Friday, July 13, 2007

The Surplus That Surrounds Us

I've noticed that people (in general) have a strange bias when they measure wealth. They tend to count only physical objects. This is not an inherently bad way to count happiness (it's certainly better than counting just currency). But merely counting objects runs the danger of missing another aspect of wealth: utility (aka satisfaction or happiness). If two people each own the same computer, but one enjoys it much more than the other, one is wealthier than the other, even though they have the same amount of stuff.

In my class's first homework assignment, I asked them to indicate a time when they experienced what economists call consumer surplus, or utility minus the cost of getting a good. The point is we experience consumer surplus all the time--most goods we buy are ones we would have been willing to pay more for, but didn't have to. Rarely is the price we pay our maximum price.

Measuring wealth is a very difficult thing to do. Wages is a convenient quick and dirty way to do it and works pretty well until people start thinking countries should stock pile gold bricks instead of importing cars. Stuff/cargo/consumer goods is generally how economists define wealth. But in rare cases, such as the computer example, people focus only on stuff and ignore consumer surplus. Two things you sort of want is not strictly better than one thing you really want. The mechanism of the free market tends to sort out such preferences and make sure everyone gets the most consumer surplus they can. But it's worth pointing out that everyday we are surrounded by wealth we cannot see or touch.


Anonymous said...

So what sort of answers did they give?


Jenny said...

I think there's a larger issue here: Economists have a difficult time measuring anything that isn’t easily quantifiable. That’s why microeconomic theoriests like the unspecified nature of “utility.” No one has to say what it is or how it’s measured. They say, it’s in the utility function. The applied economists just ignore anything that doesn’t have a monetary value attached to it…and the sociologists actually try to measure things like envy and altruism!

David said...

Actually there are some economists that are trying to measure utility (neuroeconomics) by reading chemical reactions in the brain based on various stimuli. Jury's still out on what will be had of it.

Until otherwise, I'm happy keeping it abstract. It's just a way to include and remember that just because we can't see it doesn't mean it's not there or that we shouldn't consider it when judging efficiency.