Now there’s a gripping headline! And look how long this post is! Next!
Stay with me anyway.
You know it’s a slow news day when the Hot Air quotes of the day are all about race and Jerry Seinfeld. I’ll pass on that particular controversy, although Noah Rothman does delightfully beat up a moronic Gawker writer about it here. Let’s talk about something else: the consumer surplus. (Woo-hoo!)
Why discuss that economic concept? Because I think the consumer surplus, and a couple of other economic concepts, reveal a lot about our current notions of “income inequality.”
Also, because it’s better than talking about whatever the stupid story of the day is. I listened to the “consumer surplus” concept discussed on a recent Russ Roberts podcast, and sometimes I think it’s fun to change things up on the blog by discussing things I have learned on one of his podcasts.
I’m not sure if you’re familiar with the notion of a “consumer surplus,” but the idea is that consumers often get far more value out of a good or service than they pay for it. Here is (in my view) a comically understated explanation from Forbes in 2012:
But TANSTAAFL [There Ain't No Such Thing As A Free Lunch] misses an important point: sometimes we can create value, not just move it around. Take the new iPhone 5. Recent reports put the cost of the components at $199 (for the 16 GB model), plus another $8 for assembly. The price to consumers: $649. This is a free lunch. Apple has taken $199 of parts and $8 of assembly effort and created something that consumers value in excess of $649. They have created more than $442 of value with every iPhone sold.
The consumers who buy the phone believe that they are better off with the new iPhone than with $649. Most of them would probably be willing to pay even more, say $659 or $699 to get the phone. This difference we economists call “consumer surplus.” It is the difference between the maximum that a consumer would be willing to pay, and the actual price the consumer has to pay. It’s immeasurable, but certainly a positive number. (If the consumer did not value the phone more than the money, he or she would not buy it.)
I have two completely contradictory reactions to that:
1. There is no way I would ever pay $700 for an iPhone. I just get upgrades, which are either free or cost me $100.
2. If I had to, I would pay waaaaaay more than $700 for an iPhone.
Contradictory? You bet . . . but bear with me. I think there are two principles at work here. I know the name of one of them, so let’s start with that one: the consumer surplus, which says that $649 is a great deal because the phone is worth so much more than that.
I am wedded to my iPhone, and it does all kinds of things for me. I surf the Internet for fun on it. I settle bets by referring to it. I get instant answers to things I wonder about by using it. I listen to podcasts on it. I listen to music on it. I listen to radio on it. I use it to text, take pictures, look at pictures, take videos, look at videos I made, look at videos on YouTube, illuminate objects, figure out the name of a song I hear, learn foreign languages, read books, give me directions to places (including finding my way around traffic), learn when music concerts I want to see will occur, wake me up, remind me of things, make notes, play games, watch live television, learn what the weather will be like tomorrow, make travel plans, time something, as a calculator, and probably a few other things I haven’t thought of.
Oh. And I use it to make calls.
If I had never bought one of these devices before, had never heard of such a device before, and had no idea what a device ought to cost, what might I pay for such a device? Probably thousands of dollars. A device that useful, with so many ways to make life easier, is simply incredible. I once paid well over $100 for a GPS. That’s just one of the many things this phone does. I have paid over $100 for an iPod. This thing can access the cloud and in that manner access far more music than even my 160GB iPod. The individual functions this device is capable of, added together in one small package, is easily worth thousands to someone who could afford it. To some, it might be worth tens of thousands, or more.
That is why the passage above is comical. I might pay more than $649? Maybe even $659?? or $699??????? No, I would probably pay over a thousand, easy. Easy!
That’s your “consumer surplus.”
Except, of course, there’s no way I would pay over a thousand dollars for one of these things. The idea of paying even $700 is ridiculous, but $1000 is unthinkable, for at least three reasons: 1) that’s not the price, and 2) I have never paid remotely close to that, and 3) I don’t know anyone who has paid remotely close to it.
Let’s look at some other things that are absurdly cheap to illustrate the point. I cringe at the idea of paying for an iPhone app. Why? Most are free. But if I do, it had better not be more than two bucks. Even if it’s a great app that will make my life better in countless ways, paying over two bucks is just shelling out too much money. (Excuse me for a moment; I have to pay the Starbucks guy for my coffee. Here you go, two, and there’s fifty cents, and another quarter is $2.75. Cheap for Starbucks, I know, but hey. I’m a simple guy.) So what was I saying? Oh yeah: paying over two bucks for a really super-cool app is ridiculous. Because most apps cost 99 cents or $1.99 at the most.
Similarly, I recently bought a giant mess of classical music, something like 16 hours’ worth, in an .mp3 format, for 99 cents. The quality won’t be high fidelity, and the performances may not be the Vienna Philharmonic, but I don’t know much about Haydn, and this will give me exposure to a lot of his music for less than a penny a track. But that Bach set for $2.99? Outrageous! It’s three times the cost, and it’s still only 15-16 hours of music!
Of course, there was a day when I would have considered $20 to $30 for such a collection of music on CD to be a bargain. And many of these apps are frankly worth way more than 99 cents. Mrs. P. has logged an embarrassing number of hours on some game called Plants vs. Zombies. I think it’s 99 cents, and I guarantee you she has paid less than a penny an hour for the privilege. But if she had been required to pay $5 for it? I don’t know if she would have gotten it.
And I would feel like a sucker if I found out that they had been giving away that Haydn set for a year, and jacked up the price to 99 cents the day I bought it. I got ripped off, man!
A ridiculous notion? Not really. So much of what we have access to is not just very cheap, it’s free. Russ Roberts and his guest pointed out that a fellow named Sebastian Thrun has made his intro class on artificial intelligence at Stanford available online. You can go take it right now. In fact, I might do it myself. It’s free. Through the Gutenberg Project, you have access to a lifetime of classic books, for free. I have paid scads of money in my life for piano music and musical scores, but I challenge you to think of something you can’t get for free here.
All of a sudden that CD Sheet Music set I got for $18.99 seems like an incredible ripoff. All of Schubert’s songs in one place? The equivalent of books I might have paid hundreds for? I can get that free on the Internet!
I sense two things going on here:
1. Our standard of living is greater than it has ever been, and countless conveniences and worlds of information are ours for a pittance. (Consumer surplus.)
2. If someone else seems to be doing better, or is getting their stuff just a little cheaper — or if we paid a little more now than we did in the past — we’re still going to be pissed off. (I don’t know the scientific or economic name for this, but in the Bible I think they call it “envy.”)
That, to me, is our “income inequality” issue in a nutshell.
Who among you would trade his life today, as poor as you may be, for the lifestyle of a king in medieval times? No Internet, no planes, no cars or trains or computers or vaccinations or central heating and air conditioning or running hot water or antibiotics or modern surgical techniques. The poorest person in America reading this Web site on his computer has a lifestyle outstripping those of most monarchs in history. But many of you (mostly lefties) are still bitching that someone else has it better.
That’s my long-winded response to the Barack Obamas who whine about income inequality. Just because someone else has it better doesn’t mean you don’t have it pretty damned good. So shut up and go enjoy something that this amazing world has made available to you for free.