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You are here: Home / Non-market goods, hedonic pricing, and the measurement of material well-being

Non-market goods, hedonic pricing, and the measurement of material well-being

January 30, 2011 By Mark Kleiman @markarkleiman

Matt is right to stress that much of the quality of life depends on non-market-traded items, such as public safety, which renders purely market-based measures of material well-being such as changes in real GDP per capita of dubious value. National income accounting was devised to measure capacity utilization, not welfare.

As some of the commenters point out, trying to “inflation-adjust” GDP or median family income to measure changes in welfare over time runs into both practical and conceptual difficulties even if we ignore gains and losses in non-market-traded factors. Inflation-adjustment works fine over a couple of years, with both the products and the consumers remaining reasonable stable. But the more the basket of available goods changes, the harder it is to figure out whether consumers are gaining or losing. And the consumers themselves change; it doesn’t really make sense to ask the question whether a modern vegan restaurant delivers better value for money to its vegan customer than a high-calorie, high-fat, meat-intensive haute quisine restaurant of a generation ago delivered to its gourmand customers.

That said, most of the work on “hedonic pricing” seems to me to have a considerable bias in favor of finding improvements and ignoring disimprovements, consistent with its original use in arguing for slowing down cost-of-living increases in Social Security. Yes, the WalMartization of retailing has saved consumers a ton of money. But it’s also seriously degraded the shopping experience. Where’s the hedonic price adjustment for having to sit forever in voice-mail jail before talking to an actual human being about a consumer complaint?

The same is true on the non-market-traded side of the ledger. Certainly, if we compare New York in 2010 with New York in 1970, or 1990, the improvement in safety is dramatic. But if we go back to 1960, a home in a middle-class area of New York came bundled with not only a much safer neighborhood but also a much better public school.

Still, it seems to me that the strongest implication of Matt’s analysis – one that shows that his self-identification as a “Chicago economist” may not cover all of the facts – is that there are opportunities for welfare improvement from moving resources out of the production of market-exchanged goods and services into the production of non-market-exchanged goods and services, especially in big cities.

Footnote Tyler Cowen, in the article Matt comments on, says that there’s no major improvement in sight for the automobile. I don’t think that’s right; the demands of traffic engineering are pushing us toward the self-directed car – a true automobile – which would hugely change the real cost of moving around, both reducing stress and enabling work.

Filed Under: Uncategorized Tagged With: Medicare

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