If you wait ten minutes to save fifty cents, you are saying your time is worth $3.00 an hour. So every hour you spend not-working-at-Hardees, when you could be making $7.15, is a loss of $4.15.This is the problem of the opportunity cost of time (OCT), which as I understood it from Econ 101, means the monetary value of time as determined by the price of doing the next most valuable thing. The OCT made a lot of sense when I first heard about it because it was all about the hypothetical future in which I would surely be commanding the salary of a bazillionaire, and so the opportunity cost of my time would indeed be quite high and I would be justified in contracting out nearly all of my daily functioning to services.
But now, having fallen short of the bazillion mark in my actual salary, I wonder if the OCT argument is not actually a goad to irresponsible spending, workaholism, and the overvaluation of the worth of one's labor? It's almost always introduced as an explanation for why you should not scrimp in some way--don't wait 10 minutes to save 50 cents on train fare, don't go to the grocery store two miles away because it has a better deal on eggs, don't clip coupons. These are wastes of time that you could be spending earning tons of money. Because just think! You are a person with lots of education and social capital, and so every hour of your time is worth so much! Or, at the very least, your current hourly wage!
Well, what does that mean, actually? The OCT implies that, at any given moment, instead of doing slothful activity X, I could be earning money. How can I determine how much? If degrees and social capital were enough to justify conserving time over money since those degrees could hypothetically be parlayed into high-wage employment, then Belle should be paying people to peel grapes for her. Even if the calculation should be based on one's actual hourly earnings, how do we extrapolate to the time not spent at work? I make a decent wage while I'm working, but barring a few hours of overtime a week that I'm not actually allowed to take, I can't make more if I work more hours. So even if I can determine the exact monetary value of my time at work, what is it outside of work? Zero? The amount of money I could potentially make at the second job I don't have but should get so that I am optimizing the money value of my time every minute of the day? What about when I'm on an annual stipend that doesn't dictate how many hours I spend working? Is it the stipend divided by all the hours in a year during which I could potentially be studying, which makes the OCT probably a fraction of a cent, or the stipend divided by all the hours I actually spend studying, which I can't predict in advance and so has no use as a standard for deciding how much to scrimp?
But even if the actual OCT is just an approximation, the rational thing to do in most such dilemmas--since they involve such miniscule amounts of money--is spend more money and save more time. Only the extremely unproductive should value their time so little as to spend 30 extra minutes walking to a store to save 30 cents on a carton of eggs. And who wants to be someone so unproductive that their time is worth 60 cents an hour? What kind of useless slug of a human being is only worth 1/14 of minimum wage? Obviously you should buy the more expensive eggs. But isn't that a vast overvaluation of most people's time, given that they can't possibly work all the time instead of buying eggs? And if they did always opt to pay money instead of spend time on the assumption that their time was worth at least the wage of a hypothetical second job, wouldn't that, over the long run, be an unwise strategy?
This view of the value of time seems to privilege allocating all of one's time to financially remunerative labor over doing pretty much anything else. But in Econ 101, I also learned that subjective utility has value too, so one might say in defense of OCT that Belle is still making a wise decision about her OCT when she bakes (successful) lemon bars, since she derives more utility from occasionally employing her time in the service of lemon bar preparation than from working for money non-stop. Ok, but since we can't quantify utility, what does that really mean, except that the theory of OCT has nothing to say about how any given person should employ either his time or his money? If I derive great personal satisfaction from saving 30 cents on eggs, I should walk 30, even 60 minutes to do it. Is that rational?
Moreover, I wonder if thinking in terms of OCT doesn't in some ways erode the kind of inherently thrifty mindset that works to save small amounts as much as possible because many small amounts saved over a long time add up? Maybe some individual instances of such savings are absurd or irrational, but the general attitude, consistently employed, tends to increase rather than diminish one's savings.
Anyway, Belle, you are the expert on this. What is your view?
8 comments:
I don't study labor law, but certainly most people don't have a continuous line on the work hours/wages graph that allows them to determine for themselves how many hours to work and thereby receive X amount in wages -- especially if they're actually in a salaried job. If I work at a particular firm, I'm guaranteed a certain salary based on my meeting, more-or-less, a certain number of billable hours each year. Some firms expected fewer billable hours, but I'm unlikely to get paid at a nice midpoint between the two if I want to bill exactly 1800 hours a year. Either I work at the 1500 hours kind of place for $100k or the 2000+ hours kind of place for $160k. If I know I've met my hours for the month and there's nothing demanding my assistance, why not spend a few hours fixing the light switch in my living room instead of hiring someone to do it? Theoretically, my time is billed out at more than the electrician's, but it's not like I reap that -- I'm getting the same set salary regardless.
Yeah, that's exactly my point about the OCT advice, which is always, "You're worth so much money! So spend, don't scrimp!" Only true when I'm actually getting paid.
Theres nothing wrong with arguments based on opportunity cost. If you spend one hour on activity X which saves you Y dollars, but could be spending that time working and earning W dollars, then if W > Y and you do not prefer X to working, then you are being irrational. End of story.
On the other hand, as you point out, there's lots of reasons the argument might not apply to you. Maybe you can't work one more hour because you are working 24/7. Or maybe your current job only allows you to work so much, and you can't get a second one. Or maybe you prefer activity X to working (you can read while waiting for the train) and so on.
Think of all exersize you'll get walking a half hour to get eggs! Exersize increases the lifespan! You'll get some of that time back. And, you'll be healthier, therefore enjoying the time all the more.
Yeah, the "time is money" argument only works under extremely limited conditions, and is only relevant if money is your ultimate goal. I'm happy with how much money I'm making, so my time is a bonus, to be spent however I prefer.
alex,
"Or maybe your current job only allows you to work so much, and you can't get a second one."
It's usually not that your current job only allows you to work so much; it's that they only pay so much for the work you do, and that you can't just get a second one that's only, say, an hour a day. Again, a discontinuous function on the work/money graph.
PG, its true. There's also lots of other reasons why earning more may not be an option for you.
But even if you are facing one of these difficulties, opportunity cost calculations are still not useless. You can use them for thought experiments.
As in: suppose you are contemplating driving across town. This will take an hour and save you $6. Just imagine if the manager of the local pizza place offered you one hour of work as a delivery driver for $6. In this hypothetical scenario, would you agree?
No? Then you probably shouldn't drive across town.
Bottom line: we have a lot of emotional baggage associated with "saving." Recasting your decision in an economically equivalent way may provoke entirely different emotional responses. This can be a useful exercise when making financial decisions.
1. Huey P Long famously took the state limousine across town to save a few cents on onions. It cost a lot to drive there, but the cost was on the taxpayers of Louisiana, so not incident on him.
2. Ashton Heights.
dave.s.
Patron of the same metro stop, but not my neighbor.
Post a Comment