Thoughts on economics

A quote from John Adams I like:

I must study politics and war that my sons may have liberty to study mathematics and philosophy.  My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

This kind of illustrates how I think of things: that the understanding and reconstruction of the world around us, while worthwhile, best serves to enable the understanding and reconstruction of ourselves, our souls.  But in either case the part of us which Socrates loved is stimulated by the strengthening of our connection to the natural truths: people are happy when they make music, or learn the art of dance, or write or build honest architecture.  More than happy, their existence gains purpose.

This kind of view is challenged by the “conventional” understanding of economics presented by Steven Landsburg in The Armchair Economist.  A representative expression of this view from page 45 reads:

All mainstream economic models assume that people strive to consume more and to work less.  All mainstream models judge an economic policy to be successful only when it helps people to accomplish at least one of these goals.

Landsburg shows that this simple principle is ignored in much of policy analysis – we focus on production instead, e.g. GDP.  But production is actually the part of the economic process we don’t like.  We only go through it to be able to consume, he argues.

I thought about it, and the proof for this turns out to be really straightforward.  In the economy, money signifies value, by which I mean that in its role as a medium of exchange, you will exchange positive amounts of money for things which you, subjectively, value.  If you value the use of ice cream, video games, and vacations, you’ll exchange positive money to consume them. In exchange for our labor, however, we demand money, which shows it’s something we don’t want to do: we only do it to secure money to consume other goods.  If a painter truly valued creating art – that is, if painting constituted consumption like other sources of utility such as watching movies and eating food – he would paint even if he had to pay to do so.  Do you know anyone who is really like that?

Of course, on the tube back from work two embarrassingly obvious criticisms to this argument came to me.  But unfortunately the margin is too narrow to contain the proof.

But even if we take it as given that some individuals prefer to excel at the human arts even if they have to take a loss to do so, i.e. assume the role of “starving artist”, it’s still troubling that societies punish their preferences if we have some inkling that theirs are somehow the ones more ultimately desirable.  The reason for this is that prices are determined by the marginal consumer (well, really, by the elasticity of demand, but that leads back to the marginal consumer) – if many individuals in the market are willing to pay $4 for a beer, then the price for beer will be $4 (if companies charge $5, many consumers will leave the market, so their profits will shrink; but if they charge $3, they’ll lose out on potential profits from sales to all those people who are willing to pay $4!) – and like you see, the marginal consumer tends to be someone with, roughly speaking, median preferences.  The people most affected are those with unusual preferences – someone who loves consuming material products, and who would pay $8 for a (marginal) pint, gets a steal because the market price is $4.  Our painter, however, chose to exercise some of his consumption on his human art of choice (in the form of taking a lower salary) and is therefore left with less money to purchase beer.  But he still has to pay market price!  Ad nauseum everything else available to consume: housing, food, consumer technology, leisure, etc.  Doesn’t that suck?

It gets worse.  The incentives are actually stacked against the very existence of the student of “painting, poetry, music, architecture, statuary, tapestry, and porcelain”.  The reason is something I would probably call the consumption elasticity of effort (or something).

If you’re familiar with microeconomics, you know that if we define utility U{A} as the benefit we gain from consuming any unit of A, and P{A} as the price of consuming a single unit of {A}, etc. then ideally we would consume such that dU{A1}/dP{A1} = dU{A2}/dP{A2} = … = dU{Ai}/dP{Ai} given i goods.  Don’t worry, it’s actually not very hard to follow – all this says is that if A1 costs $5 and A2 costs $20, you’d better be getting four times the utility from consuming the marginal unit of A2 as from the marginal unit of A1 – any less and you’d be buying more of A1.  However, the more A1 you buy, the less fun it gets (the more you go to see the movies, the more you think that going to the amusement park for $20 might be worth it) until finally, dU{A1}/dP{A1} = dU{A2}/dP{A2}.  Then you repeat the argument with each other good.

Another way to think about what’s going on is to hold the price constant, i.e. compare the utility from spending one dollar on each good.  Then which goods you buy are determined by how much you increase your utility per unit dollar spent, and the most obvious statistic to determine what goods have the best shot of getting consumed turns out to be their utility elasticity of unit.  But this isn’t very helpful to our study of consumption because each consumer’s preferences – how much each good contributes to their utility – differs from each others’.

Fortunately, the consumption elasticity of effort has one lucky constant: market prices.  Market prices dictate the amount of consumption, in physical terms, any individual is able to enjoy regardless of his desire to consume those goods, because either way he is only able to purchase a certain amount.  Returning to our starving artist model, we can take a look at the payoffs (C, consumption) of one unit of effort (E) applied to painting (P) verses applied to labor (L).  If you do the analysis, the conclusion seems absurd at first: the artist should only choose to paint if dC{P}/dE{P} > dC{L}/dE{L}, i.e. if nothing you could buy with the additional income from accepting market price for labor could make up for the foregone value of consumption of painting!  (Actually for various reasons the conclusion isn’t absurd – for one example, you can’t just trade marginal units of work as a painter for work as an accountant – generally if you’re going to be an accountant, you kind of have to get training and work full-time.  Additionally, some of the consumption from working as a painter is unique, i.e. you may get a commission to paint a public figure, which would be difficult if you were an accountant who painted part-time at his own expense.)

Conclusion: you have to really, really love the human arts if you’re going to rationally choose that path.* So much so that you become a member of a very small set of the population which pays for your choice in foregone income and is marginalized by popular preferences and market prices.

How much is “really, really”?  In 2008, the average actor in a West End musical earned £381 in a week. Over the course of a 48-week work year, that is just over £18,000.  (Good luck consuming goods in London on that income.)  Next time I see Wicked I’ll try to remember to clap a little louder for the average actors, the non-Elphabas, non-Glindas.

*In fact, I very much doubt that many “rationally” choose such a path.  Like war and love, most approaches to art are precipitated by some form of madness…


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