August 14, 2018 Reading Time: 5 minutes

How much would you pay for a ticket to Walmart?

That seems like a silly question. You don’t have to pay to get into Walmart. In fact, when you get to the door, you usually get greeted by a nice old person who offers you a cart to use.

But how much would you pay? That’s the way to think about the value of capitalism, to consumers: What would it be worth to have access to the markets where you can buy the things you want?

Economists have a concept we use to analyze that kind of problem, and it’s called “consumer surplus.” Consumer surplus is the amount you would be willing to pay to obtain something you want, minus the actual price you have to pay to get it.

So, if you want water (and who doesn’t?), the consumer surplus would be the amount you would be willing to pay if there were no other source, minus the amount you have to pay. Let’s look at examples of two products, water and diamonds, to get an idea how that works.

Checking Walmart’s web site, I see that I can get water for 2 cents an ounce or less, if I buy quite a bit of it. That’s more expensive than tap water, of course, but it’s pretty cheap. It would cost more if I wanted fancy French or Italian water, of course; that costs 6 cents an ounce or more, or more than a $1 for a half-liter bottle.

I also noticed that Walmart has a nice 6-carat diamond “tennis bracelet” (would you really wear that to play tennis?) for $11,000.

The point being that diamonds are much more expensive than water, at least at Walmart, in August 2018. That’s probably generally true, though: a market system is going to “value” a small quantity of diamonds much more highly than even a pretty large quantity of water.

Isn’t that a problem? After all, water is more valuable, in terms of the realities of human life, than diamonds. A number of philosophers considered this problem, and in many cases they considered the “paradox” an indictment of the market system of valuing commodities. What kind of cockeyed system would value diamonds more than water?

Plato, in Euthydemus (304 BCE) said: “For only what is rare is valuable; and water, which, as Pindar says, is the ‘best of all things,’ is also the cheapest.”

Adam Smith, with Wealth of Nations (1776) said: “Nothing is more useful than water: but it will purchase scarce anything…. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”

Plato’s explanation was rareness; Smith’s was the difficulty or expense of obtaining the thing, which fits with his labor theory of value. Other analysts have suggested that “marginal utility” is the justification: if we had no water, it would be very valuable, more valuable than diamonds, especially if we happened already to have quite a few diamonds. But since we have lots of water (most of the time), at the margin water is much less expensive.

The Happiness of Consumers

That all sounds very mechanical to me, and not really focused on the main point, which is the actual welfare and happiness of consumers. That is where the real heart of the argument for capitalism lies: consumer sovereignty. And that brings me back to my original question: what is the value of a ticket to the market system?

Suppose that—as is usually the case—your shopping list has more items than “1. Water 2. Diamonds.” You want to buy some clothes, some tools, some toys, some fishing equipment, and quite a lot of food, some of it canned or frozen and some it fresh.

You go to Walmart. (You might go somewhere else, of course, but Walmart happens to have all of those things under one roof, so it simplifies my example. There is nothing important about it being Walmart, though!) But this time, at the door, instead of a nice old gentlemen greeter who helps you get a cart, there is a fancy mind-reading robot.  The robot takes your list, and scans your mind to see how much you want each item.

In particular, the robot assigns a value for the maximum amount you would pay for each thing on your list.  It might look something like this:

Water:  $100,000
Oatmeal:  $1,000
Bread: $1,200
Fishing rod:  $25,000

And so on, all the way down your very long list.

Those amounts may look like a lot. But remember, these aren’t prices. These are the maximum amounts you would be willing to pay for these items. We never have to think in these terms, because we are always presented with choices at prices far less than the maximum amount we would pay.

Think about it: when you go to a store, sometimes you pick up an item and check the price. Then you say, “No, that’s too much!” and put it down. But you aren’t thinking “that’s more than I value that item.” You’re thinking “I can get that cheaper somewhere else,” which is completely different.  The mind-reading robot’s list is much more basic: how much would pay if you had none of that item, and had no other way to get it?

After compiling the list of values, the robot would then subtract the actual prices being charged inside the store. That would give you the consumer surplus, which is willingness to pay minus price:

Water:  $100,000 – $1 = $99,999
Oatmeal:  $1,000 – $1.75 = $998.25
Bread: $1,200 – $3.50 = $1,196.50
Fishing rod:  $25,000 – $31.00 = $24,969

Again, and so on (it’s a long list).

After performing the calculations (which are correct, at least in the sense of matching your subjective valuations, because the robot can read your mind), the robot presents you with a bill. It’s the total value of all the consumer surplus you will derive from being able to enter the store. The amount will be considerable, quite possibly $500,000 or more.

No Mind-Reading Robots

Of course, the amount of that ticket makes you exactly indifferent between entering the store and just going back home.  By charging back all the consumer surplus you would have gotten from shopping, all the value of shopping is being transferred to the seller. In my example the seller can do that because there is no other source for all these items.

But that’s not the way the world works. There are no mind-reading robots, and there are no variable-price ticket booths to get into grocery stores. That’s beside the point, though. The real reason the real world is different from my example is that we have a capitalistic market system based on consumer sovereignty. The reason groceries and other stores can’t charge a price anywhere close to the maximum you would pay is that groceries have to compete with each other. Walmart, in particular, is constantly trying to find ways to charge lower prices, not higher prices.

The consumer surplus that we derive from buying water, and other items, is enormous, almost incalculable.  The fact that all of these products, services, and useful things are available to us at low prices seems automatic, nothing very interesting or important. In fact, the capitalist system operating in the background is performing miracles of production, logistics, and delivery, all to make sure that prices are low.

That means that capitalism is focusing on making sure consumer surplus is high! Since you don’t have to buy a ticket to capitalism, it’s easy to miss just how much consumer surplus is being directed your way, without you having to make much effort to obtain it.

As long as there is competition, and limits on protectionism, your ticket to capitalism is free. Come on in.

You want a cart?

Michael Munger

Michael Munger

Michael Munger is a Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow of the American Institute for Economic Research.

His degrees are from Davidson College, Washingon University in St. Louis, and Washington University.

Munger’s research interests include regulation, political institutions, and political economy.

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