Why Cheap is Good

It’s probably not fair to comment on a book I’ve never read, but here I go. I am basing most of my specific comments off of Richard Bernstein’s piece in the New York Times. In any case, Ellen Ruppel Shell, a correspondent for the Atlantic, has written a book called Cheap: The High Cost of Discount Culture, in which she argues that America’s drive to cheap, discounted good is detrimental to society overall. Her main point is that cheap goods end up lowering wages, preventing innovation, and hurting the environment.

I have not read the book, but her arguments are certainly not her’s alone, and the first two points, at least, seem to stem from a fundamental misunderstanding of economics. Simply put, there is no reason to think that cheap goods lower wages. The implication is that if people purchased an expensive bookshelf that is handmade, workers would earn more money than if someone purchases an Ikea bookshelf. This logic is faulty in at least two point. First, is that wages are not based on the end product’s price. Wages are based on the relative levels of supply and demand for labor for that particular job. In other words, if Ikea were to double its prices, the factory worker who makes the bookshelf would see exactly zero dollars of that increase.

Second, by providing cheap goods, Ikea is making the world better, not worse, off. Why? Because there is nothing preventing someone from buying a more expensive bookshelf if they want to. More alternatives creates more opportunities to find what works best for you. The argument is like blaming Starbucks for putting your local coffee shop out of business. All your neighbors chose to move from Local Java to Starbucks, and nobody forced them to do it. Similarly, Ikea only gives you an alternative, if you don’t want it don’t get it. In addition, for some people with less money, Ikea may be the only thing they can afford. Would we rather they have no bookshelf than a cheap bookshelf?

This leads to the point about innovation. The contention that because goods are cheap, there is no money to innovate ignores basic economic insight. In reality, the increased competition would force the expensive bookshelf maker to innovate in order to compete with Ikea. The entire history of economics shows us that until competition was the norm, prices were high and innovation was non-existent. Why on earth would someone innovate if they can make good money doing what they already do?

The third point, cheap goods are bad for the environment, is the most murky and probably has some merit. Often we export pollution to poor countries by manufacturing something in China / Mexico / Vietnam. These countries have poor environmental track records, without a doubt. The problem is that it is not the cheap goods that are the source of the problem. The real problem is that we, as consumers, don’t really care about the environment in China. If we did, hand-made, American-manufactured bookshelves are available. In addition, there is a decent body of research that points to the fact that environmentalism is a luxury good — we love it because we can afford to love it. It is a bit imperialistic to push those same values on our poorer friends in China. Also, if we don’t buy cheap Chinese goods, they will never get rich enough to actually care about their environment.

I understand the sentiment of the movement away from cheap goods. We all long for an old world where goods are lovingly crafted by hand. I am sure we would all love to live just like the Amish if we could. Unfortunately for us, that crazy Mennonite lifestyle flies in the face of economic reality. One final point: If you really like the Amish way of life, Cape Air has daily flight to Lancaster, PA — if you are willing to connect at BWI.

July 30, 2009 | Posted in: Economics | Author: Charles | Print

2 Responses

mrothermel - August 4, 2009

Very true. The biggest crack on Monopolies and the need for government flunkies to crank out HHI calculations is the lack of incentive to innovate. Does that mean we can now eliminate the FTC and DOJ (since they have redundant groups). I doubt it…

Very similar to “fair trade” coffee or “organically raised” beef. If you cannot compete at your most efficient, try and create a sellable value to allow your business to operate with your inefficiencies in the system. The interesting part about it is all the argumentum ad misericordiam that is made about it. The poor inefficient worker rivals the buggy whip operator of old. I wonder when/if drugs are legalized, will Mr. Bernstein and his ilk wax poetic about the street corner pusher/independent businessman being run out of business by Big Drug?
Charles - August 4, 2009

My biggest problem with the whole “coffee shop” argument — Starbucks / Wal-Mart / Best Buy came along and ruined my whole town is that it ignores the fact that your whole town was complicit in the affair. In the end, if no one went to the Starbucks, that is, they really, truly preferred the weak, overpriced, never open, small-sized coffee served by holier-than-thou employees, Starbucks never could have succeeded.

There are those who argue that Starbucks overbids for suppliers so that no one can afford to keep up (the US Steel argument), but that is, and never was, a long-term solution. In the end, Starbucks will keep innovating, lowering profit margins, and Gorilla coffee will keep up or perish — and I get to reap the benefits of the whole thing.
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