Work and Leisure

If you watch the Jane Austen TV series you may have wondered how much time her characters spend organizing their leisure activities. She wrote in an epoch when leisure was the only respectable occupation for the rich. In contrast, the poor had very little leisure. This sharp distinction between leisure and work had not been so marked before the industrial revolution and has been weakening again since then.

So, it is not surprising that in those days Engels and other writers suggested that leisure was a reaction or compensation for work. The concept was taken a step further by some economists who took leisure as the opposite of labor. The first was seen as contributing to utility while the second reduced utility. Therefore, for some the value of work could be measured by its opportunity cost in terms of leisure.

This simplistic view was then corrected by Jevons who defined labor as "any painful exertion of mind or body undergone partly or wholly with a view to future good." and shifted attention from work or leisure as such to the marginal units of utility derived from each activity. This view that a person stops working only when the marginal disutility of work exceeds the marginal utility of the consumption derived from additional work, still underlies today’s economic thinking.

However, as was suspected then and has been confirmed in our time, there is no clear cut relation between work and leisure. Psychologists have been measuring whether people take leisure as a spillover, as compensation or as simply neutral in relation to work. In general, they found some causality between work and leisure. But, it was too weak and too complex to warrant the economists’ assumptions.

This problem, together with the need to distinguish free time from leisure, voluntary from involuntary leisure, the reinterpretation of work as a playful activity, the results of human capital investment and exertion, etc. raise important challenges for economists. In particular, unless they have a coherent interpretation of all these issues it is unlikely that they can develop a sound theory to explain the relation between work in general and the motivation for paid work (wages). The later involves both the satisfaction provided by the fruits of work as well as that of sharing such results.

Means vs. Ends: Hedonism and Happiness

Our blog is mostly about reflections on the means to achieve human happiness. Still, from time to time, we need to keep sight of what are the end pursuits of humankind. Often, these are not easily distinguishable from the means like when we pursue a long but healthy live or when we need to trade immediate pain for future pleasures.

The later is often discussed when pursuing a hedonist approach to achieve happiness. A hedonist is defined as “someone who strives to maximize net pleasure (pleasure minus pain)”. This definition is vulnerable to the usual caveats of defining inter-temporal maximization in an environment of life uncertainty and volatile preferences. Equally important is the trade-off between individual and group satisfaction (family, social, national, etc.), sometimes called utilitarianism.

Constrained maximization is not only complex but also a poor guide for action when inter-temporal choice is involved. Despite the fact that at the unconscious level we seem to be wired in a hedonistic way to seek pleasure and avoid pain at the conscious level the science of the brain has not yet uncovered ways to explain masochist or depressive behaviors and similar deviations. Consequently a simplistic taking up of hedonism would lead us to sacrifice the future for the present.

Yet, despite its limitations, hedonism can also help us to tackle the eternal human despair over life expectancy. Almost 2000 years ago, when Seneca wrote his essay “On the Shortness of Life”, life expectancy was about one third of what it is now in developed countries. Nevertheless we continue to suffer over the same issue. Should medical science find ways to treble it again our descendents will still despair over the same issue and so on until eternity? Like Seneca, in the end we all conclude that life is never too short if we do not waste most of it. By living a full life we mean enjoying both the immediate sensorial pleasures as well as the pleasure obtained from friendship and idealistic conscious pursuits, whether metaphysical or not.

In conclusion, a mild and responsible pursuit of hedonism when complemented by love and enlightened virtues is an essential means to achieve human happiness.

Not All Exports Are the Same

In these days, with mounting sovereign debt problems, most people claim that exports provide the way out. This is right, since one approach to deleveraging is through the sale of assets. What to sell is another question. Should you sell what you want or what you can? This depends on how pressed you are. Ideally, you start by trying to sell what you want but often you have to sell what you can.

Even economists who traditionally disagree about everything else accept this conclusion. However, under normal circumstances many dispute whether a country should value more or promote the export sector. Basically, they claim that one Euro earned exporting is identical to one Euro earned domestically.

This simplistic view may be considered a fallacy if it fails the aggregation test. Let us examine the problem using the analogy of a chamber maid. For this assume that there is a country (Tourist-land) with a single fully-foreign-owned hotel and a population made of maids who can clean 20 rooms a day and charge one Euro per room. The hotel has just one type of room with a standard price and its revenue is made up of domestic sales (paid by national guests) and exports (paid by foreign guests).

At an individual level whether a maid earns her Euro doing the room occupied by a national or a foreigner guest is completely indifferent.

But, if the business is improving and the hotel needs to expand to satisfy an increasing demand the situation of all the maids (the national population) will be determined by the way the owner decides to expand the business. For instance, he may decide to differentiate its supply by splitting the business into two hotels one up-market and the other low-cost. In the up-market hotel maids can now do only 16 rooms per day while in the low cost one they will be able to do 25 rooms per day.

If the owner decided to pay the previous daily wage the maids in the up-market hotel would be making €1.25 per room while those in the low-cost hotel would make €0.8. That is, any rise in national income could only be achieved by employing more maids or by asking the currently employed to work overtime to cater for the increased number of guests. Again, it would be indifferent whether these guests were nationals or foreigners.

