How much do things really cost?

At the end of 2020, a sign appeared on the street outside De Aanzet, a charming, tidy grocery store in downtown Amsterdam. It said: “Welcome to the world’s first supermarket with real prices”. Inside, two types of prices were listed for potatoes, peppers, bananas, broccoli, bread, and many other foods. The “normal” price of tomatoes was €3.75 per kilo, while the “real” price was €3.97. The difference of €0.22 represented the hidden costs of growing and transporting tomatoes – in terms of carbon emissions, underpayment of workers, and water and land use.

The real prices had been calculated by True Price, an Amsterdam non-profit organization launched in 2012 by two friends, Michel Scholte and Adrian de Groot Ruiz. A champion of academic debate and a former assistant professor of finance, respectively, Scholte and de Groot Ruiz have worked with various companies – a chocolate company, a chain of bakeries, banks and fashion brands – to calculate the real prices of various goods. . Their partnership with De Aanzet (“The Impetus”) was the most public use of the idea so far. The dual pricing system presents buyers with information and choice. It is possible to compare normal and real prices: if one brand of apple has a “real price difference” of €0.05 and another a difference of €0.50, this suggests that the first apple comes from a more environmentally and socially responsible producer. A buyer can then choose to pay the actual price for either product, in which case the extra money is redirected by De Aanzet to projects aimed at remedying this damage.

Scholte and de Groot Ruiz met about 15 years ago through a student debating society. Scholte studied sociology at the University of Vrije and worked as a cleaner in the airport business class lounge; de Groot Ruiz obtained a doctorate in economics at the University of Amsterdam. They quickly discovered common interests in behavioral economics, statistics, and the structural issues underlying poverty and environmental degradation. While still a teenager, de Groot Ruiz, an amateur physicist, had, with two friends, invented a technology to harness the energy generated by ocean waves; he had learned that investors were not interested in such systems because the “business case” for developing them was so uncertain. It seemed outrageously irrational to him. The true costs of fossil fuels – collapsing ecosystems, rising sea levels, extreme weather events – were extremely high, but they were also unaccounted for, making the fuels unrealistic by comparison.

While still students, the friends joined Worldconnectors, a Dutch think tank. There, they discussed with colleagues what economists call “externalities,” that is, costs, often environmental and social, that are not factored into transactions. Over time, the idea of ​​real prices crystallized. Politicians have been reluctant to regulate companies tightly enough to fundamentally reduce environmental and social externalities. But it might be possible to measure their magnitude and incorporate that information directly into prices. Scholte and de Groot Ruiz launched True Price in 2012, with the aim of accelerating progress towards corporate sustainability. The hope is that if businesses and consumers have fewer illusions about how much things really cost, they might change the way they spend, sell and manufacture.

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Maarten Rijninks, the owner of De Aanzet, first discovered the real prices when he attended a talk given by Scholte, in 2018. He now sees them as a way to reverse a destructive status quo so pervasive that we no longer see it as odd. “If you go today to buy something in a regular supermarket, it will always be cheaper than the product in my store, which is organically grown and more expensive,” Rijninks told me. But this cheapness is an illusion: it is only made possible if you ignore the true costs of the goods. “If you factor in the real prices, my product will also be cheaper,” Rijninks said. Since his store adopted the system, he told me, business has increased about five percent; many customers say they like it. “The problem is that customers don’t have the tools to reduce their social and environmental impact,” he said. “But they are ready to do it.”

Rijninks tells his customers that the system is a scalable experience. One problem, perhaps unavoidable, is that there are imperfections in True Price’s data. Organizational analysts sometimes use regional averages, which may not capture the exact conditions surrounding a particular product; Similarly, De Aanzet’s sanitation plans are sometimes imprecise, and so a customer who pays the true price for a banana might end up financing irrigation work on a spinach farm. Over the next few years, Rijninks hopes to develop more targeted sanitation projects with foreign suppliers and expand the range of products covered beyond fresh produce and breads. Later this year, the system will expand in another way: an association of organic grocers plans to pilot actual prices in stores across the Netherlands.

