2013-04-29

Non-Monetary Goods And Personal Welfare

One of the fun things about following that which is known as "the economics blogosphere" is that you start to notice trends in thought that extend beyond the mere topics at hand.

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It is not unlike the world of music, in which certain musical elements ebb and flow in popularity and usage beyond the specific musical genres in which they are present.

For example, in the early 2000s, it was extremely popular for songwriters to write material that made use of the IV-iv-I chord progression. The classic example here would be Green Day's "Wake Me Up When September Ends." That song stands out as an example because, not only was it an extremely popular song at the time, it is built almost entirely around that chord progression. I happened to notice around the time it came out that many musicians were making use of that chord progression. At the time, you could find it in pop music, rock music, film scores, TV commercials, and so on. It is not a particularly uncommon chord progression, so we would never expect it to completely disappear from use. Nonetheless, it experienced a peak in popularity between 2003-2006 or so.

Before that, the preferred musical trend was a static melody with a shifting tonic. This was basically the entire output of Nickelback's 604 Records. For the first half of the 90s, it was major-tonality modal music with a dominant 7th. (Think "Hands All Over" by Soundgarden as pretty much the perfect example.)

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Anyway, back to trends in economics.

This morning, Tyler Cowen begins a post on unemployment with an excellent analogy (emphasis mine):

Let’s say you are 22, full of energy, don’t feel you need to marry soon, and have lots of cash in your bank account.  Many people in this position feel they can “date around” a lot, without fear of the repercussions.  They can enter into short-term relationships without much agonizing in advance, and simply break up if it doesn’t work out. 
Alternatively, imagine you are 39, run down and vulnerable, wanting kids soon, and in a precarious financial situation.  You probably won’t date casually the same way.  You will treat every romantic relationship as if it is a significant investment.  You will be more careful, because the cost of mistakes is higher, and the cost of serial “running around” is higher too.  Search is tougher and you will apply higher standards to search. 
In good times employers are like the 22-year-old and they will take chances with many different employees.  In 2009-2013, they often have seemed more like the 39-year-old.  They are waiting and watching, rather than trying out lots of dates. 
Of course this analogy points to just one possible factor, it is hardly a comprehensive account of current unemployment, even if you ignore any possible problems in the story. 
Note that the terms “involuntary unemployment” and “voluntary employment” do not make sense here, and usually it is a mistake to insist on one or the other.  There are jobs and for that matter dates in North Dakota, so how high does the cost of moving have to be to distinguish one category from the other?  Is theory going to supply an answer here?  No.  When you see arguments for either the “voluntary” or “involuntary” nature of unemployment, that is a good sign someone is trying to mix moral issues into positive issues.  It is also a move away from the concept of marginal analysis.
Cowen starts strong, but seems to draw the entirely wrong conclusions from his own comparison. In order to see this, all you have to do is ask yourself what it would take to get you to pick up and move to North Dakota.

Cowen is going for the touchy-feely message here. What he's saying is that once costs reach a certain point, their unaffordability renders nominally "voluntary" choices involuntary in the same sense that I cannot afford a Ferrari, even though buying one is a voluntary expenditure. This point is certainly true if moving to North Dakota is extremely expensive. The problem with Cowen's point is that it's not expensive to move to North Dakota.

So, back to my question: Why aren't you moving to North Dakota, if not cost? The answer is: It's cold in North Dakota, it lacks the amenities available in more populous cities, the population is more homogeneous, the art scene is comparatively limited, it is geographically isolated from other major cities, and it is probably somewhat distant from your family members.

Cowen's blog post is all about using a careful eye to properly discern "market imperfections" and "search theory." He heavily invokes the language of non-monetary goods, but somehow fails to build them into his blog post. In fact, they tell the whole story: You're not moving to North Dakota, and the reasons for this have nothing to do with financial compensation or search theory.

You would have to make millions in order to justify living in North Dakota. Similarly, you would probably be willing to take a significant pay cut to live permanently on a Tuscan villa. The reason for this that North Dakota offers a lower standard of living at the same set of purely economic conditions, while life on a Tuscan villa offers an extremely high standard of living.

Meanwhile, David Henderson criticizes what he calls "GDP Fetishism" because it does not properly account for non-monetary goods:
To see why GDP is not the same as wellbeing [I use "welfare" and "wellbeing" interchangeably], consider the definition of GDP. One of the most careful definitions is in The Economic Way of Thinking, 10th edition, by Paul Heyne, Peter Boettke, and David Prychitko. They write: "The gross domestic product is the market value of all the final goods produced in the entire country in the course of a year."1 Most economists would agree with this definition. It turns out, though, as Heyne et al. point out, that even this careful definition does not accurately characterize GDP, let alone wellbeing. It is inaccurate in two ways. First, because there is usually no market for the things that government produces (the U.S. Postal Service being one of the exceptions), government spending on goods and services is valued at cost rather than at market prices. Second, because many goods and services are not bought or sold, even though they would have a market value if they were, these goods and services are not counted in GDP. In early editions of his best-selling textbook, Economics, the late Paul Samuelson gave his favorite example of this pitfall in GDP accounting. Samuelson pointed out that if a man married his maid, then, all else equal, GDP would fall.
That last bit, credited to Samuelson, is the most important. If it's not obvious, once a man marries his maid, he is no longer responsible for paying her, but the housework must still be done. The man saves the money he used to spend on his maid. The woman gives up that amount of income. The two of them divide the housework equally (ha! I'm updating this because Samuelson's example would not fly in today's world), and the work continues to get done. Doing housework is an economic good, but if you're not paying a maid to do it, then it is a non-monetary good.

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So the economic trend these days is the consideration of non-monetary explanations. I would conjecture that economists are running out of credible data to explain the sluggish GDP growth permeating the US economy. All the data suggests that we should be recovering, and yet we are not. (Consider Jonathan Finegold Catalan's account of how the economic data is changing the minds of economists.)

In my view, this is largely a good thing. If we are talking about finding a job, the question is seldom "Can I find a job?" and more typically, "Can I find a job that I want?" Following my example above, you would have to make a certain number of millions in North Dakota to justify not being a middle class schmuck in Tuscany.

Similarly, you might prefer working at Starbucks and having lots of leisure time, which you could fill up with going to the gym, playing the guitar, golfing, playing video games, etc. That might be preferable to getting a mid-paying job outside of your industry that neither advances your career nor makes use of your skill set, nor even provides you with a high income. What Cowen would prefer not labeling "voluntary unemployment" is actually "voluntary under-employment." The driver behind this kind of behavior is a person's relative preference for non-monetary goods, compared to the best available alternative.

Note that such a comparison occurs on the margin, so Cowen's criticism of the breakdown of analysis on the marginal does not apply here. Note also that I am not suggesting that everyone who is unemployed in the United States is under-employed and wants to work at Starbucks. I am simply using this as an example to highlight a broader point.