David R. Henderson  

Are Economists Cheap? Or Just Rational?

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Today's weekend Wall Street Journal carries a hilarious story about how cheap some economists are. Three stories from the piece and then my thoughts.

Highlights:

Children of economists recall how tightfisted their parents were. Lauren Weber, author of a recent book titled, "In Cheap We Trust," says her economist father kept the thermostat so low that her mother threatened at one point to take the family to a motel. "My father gave in because it would have been more expensive," she says.
Ms. Stevenson and Justin Wolfers, also of the Wharton School, gave a friend $150 to hire movers instead of helping him themselves. Harvard University economist John Laibson pays to have a driver pick up his sister from the airport rather than driving himself.
Stanford University economist Robert Hall, incoming president of the American Economic Association, values his time so highly that his wife, economist Susan Woodward, occasionally puts her foot down. "Bob doesn't see why we can't just hire people to trim the Christmas tree," she says. "I tell him that's not what it's supposed to be about."

The one I identified with most was the moving story above. It makes total sense to me to calculate what a friend would have to pay to move and what fraction of that I could save him by helping, and then give that amount. Moreover, one scratched otherwise-nice piece of furniture can eat up all the gains that I would have provided by physically helping him and I'm more likely to scratch it than an expert mover. On the other hand, I think differently when it's my daughter. As I wrote last year, my wife and I helped her move because we got to be part of an important stage in her life. I missed a friend's 60th-birthday party because of it, but I still think it was the right move.

I thought my Hoover colleague, Bob Hall, though, went too far. Susan thought so too.

So, yes, I think some of my economist colleagues are cheap, but often there's a core of rationality, as in the moving example above.

When I teach economics, I often give my students examples that help them see the range of options open to them and help them identify their goals. After a few weeks, they are starting to think that I'm Mr. Cheapskate and so, to explain that they missed the point and that I'm trying to get them to compare costs and benefits clearly, I tell them the following true story:

I was traveling home from Winnipeg in 1997, after winding up my father's modest estate. I brought back a record turntable packed well and carried on board to avoid breakage. I was connecting through O'Hare and had a long walk with a heavy box under my arm and a wheeled carry-on bag. My arm was getting sore because it was a long walk and I envisioned it being so sore if I went the whole distance that way that I would have pains for a few days. When I popped up the escalator, I still had a long way to go and I saw a man with an airport EZ cart. It was empty and it looked as if he was waiting for his flight and was done with it. I pulled a $20 bill out of my wallet and said, "Excuse me, sir. I'll give you $20 for that cart." I was fully prepared to pay and would have gained a lot of consumer surplus from that transaction. Instead, he said, "Go ahead. It's yours. I don't need you to pay me." I thanked him profusely and went on to save my arm.

That's not the usual story told by a cheapskate.

My co-author, Charley Hooper, and I write about many such things, applying economics to decision-making in Making Great Decisions in Business and Life.

And what did I get for my frugality? The financial wherewithal, on one full-time income, to send my daughter to a private school from 5th grade on and to send her to an expensive private college. Tradeoffs, tradeoffs, always tradeoffs.

So, are economists cheap or just rational? Answer: depends on the economist.


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CATEGORIES: Cost-benefit Analysis



COMMENTS (13 to date)
Phil writes:

The second and third stories illustrate what is usually the *opposite* of being cheap. Cheap is moving yourself instead of paying the $150. Extravagant is the opposite of cheap, and hiring someone to trim your Christmas tree is something my (cheap) parents would consider horrifically wasteful, the antithesis of cheap.

Perhaps your point is that economists are more likely to consider it socially acceptable to solve problems with money?

q writes:

i'm confused. why wouldn't an economist want to act consistently in a manner which maximizes real GDP as opposed to acting consistently to save money?

mike kenny writes:

i have this discussion with others a bit--i suggest they get people to do their lawn work or house maintenance, since their time is more valuable in other realms. a couple of people balk at this idea. i think maybe they like doing the work, or they just can't really squeeze much more money out of their higher paying alternatives--they can't work more than they already do practically.

usually people think going out to eat all the time is wasteful, though you could argue the good food is produced more cheaply and better than if you did it yourself. i wonder if people just need a break from doing 'productive' things and want to just do something simple and a bit mind-numbing like cooking dinner or chores, and if they paid someone else to do these things, they'd just do something else simple and mind-numbing rather than doing their best work, or really pleasurable leisure, and in this sense, their hiring out their simple mind-numbing chores to someone else would be redundant, because now they're just going to do some make-work simple, mind-numbing thing.

hanmeng writes:

I'm skeptical about the worth of a private college education. But maybe it meant a lot to your daughter.

agnostic writes:

Adam Smith's picture of human nature in The Theory of Moral Sentiments helps us see why normal people tremble at the sort of behavior described.

At root, we want to be praised, but even more than that we want to be praise-worthy. A simple poll would find that most people don't find it praise-worthy to do all of that contracting out of activities that signal your commitment to close friends and family.

Yet in the economist's mind, they deserve praise for being frugal and cleverly solving a problem, and make this known to onlookers. Those onlookers see a person who is not praise-worthy but who seems expecting of praise and who is a bit upset when he doesn't get it. It's no wonder that the onlookers feel contempt.

Are the onlookers being unfair? I don't think so. In Smith's view, praise-worthiness includes passing the tests of justice, prudence, beneficence, and self-command. Treating chores like helping someone move or fixing the Christmas tree as though they were market transactions surely passes the tests of justice and prudence -- so far, so good.

But it's not beneficent because if the other person resists your action and is resentful when it is completed, you have clearly not benefited them. They resist because these actions are supposed to signal your loyalty and care. There's a parallel to throwing money at the unemployed in the form of subsidies, rather than helping them gain employment to make them feel truly happy with life.

