There are bargains in the closet as well. After aviator Charles Lindbergh became the toast of two continents by flying solo from New York to France in 1927, he toured the United States in a Hart Schaffner & Marx suit that cost $42.95. It would have taken an average Joe 79 hours to buy that outfit. Today, the same company sells comparable suits for $525, the equivalent of 40 hours of work. Over the past century, the work-time cost of a pair of Levi's jeans has fallen by nearly seven hours, to three hours and 24 minutes.
Car Talk
So many products becoming more and more affordable can't be simply dumb luck. To the contrary, we owe it to the routine workings of our free enterprise economy. In the labor market, the system spurs the increases in productivity that raise wages. In the product market, it provides incentives to innovate and the discipline to increase efficiency. The benefits flow to American consumers in the form of greater value--more for our money and more money for our time.
The story of how the car came to be the signature product of America's consumer culture illustrates how economic forces work to the consumer's benefit. In the early 1900s, Ford's critics dismissed the automobile as just a "rich man's toy," beyond the means of the workers who built it. Early automakers built each vehicle to order, an expensive, time-consuming enterprise. Ford revolutionized the industry by perfecting the assembly line, a key to efficient mass production. He standardized parts and developed a network of suppliers. Ford took advantage of the gains from specialization, which increases efficiency by allowing workers and companies to do what they do best. Over the years, the automobile industry expanded, spreading overhead costs over longer production runs.
Just as important, the industry has continued to invest in and appropriate new technology. The development of plastics after World War II, for example, led to lighter, less expensive parts. By the 1990s, robots had taken on routine jobs on the assembly line. Computers are leading the latest assaults on production costs. A frontal crash test performed for $60,000 in 1985 can now be simulated in cyberspace for $200. A three-dimensional object printer has slashed the cost of some prototype parts from $20,000 to $20. Just as important were process innova-tions, such as just-in-time inventory and the once-inconceivable "single-minute exchange of dies" originally developed by Toyota.
As this last example suggests, companies don't reduce real prices out of civic duty; they do it to in response to competition. In recent decades, America's Big Three automakers--General Motors, Ford, and Chrysler--have been pushed to the limits by imports, particularly from the Japanese. But competition in the auto industry has always been fierce. In 1920, the United States had more than 360 car manufacturers, all sensing a fast-growing industry, all vying in a race that had no clear-cut winners. The companies that emerged from that fracas were those offering the highest quality at the lowest price. Hundreds dropped out of the market, but their efforts didn't go to waste. Good ideas--the automatic transmission, for example--turned up in the products offered by industry survivors. Automakers are still trying to capture customers by adding new features: power steering and air conditioning in the 1960s, sunroofs and tinted glass in the 1970s, antilock brakes and airbags in the 1980s, 24-hour roadside assistance and satellite navigation devices in the 1990s. Competition, then, has a double effect: It drives down costs while improving quality.
At Ford and other automobile companies, the rigorous application of industrial technologies increases productivity--more output from each worker. Productivity is the vital element in more affordable products. As each worker's output rises, the cost of production falls. Greater productivity, moreover, leads to higher pay for workers and bigger profits for shareholders, allowing them to consume more. The automobile industry wasn't alone in adopting modern methods of production. Increased productivity across the economy, from agriculture and services to mining and manufacturing, has pushed wages up decade after decade, allowing more Americans to slip behind the steering wheel. Today, more than 90 percent of American households own a car--and 60 percent have two or more. Within a few years, the United States probably will become the first country to have more vehicles than people.
Catch a Falling Price
The mechanism of falling real prices points us toward an important but neglected aspect of America's economic system--the role of the rich in driving progress forward. A relatively small number of consumers--for the most part, the wealthy--are the first to acquire new products. They're in a position to create new markets simply because they've got money to buy new products and services, even at what for most of us are prohibitive prices. But few entrepreneurs get rich selling only to the rich; the big money lies in bringing products within the reach of the masses. Henry Ford knew that. So does Bill Gates.
Over time, wealthy Americans' free spending spurs a great democracy of consumption because it starts the process of lowering prices. It's as if we're all standing in line, joining in the consumption of goods and services as they come within our budget. Many of us wait for what we want, and our compensation lies in eventually getting a better product for less money.
The economics of this process is straightforward. Virtually every new product requires an often sizable (and risky) up-front investment to cover the cost of getting started. Whether innovation springs from startups or established companies, it requires money for research and development, as well as for the physical plant, machinery, equipment, and labor needed to launch production. The cost of reaching just the first customer can range from a few thousand dollars for a mom-and-pop enterprise to billions of dollars for Fortune 500 companies.
Producers, enjoying an exclusive niche in the marketplace and eager to recoup their up-front investment, charge high prices at first, usually knowing full well that only a few consumers will possess the wherewithal to buy. As sales increase and competitors enter the market, fixed costs are spread over more and more customers. Larger production runs mean lower per-unit costs as economies of scale take hold. Success attracts even more competitors, kicking off a race to see which company can offer the best product at the lowest cost. Companies must slash prices to stay in business. They must improve quality to hang onto their customers.
In nurturing infant industries and product lines, the rich pay most of the early fixed costs of new industries. Over the years, they financed the emergence of the automobile, long-distance telephone service, color televisions, computers, and many other goods that are all now readily available to the masses in America. As goods and services filter down to the rest of us, prices more nearly reflect companies' added cost of making one more copy of a product--in economists' jargon, the marginal cost.
The ratio between fixed and marginal costs varies from one type of product to another, which helps explain why some goods and services show steep price reductions and others go through the process more gradually. Big declines usually occur where fixed costs are high: computers, electronics, pharmaceuticals. When fixed costs aren't overwhelming, companies start out charging prices closer to marginal cost--a pattern that fits food and personal services.
Capitalism's critics, especially those who sing the praises of equality above all else, fret that the economy works to the benefit of the wealthy at the expense of the poor. But nothing could be more wrong: Without the rich, fewer new goods and services would find their way to the rest of us. In effect, economic progress emerges from a system of price discrimination--against the wealthy, not against the working classes. In most economic systems, the rich take advantage of the masses. Under capitalism, it's the masses who benefit at the expense of the rich. By harnessing the natural power of unequal income distribution, free markets have routinely brought the great mass of Americans products once beyond the reach even of kings.
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