At De Aanzet, consumers see the true prices for themselves, but elsewhere companies have used them for internal analysis. In 2013, the Dutch company Tony’s Chocolonely asked Scholte and his colleagues to calculate the true costs of cocoa from Ghana and the Ivory Coast. They looked at eight environmental externalities and six social externalities, including air, soil and water pollution; climate change; insufficient income; and child labor. West Africa, which supplies the majority of the world’s cocoa, has well-documented labor issues: in 2020, a University of Chicago study found that there were more than one million and a half child laborers working in cocoa production in Ghana and Côte d’Ivoire. . Child labor in this industry prevails despite repeated promises from big business to fix the problem.

True Price tried to calculate the costs of all these externalities. She calculated that in 2013 the average actual cost of cocoa per kilogram was €14.17. Most of this amount (€12.07) reflected social externalities. Tony’s Chocolonely was already trying to improve its supply, and so its average real cost was significantly lower, at €7.93, including €5.99 in social costs; in 2017, when Tony’s commissioned another study from the nonprofit, the actual price had fallen to €4.52, with €2.93 reflecting externalities. Although the costs are just guesses – not exactly “true” – Tony’s Chocolonely has found them useful for setting goals and evaluating the progress of its initiatives. The company pays higher than average prices for beans, promotes more efficient and sustainable farming techniques, and operates a supply chain traceability initiative and child labor monitoring system. it spends 1% of its annual revenue investing in community infrastructure and lobbying for better supply chain legislation. True Price found that, compared to the cocoa industry average, the farmer cooperatives that supply Tony’s Chocolonely earn more money, are safer, and have fewer cases of child labor. If the company’s pace of growth continues, over the next few years the “true price gap” for Tony’s products could be zero.

Assigning precise figures to the costs of child labor or soil erosion requires a multitude of assumptions. First, of course, True Price has to decide which costs to calculate. Its system is to identify the costs associated with the violation of human rights, as defined by the United Nations, international treaties or other widely shared frameworks. This rights-based approach is uncompromising: the non-profit organization rejects, on principle, the idea that job creation, consumer convenience or shareholder value could “benefit” the violation of human rights, including including the right to inhabit a thriving natural world. Companies that source products from areas where child labor is a problem, for example, can only reduce their real prices by reducing the number of child laborers involved in making those products. They can’t cite other benefits and say the net result is positive.

Other researchers have engaged in similar efforts. A team in Italy, focusing on the true price of meat, estimated the hidden costs per kilogram of beef, including its effects on human health and the environment, to be around €19 per kilogram; this means that the annual hidden cost of beef consumption in Italy alone is around €36.6 billion. Researchers from the UK’s Sustainable Food Trust have calculated the equivalent cost of food for that country at around £116 billion a year. A 2021 Rockefeller Foundation report, based on research by True Price and academics from Oxford, Harvard, Cornell and Tufts, found that once the hidden social and environmental costs are calculated, the true cost of the food system American as a whole is at least $3.2 trillion a year, nearly three times the country’s “normal” food expenditure of $1.1 trillion.

Paying triple the current price of food is not a viable strategy for consumers, businesses or governments. But there are other ways to use real prices to fuel reform. Over the past decade, the US federal government has spent an average of $16 billion a year on agricultural subsidies, with soybeans, corn, rice, and wheat being the most heavily subsidized and produced. If obtaining these subsidies were conditional on the reduction of real costs, then producers would have an incentive to reduce some of the most destructive practices. And, as at De Aanzet, transparency on real prices could stimulate change.

Simply talking about true prices can be helpful. Products have no “true” price as an element has an atomic mass. Yet the questions raised by true prices are not hopelessly subjective. Most people agree that we should ban the production of goods made by slaves and young children working in dangerous conditions. Research at True Price and elsewhere simply suggests that we apply the same thinking to a broader set of issues: living wages for adults, freedom from harassment, physically safe working conditions, the environment, etc. This is the most fundamental sense in which real prices are “true” – they capture the deep moral intuition that human rights and the natural world should not be violated for the production of cheap goods. Over time, better studies will refine our understanding of the costs of restoring freshwater ecosystems poisoned by fertilizer runoff or providing schools for farm families in rural Ghana. What we already know, however, is that excluding these costs from the prices of goods gives consumers, governments and businesses false information about the world. And that’s a form of lying – about nature, the economy, and about each other.