Arnold Kling  

Two Improper Concepts to Measure

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1. The value of household production. Timothy Taylor writes,


Get an estimate of hours devoted to home production, and then multiply by the wage that would be paid to domestic labor.

No!

No, no, no!

Suppose I build a deck to add on to my house. Should you measure the value of the deck by multiplying the number of hours I spend on it times the wage rate of a professional carpenter? If the carpenter takes 40 hours and I take 4000 hours, then you want to tell me that my deck is 100 times more valuable?

If I build my own deck because I enjoy it, fine. But then talk about the value of my leisure, not the value of my "home production."

I think it is really important to understand that home production is not economic activity. Economic activity is outsourcing. It is patterns of sustainable specialization and trade.

Home production is what you do when institutional constraints cause the outsourcing market to fail. You should work an extra hour and pay someone else to do your household tasks, but your employer will not pay you more for working more hours. Or you could be paid more, but there is a tax wedge that makes it cheaper to do your own laundry. Or the transportation costs are too high to have someone drive to your house to open up that frozen dinner and put it in the microwave for you.

2. Happiness. Will Wilkinson writes,


I think our normative theories of happiness -- our implicit beliefs about the sort of behavior that ought to be rewarded with happiness -- probably drive our descriptive theories more than the other way around.

This is one of many reasons to be skeptical of what researchers are measuring when they claim to measure happiness.


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CATEGORIES: Economic Methods



COMMENTS (21 to date)
George writes:

I have always thought that measuring happiness is what you do when you haven't a clue about what makes an economy work. Hence, you get concepts like "Gross National Happiness" and other nonsense like that floating around the world.

Not that happiness is irrelevant. You just can't come up with a meaningful objective measurement.

jh writes:

I remember reading an article claiming to put a value on Stay-At-Home-Moms. Their methodology was to list all the things a mom does and then found the average wage of a professional who does those same tasks. For example, it said that moms cook meals so they found an average wage for professional chefs. Same with professional house cleaners, laundry services, and drivers.

I think it was a Yahoo Finance article. They have some pretty funny stuff there sometimes.

mark writes:

I very much agree with your point 1, exc the last paragraph which I'll get to in a second. It boggles my mind that so many educated people don't get that home production is identical to home consumption. No value flows out of the household into the economy. You launder your clothes so you can look good in them. You clean your house so it pleases your eye and nose or earns you social capital. You build a deck because you want to sit on it. The labor is never part of an economy unless you have a totalitarian view of your fellow citizens. At most doing your own chores is a form of savings of money otherwise earned in the economy. But the labor does not add any value to the nomy.

But I disagree that home production equates to "the outsourcing economy fails". Many people take pleasure in performing chores around their house, in developing and using the needed skills. They create value for themselves. As well, others would abhor the loss of privacy that would come from outsourcing so many chores. Again, if you have a totalitarian view of fellow citizens' use of their time and labor, you may say this is part of the economy (Wickard v Filburn) and a market failure, but if you respect the dignity of fellow citizens and their choices, then, you see this as outside the economy altogether.

Hunter writes:

Economic activity is outsourcing.

O.k. I'm missing something. Economic activity in my mind is producing a good or service of value. You may sell it, use it or give it away but it's still creating resources.

By your reasoning, we would be better off working at our jobs an extra hour and a half or so and eating at restaurants every day and I would guess in that case the market may end up making most restaurants look like school cafeterias. Maybe that's true but it stil doesn't make cooking at home any less an economic activity. Just one that's difficult to analyze by mathematical models. And the difficulty to measure how much value is being added may be the real issue. Partly because experts get paid more. If a carpenter takes only 40 hours to build a deck he may get $800.00 at $20.00 an hour. To make it economical to hire you at 4000 hours would be .20 an hour. But it's still economic activity.

Ricardo writes:

#1: wow. I never thought of that.

Glen Smith writes:

Mark,

I know people also take pleasure in doing the outsourced work. In fact, many of the higher paying jobs are also jobs that the employed finds great pleasure in doing. As a friend of mine said (I'm in the software development game), we get paid (and paid well) to play computer games. If I didn't have a job, I'd pretty much be doing the same thing I do now (except I wouldn't be getting paid). Also, at least in my corner of the world, being unemployed makes you a bit of a social outcast.

Hunter writes:

Just as an added comment as to the deck building example. Say you have the skill and knowledge to improve your free market value of deck building to $12.00 an hour and it will take you 58 hours to build the deck. You will be better off hiring yourself at $696.00 in labor than an expert deck builder at $20.00 an hour for 40 hours for $800.00.

Becky Hargrove writes:

The reason I cannot think of home production in the same terms as economic activity is the fact that in today's world, what passes as home production is often a matter of personal choice as opposed to family utility. (The garden is nice, but did everyone want or need it?) To be sure, that was not always true, as families once had to all put in their share in measurable ways for survival.

