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Rule No. 3

May 2024
1min read

It’s not the dollar cost that’s important, it’s the percentage of income.

Because of rising real wealth, even if the price of a commodity stays the same, net of inflation, its price as a percentage of per capita annual income drops. In 1939, the first year of commercial television transmission in this country, a television set cost about five hundred dollars. But in 1939 that amounted to fully one-third of the average annual per capita income in this country, and very few people can afford to spend that much of a year’s pay on a luxury. Today five hundred dollars represents only about 3 percent of average annual per capita income. The luxury of 1939 has become the commonplace of 1989.

(Obviously this ignores inflation, but inflation would only change the numbers; it would not significantly affect the relationships. Also ignored is the fact that a 1939 television set was the size of a chest of drawers, had a tiny screen, could display only black-and-white images, and broke down.)

The television set’s short journey from the exceptional to the ordinary reveals clearly the way people actually perceive what is expensive and what is cheap in the economic universe in which they live. In reality, we don’t care what something costs in dollar terms at all, as long as we are getting fair value. (Indeed, there is a word for a person who cares only about the dollar price of things: miser .) What we need to worry about is what something costs as a percentage of our personal income. That is why the rich eat caviar and the rest of us don’t. The rich can afford to because, steep as the price of caviar is, it is only a small part of a rich man’s income.

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