Dollar Costs Aren't the Whole StoryThe measures of inflation that Alan Greenspan and the Federal Reserve use to set interest rates and monetary policy, which are the instruments of the moment for directing the course of the economy, are based on price calculated in dollars. That captures the amount of money that we pay for things. But it doesn't capture another, increasingly important, feature of cost in the current economy: the nonmonetary "toil and trouble" it takes to acquire that thing. As an increasingly important part of their cost-cutting efforts, companies are making consumers work harder and harder to buy goods and services from them. That often results in cost savings to the company, some of which they pass on to consumers. Measured just in dollars, that makes prices lower. But measured by Smith's full toil-and-trouble accounting, those lower cash prices actually disguise a jump in total cost to the consumer.
Troubling LessonLet me show you what I mean using the example of the difference in price between buying an airline ticket now and 10 years ago, measured solely in price and measured by Smith's total toil-and-trouble (price and consumer effort) standard. Say that 10 years ago you bought a ticket to fly one way from San Francisco to New York for $300. Today it's easy to find a one-way flight on one of the low-cost carriers for around $140. So the cost of a ticket from San Francisco to New York is $160 less than it was a decade ago. That 53% decrease in cost sure helps keep the official inflation numbers down. But the picture isn't as favorable if you look at the full toil-and-trouble cost. Ten years ago, my flight on a full-fare carrier would have departed from San Francisco International. Today, there's a good chance I'd be flying out of Oakland. That shift is likely to add a good 20 minutes to my travel time and, if I take a cab, $15 to $20 to my taxi fare. Because the low-cost carriers at Oakland are so popular, the airport is operating way beyond its designed capacity and lines for checking in can be as long as the Golden Gate Bridge. The wait, even if you factor out delays for new security measures, is certainly longer than it was a decade ago at San Francisco International. Remember travel agents? They once booked flights for you after consulting their computerized data bases. Today, we do it ourselves. The cost of paying that travel agent was paid by the airline and passed along to the consumer in the ticket price. Today, the airline doesn't pay that cost. Instead, we "save" the money by doing the work ourselves. Even when you add the full toil-and-trouble costs, today's airline ticket represents a considerable bargain compared to the full cost of a ticket a decade ago. But the difference isn't as big as it seems to be when you simply compare dollar prices.