The Psychology Of Commerce is an essay by Jack Rusher, published here Sunday, March 09, 2008. It is part of Science For Humanists.
Money changes everything.
Economists like to tell a story that goes:
“One guy has some chickens, right, and this other guy, he has some vegetables, see, and what they do is they trade. What’s so awesome about this is that the guy with the chickens has so many chickens that one chicken more or less doesn’t mean anything to him, and the vegetable guy has so many veggies that he’ll never eat them before they go bad, so — check it out, this is so cool — the guy who wants chickens more than veg gets a chicken and the who wants veg more than a chicken gets fresh veg. They both win!”
And they’re not wrong. People really do trade things they want less for things they want more, and everyone wins. The two big reasons that the barter system works this way are decreasing marginal utility (the more coconuts someone has, the less he values each coconut) and preference (one person prefers a toaster oven, another prefers a tennis racket, so they swap). These properties lead each trader to subjectively discount her own goods, which combines with the lack of an objective scorekeeping standard to make possible the aforementioned win-win.
Of course, barter can be abused too.
1. No one thinks to herself, “I’d rather be paid in tennis rackets, because what would I do with money?” She might decide she’d rather have a tennis racket than some of her dollars, but she’s unlikely to actively not want money.
2. The chicken farmer could try to swindle the veg farmer out of a vast quantity of cucumbers, but it would just put him in the veg business — that is, it would require work on his part to convert his swindle into anything else.
3. “I’ve got chickens coming out of my ears, why would I want more?” is plausible. The same sentiment regarding money is not.
Things go a little cockeyed, though, when someone tries to use barter as a model to reason about transactions involving money. Money isn’t a chicken. Money acts a medium of exchange, and thus has the same function to everyone1. It's also a store of value, which means that while there’s a limit to how much perishable veg the chicken farmer can use2, there’s no limit to how much money he’d like to have. Lastly, it serves as a token that grants social status to those who collect it3.
4. Economists who argue that a man willing to pay $10 for a rock of crack cocaine wants the crack more than the money, whereas the dealer — being rich in rock — wants the money more than the crack, are right on the face of it, but their contention that the two have made a win-win trade is absurd. Objective scorekeeping tells us exactly by how much the dealer wins on every rock he moves.
The various properties of money change the psychology of commerce in ways that are still poorly understood. While it’s fairly obvious that hoarding is more attractive with money than with cucumbers, there are other, more subtle, changes. For example, if we re-imagine the economists’ story in a monetized economy, there appears a number representing the cost of a chicken or a cucumber to the seller. This number, taken away from the price he charges, is his profit. With cost/profit numbers in hand, it’s possible to figure out in a more or less objective way who “won” any given trade, and by how much. This changes the game of commerce from the semi-cooperative win-win model of barter to a competitive zero-sum one4.
5. Buy low, sell high!
Once the players move to a game in which the goal is to gain a higher objective score on every transaction, it becomes clear that the winning strategy is to exploit the cognitive biases of others to convince them to make the worst economic decisions possible — to pay the most for what cost the least to produce5. After awhile, the general quality of goods suffers when it's understood that marketing can make people want expensive bad things more than cheap good ones, and that doing so is winning the game.