Tom West writes:

Economic activity is outsourcing.

So we need to grow the economy by me building my neighbors deck and him building mine (at suitable wages, of course) :-).

Silas Barta writes:

@mark: I was thinking the same things as you say in your second paragraph, but I think there is an important (albeit Procrustean) sense in which Arnold_Kling's point applies: to the extent that you cannot trust someone to work in your home while respecting the level of privacy (and ownership!) that you desire, that is indeed an institutional constraint.

That is to say, in another world, perhaps you wouldn't care that e.g. a stranger saw how messy your house is, and you wouldn't worry about someone coming inside your house to do a task (no matter how trivial) because you could be sure that nobody would take anything you didn't want them to.

I call it Procrustean because it requires you to water down the meaning of "institutional constraint" to absurd levels. For example, is it an "institutional constraint" that you care about privacy at all? Do you only care about it as a means to providing security in your possessions -- which could be achieved other ways -- or is it an end in itself, that you care about irrespective of other benefits it leads to?

What about transit costs for people to come to your home? I mean, we could "institutionally" remove them by living like soldiers or ants ...

Arnold_Kling's insight can often be reduced to the unhelpful remark that "If you had different values, we could satisfy them more easily."

And as Tom_West humorously demonstrates, there's nothing *inherently* better about the fact that the consumer of your output is someone else rather than yourself. I would go further and add that it's this exact error that causes people to believe there's something fundamentally good about (N)GDP increasing, rather than it being a loose approximation of of the *truly* fundamental good thing, to be abandoned when we know the two diverge (broken window, anyone?).

N. writes:

@Hunter: it depends on how much you value your leisure, though, doesn't it?

Kevin Driscoll writes:

Don't attribute mainstream views to Kling and then knock down the strawman as being inconsistent. If you believe that AD (or pick a macro variable) needs to be increased and that you building your own deck doesn't count as economic activity, then you might be forced into saying you should build your neighbor's and he should build yours at suitable wages.

Kling isn't going to say that though. He emphasizes PSST, so he's going to say that you should pay your neighbor only if it contributes to a PSST. This means that almost never will you end up 'swapping deckbuilding services' because even if you're the only 2 people in the economy, the odds that you have the same experience, skill, and opportunity cost are infinitesimally small. The varying factors of who can do it cheaper, better, and gain more from it dictate who should be paid to do it.

Hunter writes:

@N. true, just goes to show you how difficult it is to monetize your time and the value accrued by DIY. Yes you can point to opportunity cost of not working more but what is the added value or working less or DIY?

Everybody does it pretty much by feel. What does it cost to buy a good or service, Can I work extra hours or get a side job, do I need it, can I do it myself, what is the benefit of DIY, what is the cost of DIY are all questions asked by a person or family.

Also I've assumed that it's better for you to hire the cheaper labor (yourself) than to hire an expert but I could have gotten that backwards in that the more valuable your labor in doing a certain task the better off you are using your talents to benefit yourself and to get all Marxist about it to capture all of the benefit of your labor. Sorry for the length I am thinking out loud a bit here.

roystgnr writes:

I have to agree with Hunter: if you want your phrase "economic activity" to correspond to something people care about, it must include all production of value, whether or not it makes sense to outsource that production.

Imagine that you notice that I have a nice new deck and my neighbor has a newly landscaped garden. Now imagine that we refuse to tell you whether we each did our own home improvements or whether we bartered and did each other's. Should you really have to insist on finding out before you conclude that economic activity has taken place? The IRS might care deeply about whether a transaction took place, but trade ought to be only a subset of an economist's interests, not the entirety.

Collin writes:

Actually it might be time for developed nations to start to think about household production because society most important long function, birth children is globally dropping. I am guessing outside of India (currently dropping) and Africa (with possibly Pakistan), the rest of the world population is below replacement level. Considering the developed world's youth unemployment is about 15 - 20% and the BRICs are so competitive low wage job market, it seems the world is in for a baby bust the next two decades.

Although your counterpart tends to celebrate the Duggars lifestyle, but how would recommend increasing births?

mark writes:

I am going to disagree with Hunter, who writes:

Economic activity in my mind is producing a good or service of value. You may sell it, use it or give it away but it's still creating resources.

My disagreement is: value to whom? In home production, the producer and consumer by and large have the same identity. X creates value for X. X consumes all the value X created. It's a circularity. That is not what I think of as economic activity. Would anyone other than X have paid for X to create value for X? It's a completely closed loop of 100% subjectivity. Sure an objective reference is used to assign a value to the labor of X. But what about the objective fact that there was no demand beyond X for X's home production? And that X paid nothing for X's services? The assignment of market wages to non-market activities strikes me as really sophomoric. How can it be anything other than totalitarian to regard all activity as economic?

