Just Because It’s Free, Doesn’t Mean It’s Not Expensive

Taxes

Free sign – price tagAlan O’Rourke – Flickr

It does not take a degree in clinical psychology to understand that we humans adore free stuff. We are wired up in a way that predisposes us to feel great about getting something for nothing. Shopping malls and supermarkets are aware of this and in their quest for higher profits they pull out all the stops, including offering freebies. There is no hiding from the fact that most of us just simply cannot resist the gratifying sensation of having once again beat the system by not having to pay a dime for yet another useless item we do not need.

Contrarian and self-defeating as it may seem, over the years I have developed a resolute habit of politely refusing anything that remotely masquerades as free. I do so for a simple reason: material things that are free have little to zero value to me. At best they end up as dust collectors and at worst they get trashed at the earliest possible convenience.

Recognizing the unassailable fact that marketing strategies consisting of free giveaways are wasted on people like me, I have come to a conclusion that many, if not most people value things more if and when they pay for them. A financial (or other) investment into anything in life – be it a product, service or else – creates a link that puts a premium on one’s commitment.

Put differently; prices matter. And they matter because they are intrinsically linked with the value that we, consumers, attach to the products and services we purchase. In a free market economy prices and values are mirror images of one other. The voluntary exchange that takes place between those who sell and those who buy leads to a balance of price and value – a balance that brings benefits to both sides of the transaction. But no economy is a truly free market one. This fine balance is thus tampered with by various degrees of price controls. All governments engage in such interventions although the extent to which they do determines whether their policies lead “only” to economic failures or worse still to failed economies.

Prices have a purpose. If we remove them entirely by, for instance, professing and insisting that things are free of charge we are equally removing the way in which value is communicated by those on the receiving end of the transaction. Of course, if a private company wishes to spend money on free handouts nothing should be stopping it from doing so. After all, such company would only be spending its own money. The problem with the so-called invisible prices – prices that hide the real cost which has to be borne by someone at some point – therefore does not rest with the private sector per se. Rather, the idea becomes a problem if and when it is impulsively adopted by our governments. Unfortunately, Europe is no stranger to many such experiments.

One of the more recent tryouts of the sort is Slovakia’s policy of free-of-charge trains. Back in 2014 the Social Democratic government legislated for free train passes for children under 15, students and seniors. The loss of revenues for the state-owned rail company was estimated at 13 million a year. So much for the word “free” in the title of the policy. Yet this price tag was not final. The estimate did not include the essential cost of running the additional trains that would be needed to meet the growing demand, let alone the subsidies paid to the private companies that also operate trains in Slovakia and which would equally benefit from the handout.

A train passing through SlovakiaWikipedia

The final cost would, therefore, be calculated at around 30 million per year. That is more than twice the amount initially foreseen by the government and budgeted for every year. Between 2014 and 2017 the subsidies paid out to the sate-owned rail company increased by €33 million and totaled €247 million by the end of 2017. The taxpayers have been paying for this ever growing top-up despite the fact that the number of non-paying customers has in the past couple of years plateaued and the number of paying customers has actually increased by about 40%. Against this backdrop of stabilized costs and rising revenues, one would expect that the cost of this policy would have a downward, not upward trajectory. Worse still, none of the extra funds that have been pumped into the system have been invested to improve the quality of transport. If anything, it appears that the quality has in fact deteriorated since 2014.

Calling something free does not make it so. Free trains are obviously not free at all. The policy comes at a hefty price and at a particular surcharge to the paying customers who in fact pay twice – once for their own ticket and then for everyone else’s through taxation.

But if the realization that free trains are not free were the only downside to this policy one could perhaps, albeit with a great deal of self-denial, accept it as an expensive but otherwise harmless spending exercise. Sadly there is more to it than meets the eye; the ultimate pitfall of this logic rests with its corrosive footprint. The less transparent the price of a service the more costly and undervalued it becomes. This leads to further deterioration of quality, to deformation of the market (in this case for the alternative means of transport such as busses), and above all else to fostering the illusion that there is such thing as a free lunch.

All lunches are paid for by someone, somewhere, and at some point. But while a free lunch at your local restaurant is paid for by the owner himself, a free snack or free trains for that matter offered by the state is the courtesy of us all. And as we all chip in with our generous tax contributions to pay for this luxury, the fact that its price remains largely invisible due to its non-transparent nature also conceals the ugly and inconvenient truth: that consequences of this logic will turn something that masquerades as free into something that is in fact very expensive.

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