I think it also fails the test of self-command. In Smith's view, the purpose of self-command is to modulate your own sentiment so that others can more easily sympathize with you. For example, if you're hurt, you try to restrain how much pain you show because that makes it easier for those who aren't feeling the pain in their own bodies to sympathize with you. If you are wailing, few will be able to meet your feelings half-way. So it's out of respect for your onlookers that you exercise self-command -- don't make it too hard for them to sympathize with you.

When someone contracts out the moving or Christmas tree decoration, they're complaining about what an awful chore it is -- so awful they're actually going to pay someone else to do it for them -- rather than suck it up, take it like a man, and help the friend move or fix up the Christmas tree. The ruthless economist is giving in to the easy temptation of paying someone else.

It's this public display of overblown discomfort that makes it almost impossible for others to sympathize with him -- after all, they feel little such discomfort themselves. They rightfully heap blame on the economist for making it impossible to sympathize with him, rather than dial it down and make it easy to enter into his feelings, perhaps by making a few complaints but using humor to soften it over.

The others will recognize that he's in discomfort, but they'll praise him for dampening his expression of it in order to help them feel what he feels.

N. writes:

I think it often comes down to a question of signalling. Offering a friend money to hire movers rather than helping him yourself sends a strong signal that you would rather pay him off than share the experience of moving with him, which, because of shared hardship, could be very rewarding in its own way.

In that way, I think economists probably do tend to emphasize the monetary costs over the 'human' costs, which are sometimes far more economically valuable, even if it is difficult to assign them a dollar figure. Consider: it takes a good deal of time, signaling and shared experience to build a strong social network... and yet, that network can be invaluable in finding a job or cushioning the loss of one... or, for that matter, finding a spouse or a business partner or so forth.

I used to think ritualistic gift giving was absurd. After all, what meaning does it hold if it's compelled? Well, after spending some time in the anthropology department I learned that (a) ritualistic gift giving is extremely important for strengthening ties in just about every culture; and (b) refusing to give (or receive) a gift sends profoundly negative signals that can lead to one being ostracized by the group.

Your preferences may vary, of course, but I found that when I broke down and finally started taking part in rituals I thought were silly and irritating (like Christmas tree trimming, for example!), my social network expanded rapidly, my group status improved and my quality of life went up pretty sharply.

In conclusion: stupid humans. But they're all we have.

Eddy Elfenbein writes:

I think there's some irony in posting that on your free blog.

Tom West writes:

Unfortunately for homo economus, there are all sorts of cases where strictly rational behaviour rubs human nature the wrong way.

Economists (or anyone else, for that matter) who seek to maximize their utility function without taking into account the plethora of subtle human interactions that it affects are asking to become subjects for newspaper articles.

(I'm quite aware of this because when my Asperger's son was much younger, there were a number of cases where my relentlessly logical son's actions threatened to alienate peers or teachers. It fell to me to be amateur anthropologist and try and explain to him how his reasoning did not take into account subtle social rules and how what people said were occasionally in direct contradiction to how they felt.)

Ben Hughes writes:

I get into arguments with non-economists friends about this all the time, because I always find myself offering to pay people for mundane things.

A great example is the person in front of you keeping their seat up during a flight. If I'm on a six hour flight and loose an hour of productivity by the person in front of me having the seat up instead of down, it makes total sense for me to engage in a mutually-beneficial transaction with him. Maybe it's worth $20 for me to be able to work and he'd rather have $20 than sleep.

Also when going to the park only to find the tennis courts full, I've paid people to vacate a court before. Tennis courts are often scarce during prime times and I'm certainly willing to pay to play.

RL writes:

The more interesting question, Ben Hughes, is--if you go to a park with 6 adjacent tennis courts--do you quietly ask if people will give up the court for monetary compensation, or do you loudly announce, "I'm willing to pay one pair of you to vacate your court" and see if you can get a reverse auction among the 6 tennis pairs going?

JTapp writes:

I serve on faculty at a small private university, and every summer we are asked to participate in "faculty work day" where we clean up the grounds, trim trees, weed flowerbeds, etc. It always drives me nuts. Every time I've pointed out the opportunity costs and offered to donate money to hire someone else rather than donate my more valuable time, I'm met with confused answers and angry lectures from the administration.

Tracy W writes:

q - why would an economist, or anyone, want to maximise real GDP? Economists talk about maximising utility, not GDP (nor happiness nor income) for good reasons.

If anything, wouldn't an economist be less likely to want to maximise real GDP than the average person off the street, as they know some more about how real GDP is estimated?

(I never took an Econ 101 class, but I did tutor one and I remember marking about 100 papers where every student dutifully supplied an example of something that GDP leaves out. Everyone got that question right, although one student's grammar was so bad that a pedant could have denied them the point.)

Tom West writes:

JTapp, this is exactly the sort of thing that used to confuse my son. He'd assume that the whole thing was about wanting to clean up the campus rather what it actually is about: a group demonstration of commitment to the university by sacrificing that most precious commodity, time. (Time being the one thing that we assume is given equally to us all, so thus makes for an equal sacrifice among colleagues.)

Now, at 16, he's learned enough to closely evaluate any proposition that doesn't initially make sense to look for the real reason behind it. Once he understands what's really being asked for, he can decide for himself if it's the worth the cost.

It doesn't help that most people cannot articulate the human logic behind such propositions. They understand the proposition by instinct alone, which suffices for most human interaction.

Economists are probably the ones who most commonly get the "every other person in this room knows what you said is wrong, and you're questioning our logic?" when they try and apply pure rationality to human based interaction.

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