Consider these reduction ad absurdums, all of which fit the definition of economic activity you posit:

X gets dressed. Does that home production to be equated to the cost of a valet's services?

X breathes. Is that home production equal to the cost of providing X a ventilator?

X pleasures himself or herself. Is that home production equal to the cost of a visit to a prostitute.

[edited by commenter--Econlib Ed.]

JeffM writes:

One needs to get "Austrian" here without going crazy.

I am contemplating building a deck on my house. The deck has a "subjective value" to me. The work involved has a "subjective cost" to me. The deck also has an "objective value," namely the increment in market value that my house gains from having a deck. (Actually, the deck probably has two different objective values, one if built by me and another if built by skilled workers.) Furthermore, the deck has an "objective cost," namely the market price of the resources required to have the deck built by others.

"Objective costs" are completely irrelevant to "subjective value," and "subjective costs" are completely irrelevant to "objective value." It is a faith of classical and neo-classical economists that objective costs are relevant to objective value just as soon as the auctioneer finally achieves equilibrium, and I do not disturb people in their faith. My faith is less ambitious: if the greater of subjective or objective value exceeds the greater of subjective or objective cost, then the deck will be built, regardless of the auctioneer's efficiency or lack thereof.

Even if one is not "Austrian," and I am not, (indeed I am not even an economist) it helps avoid much nonsense to have read Menger, et. al.

John Fast writes:

Arnold Kling wrote:

I think it is really important to understand that home production is not economic activity. Economic activity is outsourcing. It is patterns of sustainable specialization and trade.
I completely agree with you that the proposed method for calculating the value of household work is bogus, but that doesn't mean it doesn't have value, any more than Böhm-Bawerk's refutation of Marx's labor theory of value means that labor has no value. :-) :-)

First, would you consider arrangements based on barter to be economic activity? For example, if I am a cook, and my neighbor is a carpenter, if I cook him meals in return for him building my deck, is that economic activity?

If so, then what is the difference between that and the arrangement someone has with their Significant Other, whereby one pays the rent and buys the groceries, and the other stays home and cooks and home-schools the kids?

I'll agree that home production and consumption might not be part of the economy in its most limited sense, i.e. "transactions using money," but it's certainly part of the standard of living. And it's even part of the economy in its original Aristotelian sense of oikonomia -- the management of a household (oikos), whether of a single family or of an entire polis.

Saturos writes:

I've been waiting for another top-notch Kling post for a while now. Thank you.

Jonathan writes:

Arnold: They don't use professional carpenter wages. Turning to the fifth page of the quoted piece (http://www.bea.gov/scb/pdf/2012/05%20May/0512_household.pdf), we find:

"To compute household services, we first aggregate household pro­ duction hours across the seven categories described in section 1. The value of household services is then com­ puted to be the product of housekeeper wages for each gender and the number of hours of work. This method assumes a market-cost approach of valuing nonmarket household services. As discussed in Landefeld and McCulla (2000), in the market-cost approach, two methods of computing prices are used for valuing nonmarket household services. In our approach, we chose the housekeeper-cost method that uses the wage rate of general-purpose domestic workers. The alterna­tive method, called the specialist-cost method, uses the wages of a variety of market equivalent specialists of the categories used in valuing home production (that is, chefs, plumbers, and carpenters). Each method of imputing cost has drawbacks. Using the wages of specialized workers does not take into account the dependence of the quality of the product on the skills of the individual that performs the work. Someone who is performing nonmarket household work may be especially proficient in preparing meals but have little understanding of plumbing problems. In addition, average household workers likely do not have the same specialized tools and skills as profes­ sional specialists who devote all of their time to the specialized task. Therefore, there are likely to be econo­mies of scale and specialization that would not be real­ ized in many of the average tasks of home production. As a result, the use of the specialist-cost method may lead to an overstatement of the value of household la­bor services."

"we have elected to use the wages of general-purpose housekeepers to provide a reasonable lower bound es­timate of labor services"

Slocum writes:

Or you could be paid more, but there is a tax wedge that makes it cheaper to do your own laundry.

Here are a some other possible reasons. There may be a 'regulator wedge'. You can legally 'hire yourself' to do all kinds of things that you can't outsource unless the person being hired holds the appropriate government license. There is an asymmetric information problem -- you probably have a very good idea how skilled, efficient, and reliable you, yourself, are for a given task, but that information is much harder to come by for a contractor (which leads to search costs). Then there's the principal-agent problem, and a variation on it where, the problem isn't a conflict of interest, but an inability for the agent to simulate the judgement of the principal. How good is 'good enough'? What workarounds & shortcuts are acceptable? Scheduling can work both for outsourcing (pro -- work done on your home when you're not there) and against it (con -- you want your house torn apart only when its convenient for you, and once the job is started, you want it worked to completion, not interleaved with jobs for other customers).


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