The Must-Read Economics Book of 2008
Bruno Frey writes,
procedural utility has also been found to play a role in consumers’ decisions. The first evidence of this was presented by Kahneman, et al., who investigated customers’ reactions to a situation where the price of a good (snow shovels) was increased in a well-defined situation of excess demand (the morning after a large snowstorm). Eighty-two percent of the individuals surveyed considered the price increase unfair and so rated a normal functioning of the market mechanism as unacceptable. The reaction can be interpreted in terms of procedural utility: people are negatively affected emotionally when they perceive behavior toward them as exploitation, because it undermines their status as consumers (who are presumed to be on an equal standing with the suppliers).
That is from p. 113 of Frey’s Happiness: A Revolution in Economics.
At this point, a little more than halfway through the year and halfway through the book, I’m willing to give my opinion that it’s the must-read economics book of 2008. If Tyler wants to do another book club blog, this would be a good selection.
Bear in mind, also, that I’m not such a fan of happiness research, so I make much less of the findings than most people.
I’m not saying that there is something shocking about the fact that people resent having to pay higher prices for snow shovels after a snowstorm. But I think the point that people experience it as a loss of status has merit.
Russ Roberts’ not-yet-released novel The Price of Everything starts out by making the economic case for the snow shovel pricing mechanism. My wife read and enjoyed the novel (which is more than can be said for any of my own books, so I think Russ should be optimistic about his book’s prospects). But afterwards, she was still skeptical, wondering if Russ and I are right, why don’t more people think the way we do? Frey’s response would be, “Procedural utility.”
In a different chapter, Frey says that people are happier if they are self-employed. As an old-fashioned, revealed-preference kinda guy, I wonder whether people are willing to give up income in order to be self-employed. Frey says that studies show that they are.
Here in the U.S., I think the issue of self-employment is increasingly tied in with health insurance. If you’re healthy and you live in a state that has not regulated personal catastrophic health insurance out of existence, you can leave the protective embrace of a corporation and enjoy more take-home pay. If you value health insurance and you’re in one of those states that has gone beserk with cost-inflating mandates, then you have to just have to suck it up and work in the Dilbert Sector.
If we changed the game to disconnect health insurance from employment, then the clientele effects would be really different. Some people who now are self-employed in order to substitute cash for health insurance would switch to working for companies. And my guess is that a lot of people who now work for companies would say “take this job and shove it.”