Monday, October 17, 2011

The range of people's satisfactions

I was just discussing Tibor Scitovsky's book The Joyless Economy: The Psychology of Human Satisfaction. He argues that the right level of stimulation is critical for both personal and societal satisfaction.

So how does the economy fit into this psychological analysis? Of course, the market economic system is useful because it helps ensure reciprocity in trying to satisfy people's wants through production of goods and services.

For the need to pay a market price makes the recipient of a satisfaction perform a service in exchange or otherwise contribute to the satisfactions of others ... reciprocity in the rendering and receiving of satisfactions is the main function of the economic system.

But so much lies outside the market economy - vast areas of activity which matter to people's satisfaction, but to which economists pay little attention.

Scitovsky distinguishes six main sources of satisfaction in all. We already talked about the largest one- mutual stimulation and pleasure in one another's company.

One of the other main sources of stimulation is work itself. But we do not account very well for it, Scitovsky says, neither its negative nor its positive aspects.

Those effects of work are completely missing from the economist's numerical index of economic welfare: the net national income or net national product is not net of the disutility of the labor that went into producing it, nor does it include the satisfactions of labor, if this is what work gives rise to. ...Modern economists have nothing to say on whether work is pleasant or unpleasant. "

This is just one more of the dozens of reasons why GDP measures are incomplete or misleading.

Economic quantification is attractive and useful, but we must not let it seduce us into attaching more significance to the measure of quantity and to what is quantified than they deserve. The national income is, at the very best, an index of economic welfare, and economic welfare is a very small part and often a very poor indicator of human welfare.

In fact, how much we enjoy work has immense consequences. For example, it helps explain why working hours have often got longer, not shorter, as incomes rise - contrary to the expectations of many people in the 1970s. A rise in wages raises the price of leisure, because the cost of spending an hour of leisure rather than an extra hour working becomes higher. So there tends to be a substitution effect away from leisure, unless as income rises you want to spend more of your income on it.

When work and leisure are considered the only uses of time, and both are assumed to be pleasant, there can be no income effect, because money cannot buy more time. The substitution effect, therefore, would be the only effect of the rise in earnings, which would then necessarily lead to a lengthening of the work week.

Increased specialization can often increase the boredom and monotony of work, however, so it gets complicated. Much depends on the nature of work itself. .

Non-market goods and services - housekeeping, cooking, cleaning, looking after relatives, advice to friends - are also an immense area of activity which give people satisfaction, even if they do not flow through a market transaction.

He also identifies two other categories - self-sufficient satisfactions and externalities.

The takeaway from all this is that our standard economic way of looking at things only sees a small part of the wider range of people's satisfactions. But those other stimulations and satisfactions become steadily more important, as comfort levels rise to a level where basic wants are satisfied.

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