19 December 2011

ECONomics

This is what happens when you drop out of econ 101 halfway through:

When you make a few hundred dollars an hour, it costs you more to mow your own lawn than it does just to pay someone to do it for you. Of course, this simple math is something that most of the 99% never get.

This tool has apparently never heard of opportunity costs.  It only costs you more to mow your lawn if the alternative would cost more than doing it yourself.  Basically, this will only happen if you take (non-paid) time off from work to mow your lawn.  If you don’t work on weekends, you can mow your lawn then and your opportunity costs will be zero, in terms of foregone work/pay.  Mowing your lawn is only a money-losing proposition if the only way to mow your lawn is foregoing earning a paycheck.  This is not something most nine-to-fivers face.

This reminds me of another example that was cited in one of my college classes (econ 195, to be precise).  My professor had apparently calculated the net wealth of Bill Gates and determined that he earned approximately $4.8 million per hour (approximately $1,333 per second) and, as such, it would be a waste of his time to pick up a one hundred dollar bill that he happened to pass by on the street.  This analysis, like a lot of modern economic analysis, is too clever by half.

Actually, it’s not clever at all.  Net wealth and income are not the same, and therefore Bill Gates does not earn $1,333 per second.  He has (had) $42 billion dollars, period, and that simply exists; it is not earned.  Not only that, if he’s walking down the street, he’s clearly not working (unless he’s getting paid to walk down the street).  As such, his opportunity costs are zero, in terms of money earned because he is not currently engaged in money-earning activity.  Thus, it is clearly within his best pecuniary interests to pick up a one hundred dollar bill, since doing so will increase his net wealth by one hundred dollars.

At any rate, both of these analyses are evidence of what I like to call eCONomics.  Essentially, all you need to practice eCONomics is a poor grasp of opportunity costs and the ability to conflate terms and reason badly.  Basically, be like Paul Krugman (zing!) and you can be a successful eCONomist.

3 comments:

  1. Simon,
    If you make more than a hundred dollars an hour, chances are really high that you also work an awful lot of hours. Chances are really high that you've also got some sort of oncall responsibilities as well (if, for instance, you're a doctor or sometimes an engineer). Accordingly, your free time is frequently more limited than the average Joe's.

    In such a circumstance, one of the first things people usually try to buy back is some of their free time. That's why paying someone to do yardwork or for maid service frequently makes sense.

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  2. Ditto on opportunity cost as a concept.

    I'm just about finished with a book review (in three parts) of Murray Rothbard's "History of Economic Thought". If memory serves, opportunity cost as a concept wasn't really thought up and documented until 1600 or so.

    Given how a major point of Rothbard's history is how economic concepts are thought of, then forgotten, only to be "rediscovered" later, then the mainstream forgetting about opportunity cost does not shock me at all. They likely didn't hear about it all that much, and instead think about economics as static...thus the popular yet false notion even amongst our governing class that tax increases always equal more government revenue.

    That said, Jehu has a point, and his point isn't necessarily mutex with yours...in that if I earn a lot of money, it's simply a better use of my scarce time to pay someone else to mow my lawn than do it myself. The opportunity cost in mowing my lawn, thus not expending the $100, is the hour or so of family time or whatever I would otherwise reclaim.

    Or it could just be that paying one of the so-called 99% to mow my lawn is just me "spreading it around"...in which case the 99% should be friggin grateful.

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  3. @Jehu- the original argument was over the opportunity cost of foregone income, not foregone free time. Your point is irrelevant to the discussion at hand. That is not to say that it is invalid or useless, but rather that the opportunity cost of work and the opportunity cost of free time are not the same thing and don't merit equivalency.

    @EW- It's very shocking to me to see that mainstream economics forgets the concept of opportunity cost. This concept was covered in both the econ courses I took in college, and within the first two weeks to boot. This concept is discussed in virtually every every intro econ textbook, so the only conclusion I can draw when someone makes an argument that ignores opportunity cost is that they are astonishingly ignorant of basic economic principles or they are dishonest.

    Still, it is astonishing how often mainstream economists ignore/forget older, well-established economic truths. I suppose that this is partly to the inherent unpopularity of economic truths. After all, no one wants to be told that we can't borrow and sped our way to wealth.

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