Linder, Baumol and the opportunity cost of time

From The Harried Leisure Class by  Alex Tabarrok.  I have posted a few times on how the rising time value of money or the opportunity cost of time has caused to people to feel more anxious despite empirically better lives than ten and twenty years ago.  The breadth of prosperity in America is wonderfully astonishing yet the background noise about anxiety is pervasive.

Part of this is, obviously, newspapers needing some crisis to write about.

But I do think there is some reality to the issue.  The opportunity cost of time is one element of the issue.  I think increased complexity of all systems is another.  While everyone is doing better, they are also managing a plethora of risks that they did not consciously have to do in decades past.  The risks were the same, people just usually did not have to deal with them directly.

A couple of examples:

Mortgages - Twenty years ago and people basically had two choices once you had the downpayment and credit history: Fixed rate 15 years or Fixed rate 30 years.  Now you no longer need the downpayment, you credit history isn't quite as determinate as it use to be.  In addition you can choose among fixed and variables rates, balloon payments, etc.  Many more choices that better cover a greater range of choices and risk tolerance.  But - far more complex a decision making process and perhaps more onerous consequences if get the complexity wrong.

Retirement Savings - Again, twenty or thirty years ago, most people had Social Security and their company pension plan.  You simply decided how much to save.  Now, most company pension plans are gone or going.  Social Security concerns are ever higher, people have to take greater responsibility for planning their post-retirement finances and face far more investment choices and a far greater mix of instruments and risks.

No wonder people are anxious.

Tabarrok's argument:

How easy is it for a male breadwinner to raise a family? Oren Cass argues that the cost of “thriving,” is increasing. That’s false. When you do the numbers correctly, Winship and Horpedahl show that the cost of thriving is falling. It’s falling more slowly than we would like–but it’s still the case that current generations are, on the whole, better off than previous generations. 

Still, Winship and Horpedahl face an upward battle because while they are right on the numbers many people feel that they are wrong. Almost every generation harbors a nostalgic belief that circumstances were more favorable during their youth. Moreover, even though people are better off today, social media may have magnified invidious comparisons so everyone feels they are worse off than someone else.

I offer a third reason: the Linder Theorem. Real GDP per capita has doubled since the early 1980s but there are still only 24 hours in a day. How do consumers  respond to all that increased wealth and no additional time? By focusing consumption on goods that are cheap to consume in time. We consume “fast food,” we choose to watch television or movies “on demand,” rather than read books or go to plays or live music performances. We consume multiple goods at the same time as when we eat and watch, talk and drive, and exercise and listen. And we manage, schedule and control our time more carefully with time planners, “to do” lists and calendaring. A search at Amazon for “time management,” for example, leads to over 10,000 hits.

Time management is a cognitively strenuous task, leaving us feeling harried. As the opportunity cost of time increases, our concern about “wasting” our precious hours grows more acute. On balance, we are better off, but the blessing of high-value time can overwhelm some individuals, just as can the ready availability of high-calorie food.

In this Tabarrok and I are in the same reasoning boat.  He, however makes a couple of additional observations which I have not.

So, whose time has seen an especially remarkable appreciation in the past few decades? Women’s time has experienced a surge in value. As more women have pursued higher education and stepped into professional roles, their time’s value has more than doubled, incentivizing a substantial reorganization of daily life with consequent transaction costs.

It’s expensive for highly educated women to be homemakers but that means substituting the wife’s time for a host of market services, day care, house cleaning, transportation and so forth. Juggling all of these tasks is difficult. Women’s time has become more valuable but also more constrained and requiring more strategic allocation and optimization for both spouses. In previous eras, a spouse who stayed at home served as a reserve pool of time, providing a buffer to manage unexpected disruptions such as a sick child or a car breakdown with greater ease. Today, the same disruption require a cascade of rescheduling and negotiations to manage the situation effectively. It feels hard.

Indeed.  And this probably matches the increased reports of anxiety among women in the past twenty years and the increased anxiety prescriptions they take.

Tabarroks second point is also relevant.

By the way, the same theory also explains why life often appears to unfold at a slower, more serene pace in developing nations. It’s not just an illusion of being on holiday. In places where time is less economically valuable, meals stretch more leisurely, conversations delve deeper, and time itself seems to trudge rather than race. In contrast, with economic development comes an increased pace of life–characterized by a proliferation of fast food, accelerated conversation, and even brisker walking (Levine & Norenzayan, 1999).

I lived in Australia from 1997-2002 and it was a wonderful experience for many reasons.  One of which was the relaxed way of life.  Neighbors dropped in for tea (or drinks) unannounced.  Deadlines were treated more a guidances than objectives.  There was just an easygoing environment.  I ascribed it largely to culture and both valued it (personal life) and found it frustrating (managing a business to an acceptable level of productivity.)

But as Tabarrok points out, it probably wasn't all culture.  The human capital in Australia was excellent but labor was in the OECD scheme of things, cheap.  The opportunity cost of time was less.

A final point made by Tabarrok is doubly clever.

Linder’s theorem, as you may have correctly surmised, is related to Baumol’s theorem. In fact, Baumol (1973, p. 630) explained Linder’s theorem succinctly, “rising productivity decreases the demand for commodities whose consumption is expensive in time.” In essence, Baumol’s theorem is about the cost of production while Linder’s theorem is about the cost of consumption. I discuss Baumol and Linder at greater length here (ungated).

If the value of time fell, we might find ourselves eating more leisurely meals and taking more time to appreciate the simple pleasures in life. But, contrary to popular belief, neither Baumol nor Linder effects reduce our well-being; instead, they are a byproduct of economic growth and greater wealth. Rather than lamenting the rise in relative prices, we should recognize and appreciate our ability to afford them, and even acknowledge that on certain occasions, they are worth paying.