Arnold Kling  

The Must-Read Economics Book of 2008

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Bruno Frey writes,


procedural utility has also been found to play a role in consumers' decisions. The first evidence of this was presented by Kahneman, et al., who investigated customers' reactions to a situation where the price of a good (snow shovels) was increased in a well-defined situation of excess demand (the morning after a large snowstorm). Eighty-two percent of the individuals surveyed considered the price increase unfair and so rated a normal functioning of the market mechanism as unacceptable. The reaction can be interpreted in terms of procedural utility: people are negatively affected emotionally when they perceive behavior toward them as exploitation, because it undermines their status as consumers (who are presumed to be on an equal standing with the suppliers).

That is from p. 113 of Frey's Happiness: A Revolution in Economics.

At this point, a little more than halfway through the year and halfway through the book, I'm willing to give my opinion that it's the must-read economics book of 2008. If Tyler wants to do another book club blog, this would be a good selection.

Bear in mind, also, that I'm not such a fan of happiness research, so I make much less of the findings than most people.

I'm not saying that there is something shocking about the fact that people resent having to pay higher prices for snow shovels after a snowstorm. But I think the point that people experience it as a loss of status has merit.

Russ Roberts' not-yet-released novel The Price of Everything starts out by making the economic case for the snow shovel pricing mechanism. My wife read and enjoyed the novel (which is more than can be said for any of my own books, so I think Russ should be optimistic about his book's prospects). But afterwards, she was still skeptical, wondering if Russ and I are right, why don't more people think the way we do? Frey's response would be, "Procedural utility."

In a different chapter, Frey says that people are happier if they are self-employed. As an old-fashioned, revealed-preference kinda guy, I wonder whether people are willing to give up income in order to be self-employed. Frey says that studies show that they are.

Here in the U.S., I think the issue of self-employment is increasingly tied in with health insurance. If you're healthy and you live in a state that has not regulated personal catastrophic health insurance out of existence, you can leave the protective embrace of a corporation and enjoy more take-home pay. If you value health insurance and you're in one of those states that has gone beserk with cost-inflating mandates, then you have to just have to suck it up and work in the Dilbert Sector.

If we changed the game to disconnect health insurance from employment, then the clientele effects would be really different. Some people who now are self-employed in order to substitute cash for health insurance would switch to working for companies. And my guess is that a lot of people who now work for companies would say "take this job and shove it."



COMMENTS (11 to date)
Kevin Dick writes:

Your link to the book appears to be both broken and to the wrong book. Here's what I believe to be the proper link:

http://www.amazon.com/Happiness-Revolution-Economics-Munich-Lectures/dp/0262062771/

Barkley Rosser writes:

I have not seen Frey's book yet so do not know what is in it, although he is a very wise observer with a lot of knowledge. Two points.

Another example of something like this snow shovel thing is the whole business of the Gneezy-Rustichini "either fine enough or don't fine at all" argument. So, the poster boy example, now pretty much verified, had to do with parents picking up their kids at child care centers in Israeli kibbutzes. Some of them tried instituting small fines for those picking up their kids late. This led to more people picking up their kids late because previously people were picking them up on time out of some social morality motive, but then this was destroyed when a (small) fine was put on. I do not know if Frey discusses this famous example or not.

Regarding the happiness and self-employment bit, yes, this is pretty clearly there in the data very strongly. And, indeed, while it has not been all that much advertised (maybe we do not wish to discourage entrepreneurship), but the actual monetary returns on self-employment are seriously godawful. Most new businesses fail, and not too long after they start, and with the new owner generally working his/her bottom off and often lacking many of the benefits of paid work, such as good health care. But, being one's own boss is very satisfying to many people, and so many are indeed willing, very willing, to make the monetary and time sacrifices to do it.

Les writes:

You state that "I'm not saying that there is something shocking about the fact that people resent having to pay higher prices for snow shovels after a snowstorm. But I think the point that people experience it as a loss of status has merit."

You also state that you are a "revealed preference guy."

How do you reconcile these contradictory statements?

Lord writes:

I think it has a great deal to do with how much they like sales and probably not at all about insurance.

Dr. T writes:
If you value health insurance and you're in one of those states that has gone beserk with cost-inflating mandates, then you have to just have to suck it up and work in the Dilbert Sector.
Not necessarily, it depends on how much you are willing to risk. If you have a high enough positive net worth (say $200,000), you can take a chance that you or your family won't require a long hospital stay. You can invest the money that would have gone towards health insurance and have a well-funded, unofficial medical savings account in 5-10 years.

That's my status at present. No health insurer will cover my family, even for catastrophic coverage only, because of pre-existing health conditions. I said, "to hell with it," and told my wife that we are self-insured. We have built up a large enough fund to fully cover the cost of a liver transplant (that my child might need) and still have money left for other health care needs.

Someone from the other side writes:

If he writes anything like he holds lectures I don't think I could bear reading the whole book...

David Friedman writes:

You can find my explanation for the belief in just prices, of which the snow shovel case is one example, in my article on economics and evolutionary psychology. http://www.daviddfriedman.com/Academic/econ_and_evol_psych/economics_and_evol_psych.html

botogol writes:

"If we changed the game to disconnect health insurance from employment, then the clientele effects would be really different. Some people who now are self-employed in order to substitute cash for health insurance would switch to working for companies. And my guess is that a lot of people who now work for companies would say "take this job and shove it"

This hypothesis sounds pretty testable from state to state and country to country.

Mr. Econotarian writes:

I think "normal" people who don't mind following orders and are not naive about the realities of self-employment prefer to be non-self-employed. I ran my own company for a while. Afterwards, 9-to-5 seems like heaven.

On the other hand, a relative of mine is incapable of being bossed around. His happiness is maximized by being self-employed.

Ted writes:

And just what is this "Normal?" There is no one-size-fit-all to people. Those who don't fuction the same way as you are not neccessarily "naive."

wintercow20 writes:

David, the link to your paper does not work.

-Mike

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