A Fine Price
Here is an interesting study about valuation: A Fine is a Price by Gneezy and Rustichini.
So they tried it. But it didn't happen that way. In fact, introducing the fine increased lateness. Moreover, subsequently removing the fine left lateness at the increased level!
What happened?
Placing a value on lateness in the form of a fine made parents feel that they were in a market relationship with the daycare staff -- lateness became something they could buy. Removing the fine didn't change this perception; it simply lowered the price of lateness to zero. So the behavior persisted.
This study is intriguing to me because there is much talk about trying to place a monetary value on aspects of the environment, or even social factors. For instance, we might try to say how much (in dollars) it actually costs to use water, air, or soil that have generally been regarded as free. We might even give Nature some of her own capital, deciding how much processes like nitrogen fixation or atmospheric turnover are "worth." Companies would then have to "buy" these services from Nature as part of their operating expenses. And perhaps this notion could even be extended to a valuation of (say) a pleasant office ambience -- wouldn't it be nice to reward companies that have clean, spacious offices for the benefits they offer employees in terms of peace of mind (compared to companies with cramped, dingy cubicles)? Currently, we have no way of valuing these "soft" things, so they are simply unaccounted for and hence ignored in most corporate economic decisions.
And yet, the daycare study may give us pause. Will valuing these items suddenly place them in a market setting, making them things that can be bought and sold callously like inanimate raw materials? Come to think of it, it's way too late for the case of people's labor -- we have already valued that through the salary/wage that people earn, making employees effectively things to be bought and sold. Many of us are familiar with the feeling of being treated like just another cog in the wheel.
I don't have a quick answer or fully-developed opinion about whether and how these social and environmental factors might be given a price, and hence placed within the usual terrain of capitalism. Instead, I'd like to offer another idea that has come to mind, and which I haven't seen discussed explicitly.
That is the idea that placing a value on previously invaluable items like ecosystems and friendly office atmospheres might actually be uncomfortable because it challenges our belief in the solidity of the economic system. What if deciding that nitrogen fixation is worth $1 billion/year is ridiculous not because it denigrates nitrogen fixation, but because it exposes the essentially arbitrary nature of economic valuation? Perhaps we are treading a little too close to the curtain, behind which is the very human Wizard of Capitalism.
The economy is not real in a fundamental sense. It exists because we all create it together, every day. Why is milk worth $2/gallon? For no reason other than that, somehow, we have decided that it is. We have to be very careful with the language here. There is no central committee "deciding" things in a market. And neither is this an excuse to blame individual people for their own economic plight (poor people can't afford milk? Well, why are they agreeing to pay $2/gallon?). The tricky thing here is that there is no decision-maker, and yet decisions are being made. The web has no weaver, but we are quite certainly "doing the web". All of us, whether we know it or not.
Adam Smith first glimpsed this in his notion of "the invisible hand," but later economists have delved much more deeply, given the reality that economic systems are invariably tied to political systems. I cannot summarize all of that here.
What I can say is that beginning to consider the economic valuation of things like Nature, trust, and goodwill will actually feed back to alter economics itself. We will be forced to think about aspects of the economy that we had the luxury of ignoring previously, when things were more neatly compartmentalized. As is happening in other fields of study, we will see a breakdown of barriers between disciplines and a reorganization of mental models. The effects are anyone's guess, however.
Suppose you are the manager of a day-care center for young children. The center is scheduled to operate every day until four in the afternoon, when the parents are supposed to come and collect their children. Quite frequently, however, parents arrive late, and force you to stay after working hours. You have considered a few alternatives in order to reduce the frequency of this behavior. A natural option is to introduce a fine: every time a parent comes late, she will have to pay a fine. Will that reduce the number of parents who come late? The prediction that it will seems extremely plausible.
So they tried it. But it didn't happen that way. In fact, introducing the fine increased lateness. Moreover, subsequently removing the fine left lateness at the increased level!
What happened?
Placing a value on lateness in the form of a fine made parents feel that they were in a market relationship with the daycare staff -- lateness became something they could buy. Removing the fine didn't change this perception; it simply lowered the price of lateness to zero. So the behavior persisted.
This study is intriguing to me because there is much talk about trying to place a monetary value on aspects of the environment, or even social factors. For instance, we might try to say how much (in dollars) it actually costs to use water, air, or soil that have generally been regarded as free. We might even give Nature some of her own capital, deciding how much processes like nitrogen fixation or atmospheric turnover are "worth." Companies would then have to "buy" these services from Nature as part of their operating expenses. And perhaps this notion could even be extended to a valuation of (say) a pleasant office ambience -- wouldn't it be nice to reward companies that have clean, spacious offices for the benefits they offer employees in terms of peace of mind (compared to companies with cramped, dingy cubicles)? Currently, we have no way of valuing these "soft" things, so they are simply unaccounted for and hence ignored in most corporate economic decisions.
And yet, the daycare study may give us pause. Will valuing these items suddenly place them in a market setting, making them things that can be bought and sold callously like inanimate raw materials? Come to think of it, it's way too late for the case of people's labor -- we have already valued that through the salary/wage that people earn, making employees effectively things to be bought and sold. Many of us are familiar with the feeling of being treated like just another cog in the wheel.
I don't have a quick answer or fully-developed opinion about whether and how these social and environmental factors might be given a price, and hence placed within the usual terrain of capitalism. Instead, I'd like to offer another idea that has come to mind, and which I haven't seen discussed explicitly.
That is the idea that placing a value on previously invaluable items like ecosystems and friendly office atmospheres might actually be uncomfortable because it challenges our belief in the solidity of the economic system. What if deciding that nitrogen fixation is worth $1 billion/year is ridiculous not because it denigrates nitrogen fixation, but because it exposes the essentially arbitrary nature of economic valuation? Perhaps we are treading a little too close to the curtain, behind which is the very human Wizard of Capitalism.
The economy is not real in a fundamental sense. It exists because we all create it together, every day. Why is milk worth $2/gallon? For no reason other than that, somehow, we have decided that it is. We have to be very careful with the language here. There is no central committee "deciding" things in a market. And neither is this an excuse to blame individual people for their own economic plight (poor people can't afford milk? Well, why are they agreeing to pay $2/gallon?). The tricky thing here is that there is no decision-maker, and yet decisions are being made. The web has no weaver, but we are quite certainly "doing the web". All of us, whether we know it or not.
Adam Smith first glimpsed this in his notion of "the invisible hand," but later economists have delved much more deeply, given the reality that economic systems are invariably tied to political systems. I cannot summarize all of that here.
What I can say is that beginning to consider the economic valuation of things like Nature, trust, and goodwill will actually feed back to alter economics itself. We will be forced to think about aspects of the economy that we had the luxury of ignoring previously, when things were more neatly compartmentalized. As is happening in other fields of study, we will see a breakdown of barriers between disciplines and a reorganization of mental models. The effects are anyone's guess, however.
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