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Credit: Flickr/Kyle Sorkness

Save us from Commodification

Is increasing commodification a problem, and if so, can behavioural economics help avert it?

Is the massive growth of the so-called sharing economy, typified by the likes of Uber and AirBnB, a sign of a trend towards a more closely networked society? You know, a society where we don’t just hitch a ride with a close friend, or don’t just kip on an uncle’s sofa, but where we can benefit from a spare seat in the car of a total stranger, or stay the night in their spare room. Or is it a sign of the commodification of the good turn, where we squeeze money out of every unused ‘asset’ we have by renting it out instead of simply lending it — from musical instruments and power tools to baby cots and washing machines?

Some people see the cooperative aspects of this new economy, but others worry about the apparent relentless shift from social values to market values. We no longer do things in order to do others a favour, and increasingly see everything as an economic, profit-maximizing transaction. Branko Milanović, an economist and expert on global inequality, tends towards the latter. In an excellent blogpost he describes how the outsourcing of household tasks like cooking and cleaning, and the gig economy, in which conventional employment is replaced with zero-hour contracts, or by temporary contractors, are reshaping our society. We are slipping towards what he calls “the dream world of neoclassical economics”, where relationships are dehumanized and no longer apply between people but between ‘agents’.

This risks destroying arguably the most important pillar of a successful economy: trust. “If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” as Steve Knack, an economist at the World Bank, says. If we all become flexible workers, our dealings both as a seller and as a buyer will be with a succession of one-off transactions with strangers, and at both sides it will literally be a waste of effort to be nice. There is no justification for building and maintaining trust because you won’t see your client or supplier ever again.

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Source: Our World In Data

A crucial trade-off

Milanović observes that this is not new — not only has commodification of goods through mass production to the detriment of the artisan been with us for a long time, it has also made us way better off. But, he says, there is a trade-off to be made: cheaper goods and services come at a price that is not paid in money.

As someone deeply interested in the concept of the trade-off at the core of much human behaviour, I thought this was a very interesting view. We are not always aware of what we give up in order to realize some enticing gain.

However, when a trade-off is made at a societal level, it is rarely a case of everyone losing a bit, and (hopefully) gaining a bit more. Most of the time some people lose and other people gain. Diane Coyle, another respected economist, was quick to draw attention to this in a reaction to the original post. She points out that the outsourcing of domestic chores “has saved women millions of hours of labour in the home.” She also challenges Milanović’ criticism of the gig economy, but it is particularly her singling out of women as the beneficiaries of these trends that is worth dwelling on. While the original post may imply that we may be sacrificing precious societal values for the sake of cheaper goods and services, it is clear that there is a huge societal benefit as well. You don’t need to be a woman to rejoice in the fact that half the population has gained a hell of a lot of new freedom.

This observation suggests the original analysis can be seen as giving rise to an economic externality, a term that refers to a situation where a transaction between two parties has a (detrimental or beneficial) consequence for an unconnected third party. If a household outsources cooking by purchasing ready meals from the store, every family member can heat their grub in the microwave oven whenever they want. That is cheaper and more convenient, but it also means families eat fewer meals together. The original post warns us that the household may be focusing too much on convenience and savings, ignoring the decline of family time in the trade-off. But in this analysis the benefit for the mater familias (who is technically a third party in the transaction between the household and the supplier of chilled meals) is overlooked. Housewives enjoy a positive externality in the trade-off.

The retirement connection

This is reminiscent of a trade-off that is often cited in the Behavioural Economics literature. During our working life, we all have a choice between saving for our retirement so we can consume later, and consuming our income right now. Left to our own devices, many of us would not save enough, if anything at all. How come?

According to Richard Thaler, a celebrated behavioural economist who describes retirement savings as “behavioural economists’ biggest success story”, one reason is our lack of self-control. We can vividly picture the goodies the money in our bank account can buy us now, while retirement is far away — and anyhow, we can start saving next week, or next month. Because spending too much now and saving too little for later goes against our long-term interest, this behaviour is seen by many as irrational behaviour — the terrain of behavioural economics.

But this trade-off can also be viewed as an instance of an externality. Our current self chooses to splurge money on stuff we want now, because it makes us feel good for a moment, but that instant gratification will be a sour memory for our future self when we come to retire. Our future self is kept out of our purchases now, but suffers the consequences as a negative externality.

What is better?

Mr Milanović was equally quick to reply to Ms Coyle’s reaction, and acknowledged that he should have added domestic chores not traditionally done by women to support his argument. But he also returns to the crucial trade-off between material progress on the one hand, and the gradual disappearance of personal ties on the other. There is no doubt in his mind that in most cases commodification has led to improvements in welfare. These have come at a cost, though: something is lost, something of value. If we continue to shift transactions from the social, personal domain to the commercial domain, we risk regretting our collective choices some time in the future.

And this brings us back to the individual “irrational externality” of the workers who, late in life, regret not having saved enough for their retirement. Might there be something similar happening here? Are we collectively sacrificing the personal ties that are vital for the trust that underpins our long-term economic interest and for our own happiness and wellbeing — all for the sake of some minor material benefit in the short term?

The picture that Mr Milanović paints, of a “Utopia of wealth and a Dystopia of personal relations” should worry us. We may end up even without the promised wealth as trust becomes the victim off the ubiquity of one-off deals.

Alas, this is not necessarily a choice we can make individually, like the choice whether or not to build up a pension pot. Even if we consciously and rationally strike what we believe is the right balance for us between material gain and loss of personal ties, that doesn’t mean the outcome at the overall society level will be the right one.

If nudging individual people to save enough for their retirement is one of behavioural economics’ greatest success stories, could societies be nudged to make the right trade-off between material wealth and immaterial values like trust and relationships?

Perhaps that is the next big challenge for behavioural economists and their traditional colleagues. Let us hope they can save us from excessive commodification, and that it will become the next big success story.

Originally published at on August 19, 2016.

Written by

Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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