The value(s) we trade
We see trading primarily as involving monetary value, but it is when it involves values that it is truly meaningful
We see trading primarily as involving monetary value, but it is when it involves values that it is truly meaningful
Barely a week ago, a British government minister resigned. This in itself is no longer big news in these somewhat surreal times (another minister did the same just a few days later). But the fact that it concerned the prime minister’s brother gave the event some extra prominence.
Why had Jo Johnson resigned? He was quoted as being “torn between family loyalty and the national interest”. It may not be immediately obvious, but choices like this are, in essence, a matter of economics. One of the issues with which the dismal science concerns itself is the allocation of scarce resources. A piece of cake is a such a scarce resource: you can either have it, or eat it, but not both. Whenever you can either have one thing, or another, but not both — either having the cake or eating it, either serving family loyalty or the national interest — you have to decide which of the two mutually incompatible options is ‘best’. Choosing one means giving up the other. In economic terms, you trade one for the other.
And trading is very much in the realm of economics. In a business context, this is generally not particularly difficult. It’s mostly about money: just apply a suitable discount factor, calculate the return of this investment and that investment, and compare the outcome to see which one is best. At worst, a business economist may have to make explicit some assumptions (like the cost of borrowing), perhaps also some projections (like the profit margins that will be achieved), that kind of thing, but no more than that.
When costs are apples and benefits are pears
Since pretty much every aspect of a business can not only be quantified, yet also expressed in identical actual currency units, you’re simply exploring where to spend money to earn money. That makes carrying out a cost-benefit analysis quite straightforward.
Cass Sunstein, who not only co-authored Nudge with Richard Thaler, but who also headed the White House Office of Information and Regulatory Affairs under president Obama, is a vocal advocate of cost-benefit analysis, especially in policymaking. Yet here, at least one side of the comparison is not easily expressed in a monetary unit: the welfare of the citizens. And that complicates matters.
In his paper, Cost-Benefit Analysis, Who’s Your Daddy?, Sunstein illustrates the challenge through some examples. One is a proposed regulatory measure that would prevent 100 deaths (mostly of people over 80) and deliver $150 million by averting non-fatal illness. It would also impose $900 million costs to implement, and cause 3,000 job losses. Looked at simply on a monetized basis, given that a death is valued at $9 million, the benefits of the regulation exceed the costs. But should the age of the victims (is the death of an 85-year-old as significant as that of a 45-year-old?), and the job losses not be taken into account? This is where things become tricky: we need to compare apples and pears.
Many of our personal decisions are, in fact, much like this. Most of what we spend is not intended to make money, but to enhance our welfare in some way. However, since we generally have a limited amount of money available, we would really need to establish, through a similar cost-benefit analysis, whether, say, a bottle of wine is more welfare-enhancing than a cinema ticket. That is hard, and we don’t always do it. But happily, on the whole, we somehow seem to manage to strike a reasonable balance between wine, cinema, and everything else.
The intention behind spending money (or resources more generally, like time and effort) may well be to enhance our welfare, but this is not the only effect it has. How we use our resources also shapes our profile in the eyes of others. If we spend a lot of time and money on keeping our front garden pristine, this says something about us. If our recycling bin bulges with empty bottles every fortnight, that also says something about us. So do whether we wash our car every week, or whether it only gets cleaned by the dealer once a year when it has its service, and dozens of other choices we make.
Of course, each of them only provides a small glimpse of that profile. The state of our front garden doesn’t say anything about whether we buy free trade groceries, or whether we have a season ticket to the opera or for a premier league soccer team. More importantly, outsiders only get an idea of the resources we spend. They cannot really see how we would have spent it otherwise.
This is what economists call the opportunity cost. If others knew we’d have to eat beans on toast three times a week in order to afford the repayments on our car, that would tell them something different than if we paid in cash out of our bonus as a commodities trader.
The opportunity cost, when it involves how we spend money (or even time) is not easy to discover for outsiders, and it’s often not entirely clear to us either. We do not consider all the other ways in which we could spend the money that goes towards a round in the pub, a new jacket, or the fuel for a trip to the seaside.
Which value counts most?
But the opportunity cost does become very clear when we are having to choose between having our cake and eating it — the kind of dilemmas that don’t involve money, and that do not leave room for compromising by spending a little more here and a little less there. Eating the cake means not having it, and vice versa.
We can see such dilemmas in many places. One serendipitous example is that of London pirate radio from the 1980s (by coincidence, while I was working on this piece, the TiVo was playing a documentary on the subject). These stations championed black and dance music ignored by the mainstream radio stations — they were “cool and underground” as one of the DJs remarked in the programme. By the end of the decade, several of the original pirates obtained a licence so they could broadcast legally. But in a changed landscape they had to make a tough choice: continuing to be ‘cool and underground’, or chasing ever bigger audiences. Sacrificing their identity for profit, or sacrificing profit for identity? You can no doubt guess which way most of them went.
We see it also in the case of Jo Johnson. While we can be pretty sure that he is not immediately going to be plunged into poverty, we can assume that he valued his career as an MP and a minister. Giving it up will have meant a significant sacrifice. (This is true, irrespective of the way in which his dilemma is interpreted. Did he place the national interest — disagreement with his brother’s policies — above family loyalty — support for his brother? Or did he place family loyalty — his wife is reported to have said “It’s Boris or me” — above the national interest — staying on as a minister to try and influence his brother?)
And we see it in the choices that all of us make regularly. Like Jo Johnson, we trade values. We may not need to worry about the national interest, but there are plenty of other situations where we may need to decide which value comes first — including family loyalty. Do we sacrifice the last chance to see Elton John perform live in order to see our daughter’s school play — or the other way round? Do we postpone our holiday by a day to help a friend move house, or not? Do we literally drop everything to help out our neighbour care for her baby after a very traumatic birth experience, or is our normal household routine more important after all?
These are the choices that truly tell others, in bold capital letters, what kind of person we are, and we should make them with care. Our profile is not so much defined by the choices we make, but by what we sacrifice to make them.
Originally published at http://koenfucius.wordpress.com on September 13, 2019.
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