The New Ideas Blog

Yesterday I was reminded how important basic principles or “key ideas,” cab be to our everyday understanding of things. I pulled a frozen meal out of the freezer yesterday and noticed the incredible amount of packaging it had. Why? It seems so wasteful, and yet there are several contributing factors to this situation, based on some key ideas about politics, economics and psychology. Understanding these suggests solutions.

Here are some of the key ideas involved:

Our psychology misleads us in certain ways.

Those who want to sell to us want to make more profits.

They make more profits if they cater to the ways our minds work.

We don’t pay the full and true costs of things in many parts of our economy.

Because we don’t pay the true costs, rational economic decision making is perverted.

True costs are often hidden because of laws that grant favors to certain industries.

First, the psychology. We all have a hard time getting past how things are packaged (which may explain our political choices too). If the exact same frozen meal was in a plain plastic bag instead of a thick plastic tub inside a big cardboard box, it would cost less, and we could microwave it on a plate. But if you saw meals in bags next to ones in colorful boxes, the latter would catch your eye, and you may even pay a bit more for them. The food never looks like the photo on the cover, but we hope it will, and in the store it looks better than a frozen lump in a bag.

You might think that a “responsible” company would want to help eliminate such waste of our resources, and just sell food more simply. But they are responsible to their shareholders, and if they make more money over-packaging items, they’ll do that. This suggests that if we want different outcome, as consumers we might have to start selecting the items with less packaging. Certainly companies would not do it the way they do if they made more sales with simple packages.

Now here’s a question: What if instead of a little bit more, we had to pay a lot more for that extra packaging? That might change shopping behavior, right? That leads us to the next important principles having to do with true costs.

We subsidize the paper industry by paying for the building of roads into forests where they cut the trees needed for pulp, or by charging less-than-market rates for leases on public lands. This artificially lowers the cost of that cardboard box. In other words we are not paying the true cost for that box at the point of sale (although we pay through taxes for the subsidies).

The oil that makes plastics is similarly subsidized with artificially low lease rates. In addition, the transportation cost of the product is lower than is natural, because gasoline taxes pay for only a part of the cost of roads (the rest is taken from other sources of taxation). This means we have also never paid the true costs of plastics or of transportation of goods.

Now, you don’t have to an economist to understand that if you artificially lower the prices, it affects behavior. If the government subsidized gas in order to keep the price at 13 cents per gallon, as they do in Venezuela (as of 2008), do you think more people might have gaz-guzzling SUVs? Of course prices affect our personal economic decisions.

Hiding the costs is a result not of free markets, but of businesses and citizens lobbying for special laws that benefit them. Paper companies want us to pay for their roads. Oil companies want cheap access to oilfields that the public owns. We all want cheap gas and low gasoline taxes, even though we have to pay for all our highways in one form or another in the end.

Now, what if excess packaging was priced according to the true costs involved? That fancy plastic tub and cardboard box might add an extra dollar to the meal. At that price, I think we would see behavior start to change quickly. This is why I favor a system that allows true costs to be reflected in prices (no subsidies or other government distortions). We might call it capitalism or free markets, but whatever the name, it sure isn’t anything like the system we have now.

And hopefully - if I explained it well - this is a good example of how learning a few important principles can open our eyes and lead to more understanding of everyday things.

Tags: everyday understanding, key ideas, principles

This entry was posted on Thursday, October 30th, 2008 at 7:15 am and is filed under Brainpower, Economic Theories, Political Ideas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.