I read recently of three instances where low prices attracted consumers. Interest rates on bonds in Europe are 3% lower than in the U.S., so American companies are borrowing money in Europe. BlackRock lowered the fees it charges big clients to close the gap with cheaper rivals and attract investors to its products. Residents of New York are moving to Florida where taxes are lower.
Thus, do low prices give capitalism a bad name? Companies relentlessly work to lower costs. They pay as little as possible for labor and supplies. They may gain customers by doing this or keep themselves in business but they divert income away from workers and suppliers. They don’t like to pay taxes which in turn buy public goods. Other companies connive and lower the quality of their goods in order to move further along the price/demand curve to lower prices but more demand.
Even with high-priced status and luxury goods, those at lower, more competitive prices may find more ready buyers. Look at the trade for knock-off, counterfeit purses and Rolex watches.
It is certainly true that some people will willingly, even eagerly, pay more for goods which have emotional significance – free trade coffee, support of socially responsible enterprises or for something having an intangible but beneficial impact on culture or communities.
Yet, one could easily predict that they would choose to pay a lower over a higher price if both alternatives would provide the same satisfaction.
For every micro-economic utility function there is more demand at lower cost. That’s just the way people are and rationally so, for spending less gains them access to more of life’s flow.
Even very rich people with low marginal utility of every additional dollar earned still are prone to buying the same good from another seller if the price is less.
As Benjamin Franklin pointed out “A penny saved is a penny earned.” And the more pennies we have in hand, the more we can get out of life.
The force field of competition keeps companies at the grindstone of lowering their costs and their prices unceasingly. Prices drop to commodity levels.
Not every capitalist likes working to make a profit under competitive pressure to lower prices. Many seek relief by obtaining market power – trademarks, patents, monopolies, cartels, etc. – which permit them to sell at a premium over cost.
So, who benefits from a system where lower prices for the same quality/utility are rewarded with more customer demand?
Customers for sure, particularly those with less wealth and lower incomes.
Society, maybe not so much. And therein lies the appeal of socialism.
The environment too, not so much. Environmentally sustainable products often cost more. Ending the hydro-carbon energy civilization would cost quite a lot just now. There is little mass enthusiasm to paying those costs out of our pockets but a great wailing and gnashing of teeth that we humans are so selfish and short-sighted.
The demand for lower prices gives rise to a fundamental critique of capitalism in that the system rests on individual greed. People, day-in-and-day-out, like to have more money and spend less. Why? Why can’t they care more for others and sacrifice their self-interest to let others benefit more? If customers would pay more, workers could earn more. If customers would pay more, quality would improve and risks to society and the environment would decrease and suppliers would willingly add more value to final goods.
If we look at money as power, then a law of thermodynamics might apply. Power is flow; it gets things done; it can even move mountains. Life is more giving, more fulfilled, more complete, more enjoyable, more accomplished, more diverse, the more there is flow.
It is natural for nature to want more flow. Higher prices restrict flow; lower prices augment flow.
More flow is distributive justice.
A system with the lowest costs for the same level of purchasing power has maximum flow. This is efficiency which is good for the social order.
There is rationality in running any system to lower its costs commensurate with quality.