suggested a nifty exercise to prove the point: ask yourself how much you would be willing to pay, through insurance premiums say, so the health-care system would cover a treatment to extend the life of a stranger by one year. Would you pay $1 million? $10 million? The moment you say no you have put a ceiling on the price of that person’s life. Unsurprisingly, prices like this one tend to be controversial.

Consider the September 11th Victim Compensation Fund, which Congress approved to compensate the injured and the families of those who died in the terrorist attacks against the World Trade Center and the Pentagon in 2001. Moved by generosity, mixed in with concern that victims and their relatives would bury United and American Airlines in lawsuits, Congress established the fund with an unlimited budget. Conscious of cost, however, it set tight criteria for payments, to be based on the “economic and non-economic” loss to a victim’s family. This principle set victims’ lives along a scale of values. It gave them a price.

Appointed to run the fund was Kenneth Feinberg, a lawyer and former chief of staff of Democratic senator Edward Kennedy, who had an impressive track record as a mediator in tough cases. In 1984 Feinberg brokered the $180 million settlement paid by the manufacturers of the defoliant Agent Orange to some 250,000 Vietnam veterans who had been sickened by exposure to the toxic chemical that was sprayed on Vietnamese fields. He was one of three lawyers who determined the $16 million price paid by the government to the heirs of Abraham Zapruder for the original 26.6-second film he took of the assassination of President John F. Kennedy in Dallas, Texas, on November 22, 1963. Years after he had completed his work for the compensation fund, he was tapped by President Obama to become the White House’s “pay czar” and set compensation limits for top executives at the big banks that were bailed out by taxpayers following the financial crisis of 2009. In 2010, he was appointed to administer the $20 billion fund created by oil giant BP to try to repair the damage caused by millions of barrels of oil released into the Gulf of Mexico following the explosion of its Deepwater Horizon rig.

For Feinberg, determining the noneconomic loss of the 9/11 victims was easy. He settled on $250,000 a head plus $100,000 per dependent, which he recognized as absolutely arbitrary. Measuring economic loss was more difficult. The concept of economic loss was meant to capture the forgone earnings of a dead worker, adjusted for his or her age, marital status, and number of dependents. This ensured big gaps between awards. It pitted the multimillion-dollar paycheck earned by executives at the brokerage Cantor Fitzgerald working on the 105th floor of the World Trade Center’s North Tower against the $17,337 a year made by an illegal immigrant from Peru who worked as a cook at the Windows on the World restaurant five floors above them.

Senator Kennedy, his former boss, gave him some advice: “Ken, just make sure that 15 percent of the families don’t receive 85 percent of the taxpayers’ money.” But despite the suggestion, victims’ value in death reflected the inequality they experienced while alive. Bankers were deemed to be worth more than janitors and the young more than the old. Men in their thirties were priced at about $2.8 million. Men over seventy, by contrast, were deemed worth less than $600,000. The women who worked and died in the World Trade Center and the Pentagon earned, on average, less than men. That implied that their value in death—the sum total of what Mr. Feinberg estimated they would have made during their lifetimes—was also lower. The average compensation to their families amounted to about 37 percent less, on average, than men’s. The fund ultimately paid about $2 million, on average, to the next of kin of 2,880 victims who died in the attacks. But each of the families of the eight victims who earned more than $4 million a year got $6.4 million, while the cheapest victim was valued at $250,000.

This cold accounting is about as far as one can get from Saint-Exupéry’s musings about life’s unfathomable worth. The values attached to those who died in the terrorist attacks were determined as a function of their forgone economic output—what they could no longer produce because they were dead. Tort law in the United States uses such techniques to determine compensation for victims of wrongs. But to families of the victims, they represented a distortion of what was really lost.

Family members offered all sorts of personal metrics to inflate the value of their loved ones, relative to the others. One widow said her loss of a husband of thirty-six years had to be worth more than the loss of a spouse to a newlywed. Another claimed her husband’s death was worth more because he took a long time to die, as evinced by the many calls he made from his cell phone, and so suffered more than someone who died instantly. The fund to compensate families of the dead of 9/11 produced a head-on collision between family members’ notion of the value of their loved one and the collective view that while lives are very valuable they must fit within a finite budget. It was almost guaranteed to leave everybody unhappy.

In
What Is Life Worth?
—a memoir of his experience at the head of the fund—Feinberg suggested that if Congress were ever again to craft a compensation plan of this sort it should pay all the victims the same amount. “The family of the stockbroker and that of the dishwasher,” he wrote, “should receive the same check from the United States Treasury.” If part of the idea was to keep the rich from suing, however, this is unlikely to have worked. Indeed, the families of the ninety-six mostly wealthy victims decided not to participate in the fund at all and sued the airlines instead, hoping to get more money from the courts. Though this required paying for expensive lawyers, and it took them longer to get their money, they did get a bigger payoff. Years later, the ninety-three families that settled got an average of $5 million.