What Prices Tell Us About Ourselves

Being schooled into homo oeconomicus

7.7 billion litres of cola and other soft drinks are produced in Germany every year. From next summer, they will carry an additional tax of up to 38 cents per litre. About eight times as much petrol and diesel is filled up in Germany every year. Every litre of that currently enjoys a tax break of around 17 cents through the Tankrabatt, the fuel tax rebate. – According to Niklas Luhmann, prices are information through which the economic system reaches an understanding with itself and about itself. So what is politics trying to tell us when it raises one price and lowers the other?

Three theories

Theory number 1: Rising prices are scarcity signals. – According to Luhmann, however, they represent only scarcity on markets, not necessarily real scarcity. A look at the world situation nevertheless shows that fuel is also really scarce; sugar, too, is probably becoming scarcer this year because of poor harvests. – Yet the state amplifies one price signal and dampens the other.

Theory number 2: Taxes serve to finance the state. – The budgets of the Länder and the federal budget are both under pressure. Depending on one’s economic or political position, one can raise taxes to consolidate the budgets, or lower taxes to stimulate growth and thereby consolidate the budgets. The state does both at the same time.

Theory number 3: Prices have an incentive effect. – When something becomes more expensive, less of it is consumed, because individual cost-benefit calculations shift. If that were so, the state would have an interest in less sugar but more petrol and diesel being consumed. – That holds for sugar, because excessive sugar consumption causes health damage that costs the health system a great deal of money. But it does not hold for diesel and petrol, because the transport sector would have to reduce CO2 faster so that Germany as a whole can meet its international obligations.

The logic of self-interest

At first glance, there seems to be no logic behind it. The public mostly contents itself with discussing particular interests. Sometimes it points to the inconsistency of politics. But could it be that this behaviour is not so inconsistent after all? Could it be that behind it lies a rationality that has long since impregnated all of us, but which we are reluctant to face?

It is the egoistic perspective of the individual utility maximiser, that straw man of homo oeconomicus who (supposedly) does not exist in reality, that explains political action: The dearer cola hurts one’s own wallet, but it also benefits one’s own health. The benefit to the health system is a collateral benefit that we accept because we get something out of it too. Presumably, that is why a majority in surveys supports it. – Dearer petrol, by contrast, would hurt one’s own wallet and benefit only future generations. That is why in June more than 60% of Germans were still in favour of extending the Tankrabatt.

The other kind of person

There is research showing that human beings are not egoistic utility maximisers. Philosophers, psychologists and economists have shown that people can act differently, and want to act differently, from optimising themselves always and everywhere. A famous empirical study from 1997 on the acceptance of a nuclear waste repository beneath a Swiss village showed that approval fell when the residents were offered money. Some things simply cannot be paid for.

For the political system, we would need this other kind of person. Living together in a community demands compromises and sometimes personal “sacrifices”. There is no social equilibrium if everyone insists on optimising their own utility function. Amartya Sen already objected to this in 1977, arguing that a society that relies only on personal advantage cannot function.

Smith and Kant

Adam Smith did advise us not to rely on the baker’s benevolence when we buy our bread, but he also knew that this behaviour does not exhaust what it means to be human:

“And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature.” (Adam Smith, The Theory of Moral Sentiments, 1759, I.i.5.5)

Immanuel Kant, too, distinguishes between the pragmatic law, which addresses the human being as someone who seeks their own happiness and optimises their benefit, and the moral law, which addresses them as a rational being and affirms their dignity. It is the setting aside of one’s own benefit that makes the human being a human being. It is their awareness of being able to commit themselves to a higher cause that gives them dignity. – That distinguishes economically rational action from law, which according to Kant is to be founded on the law of freedom: Law applies unconditionally, whether I want it or not; the price applies depending on my ability or willingness to pay. Before the law all are equal; before the price they are not.

The price as a political instrument

Now, the state has long intervened in the economic system with taxes and levies in order to put a price on so-called externalities. In 1920, the British economist Pigou proposed using the price so that those who cause harm bear the damage they inflict on others. (Pigou 1920; Edenhofer/Franks/Kalkuhl 2021) Politics and law nevertheless went on for decades to work with bans, limits and standards, and even in Germany price signals long counted as hardly feasible politically. Only since the early 1990s, when Finland and Sweden introduced the first CO2 taxes, has the price become a political instrument. Starting from Gary Becker’s rational choice theory, the idea of incentives begins to spread. In 2003, Richard Thaler and Cass Sunstein proposed steering people through the design of their choice situation so that they themselves end up better off. From this develops the idea of “nudging”, of gentle pushes. The sugar tax goes one step further, it changes the price. Yet the price is no longer merely a means of internalising externalities and protecting others from me. The price becomes an instrument for protecting me from myself.

One resorts to the price because it is perceived as less restrictive of freedom than a ban. But prices address, after all, the economically rational or pragmatically acting part of the human being, not the part oriented towards the common good. If politics increasingly communicates through prices instead of seeking democratic discourse, it ends up promoting a society whose interaction resembles market behaviour more than democratic coexistence. That people in such an environment also come to see the state only as a supplier of citizen benefits, and are bound to be disappointed, should surprise no one.