One of the concepts in economics that people seem to have difficulty grasping at an intuitive level is how other people's income affects one's own income. Many people instinctively ascribe to the "lump theory" of money, in which one may imagine all wealth to consist of a set amount of money, like a dragon's hoard. If you capture more of it, that means that someone, somehow, has ended up with less.
In certain circumstances, this theory might describe things pretty well, but in most times and places wealth grows and shrinks with productivity. Basically, if I am able to produce more goods and services of value to othe people in the same amount of time, then my income grows.
Not only does this benefit me, it also benefits the other people near me with whom I do business -- even if their productivity has not actually increased.
So for example. It's not unusual at this time of year to have some guy come knocking on our door and offer to mow the lawn for $20-30. I always say no, partly because I take a non-monetary pride in being the sort of guy who mows his own lawn, but mostly because I don't want to pay $20-30 for something which I could easily do in 45 minutes of spare time in the evening.
Imagine, however, that I drastically increase my income, by producing goods or services that people value a great deal more than my current efforts. Now I make three times as I did before. The idea of paying $30 not to have to spend an evening mowing my lawn might sound great. Indeed, I might be willing to pay $50. So the lawn mowers would probably end up making more money, even if before going and investing their hard earned money in a 30-inch-swath self-propelled lawn mower and increasing their own productivity.
This is why one of the constants of a growing economy is that all commodities other than human labor decrease in price, while labor increases in price.
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2 hours ago
3 comments:
I disagree. Back when I owned a house I had a neighbor, a widow in her 70's. It was getting hard for her to keep mowing her own lawn, but not being wealthy she really didn't want to hire it done. Coincidentally, my own lawn mower went on the fritz at about that same time, and rather than get it fixed I made a deal with her: I would use her lawn mower to mow both of our lawns. We were both happy with the arrangement, and kept it up for almost five years (until I moved to another state).
By your analysis, our arrangement was bad, since we were withholding spending money. I didn't spend $200 to fix my lawnmower (or $500 to buy a new one), and she didn't spend $20/week to hire a mower. Thus the economy was shrinking. Right?
But this is where I part ways with you: you say that the economy grows when people spend money. I say the economy grows when people spend money *efficiently*. The guy you hired to mow your lawn would probably be doing something more productive if you hadn't. The fact that you hired him away just so you could enjoy sitting on your butt is an economic drain, even if you pay him $50/hr. Of course, if you spend that time doing something even more productive than lawnmowing, then hiring someone makes sense. As long as you don't pay him more than your own productivity.
Look for efficiencies. Don't just look to spend.
Joel
By your analysis, our arrangement was bad, since we were withholding spending money. I didn't spend $200 to fix my lawnmower (or $500 to buy a new one), and she didn't spend $20/week to hire a mower. Thus the economy was shrinking. Right?
Actually, I think I'd say that the economy remained exactly the same size as it was before. It didn't shrink -- no one who was making money before came up with less income -- but it didn't grow either, no one is making more.
I say the economy grows when people spend money *efficiently*. The guy you hired to mow your lawn would probably be doing something more productive if you hadn't. The fact that you hired him away just so you could enjoy sitting on your butt is an economic drain, even if you pay him $50/hr.
I suppose it depends what you mean by "more productive". Usually when this has happened, it's a guy with pick-up pulling a flat-bed trailer full of large yard-work equipment, so I'm assuming that probably what he does for a living is yard work, and he's looking to pick up a new client. On other occasions, it's been a teenager from down the street looking for money.
At the basic level of economics, I'd say that usually that someone comes to you asking to do a job for a specific price indicates that he _doesn't_ have something more productive to do with that time (or that he doesn't think that he does.) And further, that if later he comes up with something more productive to do, he'll either quit or charge me more.
However, there's a cultural and social aspect to this as well. It simply bothers me to pay someone to do something I can easily do by sacrificing some of my leisure time. And I don't like the master/servant feel of paying someone to mow my lawn. (Just as my wife wouldn't like the idea of paying someone else to clean the house -- however much she might like to have the time back.)
So personally, I really can't see that I'd hire a "yard guy" even if I was making 2-3x what I'm making now. Maybe making that much more would change my values on that, but where I sit right now I just don't think I'd feel right about it.
I was just drawing on it as an example of how someone else increasing his productivity and thus income could benefit those whose productivity doesn't increase, but inhabit the same ecosystem.
I would have been a lot poorer as a teenager if my neighborhood had been filled with exemplars of the Protestant (Catholic?) work ethic with regard to lawn care. As it was there were lots of elderly people who no longer were healthy enough to mow their lawns themselves and both parties benefitted as a result.
I agree with the first commenter that efficiency is important but inefficiency seldom occurs in an arm's-length transaction. It is more likely when the government imposes price quotas or incentivizes a behvior it considers morally righteous through artificial incentives.
Besides, if you're ueber-productive, a break every now and then can't hurt.
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