The Going Rate

The story I've always been told about prices is that they're set by the market. No central mind could ever gather up all the scattered, local, half-articulate knowledge in an economy, and so the price system does it instead, compressing millions of small facts about scarcity and desire. The price of a pencil knows things that no person knows. It is a beautiful story, and I believed it, and I still do, but I now believe it's more complicated than that.

Consider what people actually charge. Consider your plumber. Or your lawyer, or your freelance designer, or the man with the truck who will haul away your old couch. The people themselves vary enormously. If the market were truly pricing each of them, the prices would vary the way the people vary, in their judgement, nerve, neuroticism, honesty, naivety, etc. Instead there is a going rate. Everyone seems to charge within a narrow band of it, the excellent and the mediocre alike, as if human skill were a commodity like wheat. It is not. The uniformity is the puzzle.

So where does the going rate actually come from? Let's watch it form. Here it goes! One tradesperson is sending a text message to a friend in the same trade, asking what he'd bid. Now its appeared in a forum thread titled, "What are you all charging for this now?" Now it's just shifted over: a salary has just been confessed over beers by the coworker who is leaving and finally free to tell the truth. Now there it is in a leaked spreadsheet! In the trade association lunch, in the conversation at the supply house counter, in the recruiter who states the rates as if reciting a law of nature, in what so-and-so makes, in what so-and-so got away with.

None of this is called the market. It is called talk.

And I have come to believe it does most of the actual work of pricing. Adam Smith, of all people, saw it plainly: people of the same trade seldom meet together, he wrote, even for merriment and diversion, but the conversation ends in some contrivance to raise prices. He offered it as a warning about conspiracy. It reads to me now as a simple description of how prices actually get made.

An economist will object that this is the market, that talk is simply the mechanism of discovery, and that I have described price formation, not refuted it. Fine. But then we should be honest about what the mechanism is made of, which is not supply curves! It's not math, it's not systems! It's fairness, embarrassment, envy, loyalty, nerve, the fear of being thought greedy, and the deeper fear of being played for a fool.

A process built out of those materials does not produce a reading from an instrument. It produces a consensus, the way a neighborhood produces manners, and the consensus then gets dressed up in the costume of a market outcome and credited with an intelligence it never exercised.

I don't really know what follows from this. I just thought it was interesting But I find I can no longer look at a posted price, or a salary band, or an invoice, without seeing the human network standing behind it: the phone calls, the group chats, the parking-lot conversations after the job is done, the lunches, the hushed confessions between friends, all of these people quietly asking one another the same tender question: "What am I worth?"