Wednesday, June 17, 2009

The Time Value of Time

A common economics question to answer runs along the lines of: "why do people eat at restaurants so much"? Apart from the pat response, "because they want to" (which is certainly true at face value), those of us drenched in the economic way of thinking immediately drag out one of our favorite horse corpses (horpses): opportunity cost. We plaster on a dastardly, sometimes smarmy grin and crow that, as a nation, we are quite wealthy (true) and that our time is increasingly valuable (also true).

There is, however, a dreadful flaw committed when we press the point. The reasoning goes something like this:

1. Wages are efficient (this is to say that workers are paid according to their productivity). I won't belabor this point or try to prove it here, as this is given ample attention in most intro micro courses. I will say that this is generally true, with a few notable exceptions.

2. Time is a finite resource (unless you're the Highlander, but even then, there can be only one).

3. The opportunity cost of an hour of leisure is an hour of labor.

This last point justifies additional division of labor while a worker is off the clock. That isn't entirely unreasonable. Most of us could pick up an hour or two of overtime for a wee bump on the first or fifteenth, or we could call in sick to go fishin' down at the ooooooool' fishin' hole. In these cases, yeah, that time is precisely worth the marginal cost (product) of labor. However, as anyone who's worked double shifts for any extended period of time knows, you get sloppy when you don't have enough time off. The fancy economist way of saying this is that there are diminishing returns to labor in the absense of leisure. Well, I reckon that might be close to the fancy economist way of saything that at any rate.

4. Since leisure time is equally as valuable as time spent laboring, this time is best spent as efficiently as possible, taking the greatest advantage of the division of labor as befits a marginal cost/marginal benefit analysis.

Whoa. #4 is just a bunch of economic jargon. Spivonomist, you're just trying to make yourself look smart, you great douche. Speak clearly. Well, okay. Look, if I'm making 10 bucks an hour stocking shelves at the grocery store, then my time off should be worth ten bucks an hour to me. This seems kind of fair, since that's how much I give up when I call in sick. So, when I choose off-hours activities, they have to be able to be just as profitable to me as my work is. In other words, I have to be able to get ten bucks of enjoyment out of every hour I spend at home. Since I'm hucking cans of green beans in this example, that ain't so tough. I could probably get my money's worth by trolling some pudgy nerd on deviantART. Easy enough. The marginal cost is fairly low and so is the marginal benefit, but there is a difference there, and it is in fact, oh exploitable! Indeed, I'll troll until the lolcow has been milked of its fresh, creamy lulz (this touches again on the idea of diminishing marginal returns).

By the same token, suppose I'm now a record company executive, raking in millions every year. Now all of a sudden, my time is vastly more valuable. It would be insane of me to piddle about cooking my own meals, tending my own garden, and washing my own car. What a waste of time! Look at it this way, instead of spending 30 mins scrubbing my Mercedes, I could be cutting a multi-million dollar deal. Which is a better use of my time?

...and so the standard argument goes. And a convincing one it is. There are extremely good reasons to exchange services, especially as income rises (note I say "income" here and not "wealth"). Income is our proxy for the value of our time.

It is my contention that it is an imperfect proxy, and occasionally, dead wrong.

The value of our time is heterogenous. This is especially true during the hours of sleep, when no one is productive, except perhaps laboratory test subjects. But I maintain that it's also true in the routine course of things. Even for creative types (including economists), nobody can be running full throttle all the time, and the real opportunity cost of time is, and this is important, the productivity capacity we possess at that time. I'm generally not well aligned with Keynesian thinking, but I don't think even Murray Rothbard would suggest that wages should be a continuously variable function of productivity, varying throughout the day. There is indeed some stickiness in there, and I think it's fatuous to suggest otherwise, or to suggest that anyone's time is precisely worth their wage at all times in the course of a normal human day.

If my productivity declines working 100-hour work weeks (which I have done in the past), and it does, then not all of my time is worth what I earn. Therefore, I have some wiggle room in determining which services I can rationally farm out and which I can do myself. This wiggle room explains why salaried professors can waste time blogging or puttering about in the garden when they should, by all rights, be publishing and attending conferences. It is my contention not that the division of labor is a dumb idea, but that Smith was right when he pointed out that someone who overspecializes is a dull and stupid creature, or words to that effect.

Yep, heterogenity of productivity. Leisure time isn't quite as valuable as the rational economist wants you to believe.

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