I was thinking about Adam Smith as I waited on hold to schedule what would turn out to be the sixth unsuccessful attempt to fix my high-speed Internet service.

More than two centuries ago, Smith wrote in The Wealth of Nations: "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it."

Smith was trying to explain why the same thing sells for such different prices in different places. But Smith's emphasis on the toil and trouble of acquiring a thing also explains why our current statistical measures of price inflation fail to capture the full cost of a thing or service. If you look at the full toil-and-trouble cost instead of just the price tag in dollars, you can see not only why inflation feels higher than the official measure, but also why it is higher.

Smith's 18th-century point of view also reveals the growing do-it-yourself nature of today's corporate cost cutting. And that, in turn, points the way toward an expanded strategy for picking stocks in the current inflation environment.

Dollar Costs Aren't the Whole Story

The 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 Lesson

Let 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.

What's Your Toil Worth?

You can find examples virtually anywhere you look in the economy and in your daily life. And most of them don't work out to be as much in the consumers' favor as my airline example. It's at work at the rental car counter when the company decides to hire one less person to process reservations. The company cuts costs and you wind up waiting in line a little longer.

This kind of do-it-yourself cost cutting isn't limited to the consumer world. Look around you at work. Many of the vendors that your company buys from used to employ salespeople to explain new products, take orders and resolve problems and complaints.

Now, many of those sales have been shifted to the Internet, which sure saves the vendor time and money, but adds some work for the customer. And woe to you if you have a problem.

It's easy to understand the attraction of this kind of do-it-yourself cost cutting to companies that have made all the easy cost reductions and still face pressure to reduce costs. The company saves an easily calculated amount of hard currency and the customer faces a fuzzy and hard-to-calculate increase in the toil-and-trouble cost. How much, for example, is an extra 20 minutes spent waiting in line worth to a customer? Because of their subjectivity, their fuzziness, and their invisibility, none of these toil-and-trouble costs are included in the official inflation numbers.

The Consumer 'Benefit'

But consumers aren't passive patsies in any economic system. This do-it-yourself cost cutting can be a pain in the neck for consumers, so if it didn't offer them something in return they'd protest enough, with their purchasing decisions, to stop the strategy dead in its tracks.

So what do consumers get out of it? A chance to turn "free time" into cash. That's a very attractive deal in an economy where income is growing relatively slowly. According to Mercer Human Resource Consulting, companies expect to increase pay by 3.3% in 2004. That will match the 3.3% raise in 2003. Next year, 2005, is expected to be slightly better, with pay increases projected at 3.5%.

But the average annual pay increase has been below 4% since 2002. In the 1990s, pay increases outpaced inflation by about 2 percentage points a year. Recently, pay increases have only outpaced inflation by 1 percentage point or so. Subtract higher co-payments and premiums for company health insurance, and that pay increase just about vanishes.

Which explains the "popularity" of part-time work, either in the form of an official part-time job -- according to the Bureau of Labor Statistics, the number of persons working part-time increased by 495,000 from March through June 2004 -- or in the form of a "do-it-yourself" job, such as waiting in line, installing your own modem or assembling your own furniture.

When cash pay is stagnant or worse, consumers are willing to substitute their "free time" for paying higher cash prices. It's a good trade-off, in this economy, to spend six hours assembling a piece of furniture from Ikea instead of spending more for a more expensive factory-assembled table or desk, for example. Think of those assembly hours or that time waiting in line or on hold as a second job that pays in discounted prices.

Converting free time into lower cash prices isn't without its cost to consumers. I don't know about you, but I don't have a lot of free time as it is. Taking away some so I can wait on a help line or install my own replacement gasket on my washing machine may save me dollars, but it eats up another commodity that's in high demand in my life. I have a suspicion, but no way to put it into numbers, that patience is in increasingly short supply in the U.S. and that we're all crankier than we once were. Do-it-yourself cost-cutting strategies play a role in this.

Stock Winners: Efficiency and Lower Prices

Smith's perspective does suggest a way to pick stock winners and losers in an environment of do-it-yourself cost cutting. The winners are those companies that, when all the dollar savings and free-time consumption and potential aggravation are netted out, offer customers real value in the tradeoff of free time for lower prices. If the cash price is lower but customers think they have to spend too much time on the transaction, or the price of frustration outweighs the cash savings, then the customer is likely to conclude that the full toil-and-trouble cost is too high. The company may have successfully cut costs only to discover that it has also cut customers.

And the biggest winners are those companies that have combined lower prices and efficient transactions. They haven't just found a successful cost-cutting strategy, but a positive competitive weapon in this economy.

At the time of publication, Jim Jubak owned or controlled shares in none of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. Email Jubak at jjmail@microsoft.com.

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