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

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.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

13 thoughts on “Non-market goods, hedonic pricing, and the measurement of material well-being”

  1. "both reducing stress and enabling work"

    And saving lives by the tens of thousands by reducing the impact of driving under the influence of drugs, alcohol, text messages, cell phones, food, children, etc…

  2. Thought experiment: You are permanently transported back 40 years in time. You retain your current age, health, family situation (nearest and dearest come with you), residence, and job. (Where necessary, substitute nearest plausible equivalent for something such as a job or residence that didn't then exist.) Your real income remains the same, so your relative economic status is modestly improved. No one but you has any sense of having experienced the future, and you are able to adjust to the psychological disorientation. You are unable to "fix" any relative shortcomings in technology, except where that would have been part of your occupation anyway. Would you be better or worse off? Why, and by how much? As for me, I would greatly miss much about modern communication, education and entertainment technology (including the option to send something like this post to you). I would be apprehensive about the absence of 40 years of medical technology, although I can think of nothing that greatly affects me immediately. Many other more minor technological downgrades would be annoying, as would value-for-money of many goods, including automobiles. I would not be pleased with having a few years shaved off my life expectancy. I can think of no reason that I would be notably better off.

  3. "You retain your current age, health, …"

    However, if your skin has a lot of pigmentation, you might want to lighten it up a bit.

  4. Under my little experiment, one's pigmentation would not change, and issues related thereto would likely give some an additional non-monetary reason to find themselves better off 40 years on.

  5. Another thought experiment to go along with Ken D's:

    Imagine that for every block in a typical residential neighborhood, there were one lawnmower, which would be shared among the neighbors. This would happen in a cultural setting in which neighbors know and trust one another sufficiently to share such basic tools of ordinary life. Would you be better or worse off living in such a situation than in a more typical one in which every house has its own lawnmower? The answer is not self-evident; I think I would prefer the shared lawnmower world, which would involve some major enrichments in social capital, but others may think differently.

  6. Benny, do you have any actual evidence that what wasn't possible in 1957 won't be possible in 2030? A car that can drive itself on an urban street may be a pipe-dream, but superhighway driving – on a highway where the road controls all the cars – ought to be a much simpler problem.

  7. Mark,

    There are two problems with self driving cars. One: who would insure them? Two: who would drive them if that means you will be cut off by human drivers?

    It isn't that they aren't possible in a technological sense. I question the practicality of self driving cars, which has been a dream of the automobile industry since at least the 1950s, as my link demonstrates.

  8. Benny may have a point. A child's ball bouncing into the street and a crumpled-up grocery bag blowing in the wind would look pretty similar to most self-driving automobiles. Such a car would frequently be running over children or slamming hard on the brakes for grocery bags; that sounds like a bad insurance risk.

  9. I think you're bumping up against the limits of imagination, not the limits of technology. With sufficient sensors, software and processing power, self driving vehicles could pay undivided attention to everything in its total environment pertinent to moving about safely and ignore everything else. And everything it observed or learn about that environment could be almost instantly known by other self driving vehicles.

  10. "A child’s ball bouncing into the street and a crumpled-up grocery bag blowing in the wind would look pretty similar to most self-driving automobiles."

    Only to the degree that they look pretty similar to most humans driving automobiles. Optical recognition gets better in computers every month.

  11. It doesn't really matter what the actual accident issues are for self-driving cars (albeit the algorithms people have now are still demonstrably very brittle). What matters is whether anyone is going to be willing to make a trillion-dollar bet on the stock price of the first insurance company covering a policy on such a car that's involved in a major accident. (That includes the insurance held by the manufacturer and the manufacturers of subsystems.) Perhaps by the 10 years it would take to get a plausible vehicle there will have been enough financial innovations that people think the risk is adequately spread. (I expect that the universal self-driving vehicle is a long way away, but that you'll see more and more of them in certain restricted environments, along with safety features that reduce the incidence of certain kinds of stupid crashes.)

    But gosh. 40 years ago I would be commuting instead of working at home (or living in a nice cheap brownstone), looking forward to another 20 years of increasingly respected work at a respected institution, and feeling secure in the knowledge that my children would have a better life than I. Whoops.

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