Economics studies how humans decide to allocate scarce resources. We all do that every day. Here are examples from my own week.
I am rebuilding a raised garden bed just as Michael Lewis’ book “The Undoing Project: A Friendship That Changed Our Minds” is reviewed widely. Lewis wrote about Wall Street in books starting with “Liar’s Poker” in 1989. “The Big Short,” published in 2010, detailed the housing debt bubble up to the financial crisis from 2007 on. Now, he explains the life and work of Amos Tversky and Daniel Kahneman, who showed how assumptions of human rationality underpinning economic theory are wrong.
So what about my garden plot? I have taught introductory theory with usual assumptions of rationality for 37 years. But the time and money I am spending on my garden is not rational.
Here is the situation: We’ve just moved to a condo. We can get a small garden plot when someone gives one up. I was offered a large one because no one else wanted it. It is on a slope, and the wood structure that made it useable had collapsed. It needed a lot of work and material to be serviceable.
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Waiting to check out a cart of pressure-treated planks, it struck me that amortizing this investment over the years I might be able to garden means our cucumbers, lettuce and tomatoes will be very expensive. Why not go to a farmers markets? Why not get a nice, larger community garden plot a mile away?
Yet I unhesitatingly pushed my cart to the cashier and shoved my card into the reader. Am I irrational in digging post holes in rocky clay and spending hundreds on lumber?
There are several explanations.
One is that building itself produces pleasure. Some people play golf. Others build cedar-strip canoes. Others like to build practical structures. Many people spend more in greens fees each summer than my one-time garden-bed outlays.
Moreover, produce is not a “homogeneous commodity.” Walking 100 feet to pick a ripe tomato you raised yourself is more satisfying than a locally grown tomato from a market, just as that is more satisfying than one trucked in 1,500 miles.
Another possibility is “conspicuous production,” a variation on Thorstein Veblen’s “conspicuous consumption.” Perhaps I want to impress my new neighbors with the biggest, baddest raised beds in Dodge. I’m the tough guy on the tomato and cucumber block. How I spend money on a pickup load of cedar-tone treated lumber shows I have plenty of cash. I am obviously important.
This is true in agriculture. A shiny green combine can do for a farmer what a new BMW does for a lawyer or banker. Regardless of general culture, we all are influenced by the people we associate with most.
My brother-in-law, who sells cars in central South Dakota, seldom sells a pickup costing less than $45,000. Many go for $75,000. And these often are bought by people of apparently modest means. But in that area, for town residents as well as farmers, having the newest, shiniest, most fully equipped pickup grants instant status. I just happen to live in a peasant village where garden plots serve the same function more cheaply.
Perhaps I am just mentally ill. I have some bipolar tendencies and, as I age, I see hints of obsessive-compulsive behavior in my actions. Building a raised bed wall that will outlast the Roman Colosseum really may not give me any status among neighbors. Perhaps they are all snickering at me as I try to sink posts deep into rocky ground. The status I actually am gaining is that of a nut. But if this is what my distorted psyche wants, that is what I will do.
Economics has always recognized that “utility functions” — the factors that produce satisfaction in a human — are complex. My mother often said, “Leave a farm in better shape for the next guy than you got it from the guy before you.” That makes no profit-maximizing sense. But it is a good ethic.
For some people and things, mere ownership produces satisfaction. Just having a Faberge egg or Stradivarius violin may give you a warm glow, even if no one else knows of it. I once swiped a blacksmith’s swage block from the mud at an ag college where I worked, mostly because I long had wanted one.
For it and a huge vise I pulled out of a dumpster, I would not have $100 to buy them. But now that I own them, I wouldn’t sell either for under $300. Kahneman examined this asymmetry, called “the endowment effect,” which also affects people who win sporty cars on game shows. It’s also why passengers object much more to being removed from a flight after boarding than they do being kept off at the gate. This anomaly is surprisingly important in refuting strict rationality of decisions.
The upshot is that, within social and legal limits, people do what they want to do and spend what they want to spend. Sometimes this is rational: going to a big-box drug store for cough medicine but then grabbing a gallon of milk after seeing a sale price $1.50 below what we usually pay. And many times it is irrational: spending several dollars a square foot to construct a raised bed to last a half-century when I may only use it for 10 years myself.
Economists will spend decades sorting out economic theory that accommodates a more complex and realistic understanding of such human behavior. In the meantime, I need to bolt some planks to my posts.
St. Paul economist and writer Edward Lotterman can be reached at firstname.lastname@example.org.