However, it is unlikely that the maids employed would remain the same. The up-market hotel would require more sophisticated maids while the low-cost hotel could do with less qualified personnel.

Thus the later might be challenged by competitors with lower skills and lower wages (e.g. migrants) while the first would have a need and an opportunity to invest in new skills with a positive return (e.g. education in etiquette, culture and foreign languages or in clothing and other personal attire). Consequently their wages would need to increase to compensate for such investment (for instance the wage of qualified maids might rise to €1.5 Euros per room while the less qualified could decrease to €0.75.

Now, at the individual level the income of the two types of maid would be substantially affected. But, in aggregate, the national income of all maids might remain the same depending on the ratio between the numbers of guests opting for low-cost or up-market rooms.

Here resides the aggregation problem. If the up-market hotel were to be indifferent between attracting national or foreign guests it might soon run-out of wealthy guests and would employ fewer qualified maids. Thus in aggregate the national economy could be even worse-off than before if the share of less qualified maids increased (even if the low-cost hotel were to export more). On the contrary, if the hotel were to target international clients it would not run out so easily of wealthy clients. As a result, the scope to increase the share of qualified maids would be greater creating the conditions to raise national income.

In sum, it does no matter how many foreign tourists the country attracts but the revenue that they generate. That is, what matters is the income elasticity of demand for both types of maids. Only countries specializing in services or products with a high elasticity of demand will have the conditions needed to obtain higher returns in human capital investment.

Thus, although for an individual maid in the up-market hotel it is indifferent whether she is doing the room of a national or of a foreigner, in aggregate that is not true. That is, not all exports are the same.

University Men in Business

University Men in Business was the topic of one of the earliest radio broadcasts by John Maynard Keynes in 1927. Obviously, the much discussed and little understood relation between Universities and Business is an ever-lasting theme. The talk was moderated by Sir Ernest Benn, a business man who had not attended University. The two discussants were Mr. Walls, the Managing Director of Lever Bros Ltd, who had attended University and Mr. Keynes of Cambridge University.

After an introduction by Sir Benn, where he made a distinction between education and instruction, here are some interesting extracts of what they said:

Mr. Walls: Universities can help us in business … making the career of business more of a profession than it is today. … Today it is expected that an undergraduate … will leap straight from the university into business and settle down immediately into it. No one expects the same thing of a lawyer or any other professional man (clergy, doctors, etc.).

Business calls for a professionally trained business man and the question is: Can the universities provide him in the same way that they have successfully supplied the older professions?

Mr. Keynes: The men whom the universities have supplied to the business world in the past have belonged to two quite distinct types.

There are first of all the sons of wealthy business parents … they will, at the end of it all, find a safe berth in the family business or in some other concern where the family has influence. … The degree he takes will not be much scrutinized. For him, the university is a pleasant and delightful interlude without much serious bearing in his future career.

The other type consists of undergraduates with no family or other influence in the business world, who are faced with the necessity of earning a living immediately after the conclusion of their university career, and have nothing but themselves to depend upon. These young men are naturally, as a rule, pretty serious workers.

Now, in the past, the majority of university men in business have belonged as a rule to the first type. … I fancy, however, that the other type … is going to become increasingly important.

[Blogger comment: How much has this ratio changed?]

Mr. Walls: What I would be interested to know is what kind of vocational training, if any, followed the university course in these cases.

Mr. Keynes: it is a mistake for the universities to attempt vocational training. Their business is to develop a man’s intelligence and character in such a way that he can pick up relatively quickly the special details of that business he turns to subsequently. … special training … can only be taught by business men to business men.

[Blogger comment: Where are we now on this endless dispute?]

Note: The full transcript can be found in: Keynes on the Wireless, Edited by Donald Moggridge

Scared by the pension time-bomb?

In Europe and America most people worry about the so-called Social Security time-bomb.

Its ticking is usually measured by the ratio between the number of active workers to Social Security recipients. In the USA this ratio declined from 17-to-1 in 1950 to 3-to-1 today. Are you scared by this trend?

Here is some arithmetic to calm you:
a) The fact that now it only takes 3 workers to support themselves and one pensioner is only possible because productivity has risen more than 2.93% annually (on an annual compound basis).
b) This was only possible due to the extraordinary economic growth during the golden fifties and sixties. Since then the productivity growth slowed down to an annual rate of 1.83% over the past 40 years.
c) Yet, if we are capable of maintaining this same productivity growth over the next 60 years we will need only a ratio of 1-to-1 by 2070.
d) I have not checked the demographic projections, but I believe that by then the working age cohort of 18-70 year olds still exceeds the other two age groups. So it is just a matter of keeping them employed.

Although I am not particularly worried about the demographics, I am concerned about the financial consequences of such ratio. Why? Because to be able to pay the pensions for all the retirees the pension funds must own a much larger share of the national wealth than they own today.

However, given the current degree of wealth distribution in America (where the richest 1% own more than 30% of total wealth) it is unlikely that pension funds will be able to accumulate such share of total wealth by normal means. I am afraid that some form of expropriation will have to take place in the future.