Stephen Monrad

I’ve got a project to work on at home for a couple of months that is going to keep me busy. I will get back to blogging, but it it will be a few months from now.

Maslow’s Hierarchy of Needs

Maslow’s hierarchy of needs is a theory of human motivation that has 5 levels of human needs. The levels are

1. Physiological – Breathing, Food, Sex.
2. Safety – Personal security, Financial Security, Health.
3. Love / Belonging – Friendship, Intimacy, Community.
4. Esteem – Self esteem, Confidence, Respect.
5. Self Actualization – Morality, Creativity, Spontaneity.

Maslow’s idea was that a person has to satisfy the lower levels in the hierarchy before moving to higher levels. In simple terms, a starving man doesn’t have time or energy to worry much about morality.

While Maslow’s theory has its critics, I think it has good insight into what motivates people.

Economics

If it makes sense for a person to address lower needs on the list before addressing higher ones, perhaps it makes sense for communities and even countries to do the same thing. If people are starving, all available resources should be focused on making sure everyone has food. Only when everyone’s physiological needs have been met should economic output be devoted to meeting higher needs.

This is really just another argument for my egalitarian view of the world. The analogy is that if it doesn’t make sense for a starving man to save for a yacht, perhaps it doesn’t make sense for a community with starving people in it to be building yachts for some of its members.

I’m travelling for a few days and won’t be posting. I’ll be back to blogging on Wednesday.

I heard somewhere that self-employed people tended to earn less than employees. I looked this up online and found this page on the Statistics Canada website. In 2005, the average employee in Canada earned $36,703. The average person earning their entire income from self-employment earned only $22,866, 38 per cent less.

This data suggests that people who work as part of a larger organization are more productive than those who work for themselves. It isn’t an iron clad proof because the types of work self-employed people do may be lower paying. It might be the case that if they worked for a company, they wouldn’t do any better because of  the type of work they do.

However, having said that, self-employed people do a lot worse than employees. It seems to me that larger organizations must be more productive to be able to afford to pay higher salaries. This is interesting because self-employed people should be highly motivated to succeed. Their success or failure depends entirely on their own effort. My guess is that self-employed people do work harder than employees on average. however, their productivity is lower because they can’t achieve the same economies of scale.

I heard Professor John Helliwell speak last night at the Walter Gordon Massey Symposium in Toronto. The symposium was about rising inequality. Professor Helliwell’s main point was that we shouldn’t be too worried about income inequality. What we need to focus on is happiness inequality.

He talked about the research that is being done by psychologists and behavioural economists that shows that more stuff doesn’t make people happier once people are able to take care of their basic needs reliably. What people need to be happy is control over their lives and the ability to contribute to their community. This falls in line with the book I mentioned, Stumbling on Happiness, in my January 29, 2009 post.

I thought more about why wealth doesn’t bring happiness. I think the reason wealth doesn’t increase happiness is because many simple and cheap activities are just as pleasurable as expensive ones. It might be very nice to go out for a sail on an expensive yacht. The activity, however, isn’t really all that much different than hanging out at a beach playing Frisbee. Both are social activities requiring skill that are done outdoors. The main difference is that one needs a boat costing tens of thousands of dollars while the other needs only a piece of plastic costing a few dollars. If you don’t like Frisbee, there are plenty of other similarly cheap activities that you can take up. All that is needed is a little imagination and like minded friends.

If expensive and cheap passtimes are equally enjoyable, why do we choose the expensive ones? It could be for increased status. It could be because we simply don’t realize that cheaper activities are just as much fun. Either way, it seems likely that first world standards of living could be cut back dramatically without making people much worse off. This is good news with the current economic downturn and looming environmental problems.

The economics definition of rationality says that if you prefer good A to good B and good B to good C, then you must prefer good A to good C. Your preferences need to be transitive, to use the mathematical term. A > B and B > C implies A > C.

If this isn’t the case, one of my economics profs argued when I was in school, you could be fleeced in the following way. Suppose good A is an apple, good B is an orange, and good C is a banana. Suppose that you would be willing to pay 5 cents to trade the fruit you have for the one you like better. If you prefer apples to oranges, oranges to bananas, and bananas to apples, I could keep trading fruit with you in a cycle that goes on forever extracting 5 cents each trade.

You have an apple? I’ll trade my banana for it and 5 cents.
Ah, now you have a banana. Would you like to trade it for my orange at a cost of 5 cents?
Now you have an orange. Here’s a nice apple. I’ll trade for 5 cents.

Now you have your original apple back and I am 15 cents richer. Let’s do it again.

My prof’s argument is that people can’t be irrational because they would be quickly wiped out financially. It’s a good argument except for one problem. There is a simple way for irrational people not to get fleeced in this way. Don’t make trades where the difference in value is small or uncertain.

In the real world, nobody is going to trade an orange for an apple at a cost of 5 cents even if they slightly prefer the apple. They would just eat the orange they have and perhaps buy apples next time. They certainly aren’t going to go swapping fruit endlessly.

Most people get the things they need in a two step process. They trade their labour for money and then money for the things they intend to use. A little bit of irrationality in their preferences just means they won’t always buy what will make them happiest. The fleecing scenario rarely if ever materializes.

In my opinion, it’s safe to be irrational. While it certainly isn’t optimal to make daft decisions, If you aren’t omniscient, you have to do the best with the brain you have.

For individuals, being able to earn money one day and spend it another is very useful. You can build up a financial cushion to use to solve unexpected problems. You can get a car and pay for it from wages you earn at the job the car lets you drive to. You can save for your retirement. You would find it difficult to function in a modern economy if you couldn’t save and borrow money.

The current economic crisis shows that there is a problem with how saving and borrowing is managed. There are two problems. First, when people are worried that there is going to be an economic downturn, they tend to save more money. The economy doesn’t have a way to deal with the increased savings. The things that are produced need to be bought. If they aren’t bought, an economic slowdown is the result. People are losing their jobs today because our economy doesn’t have a good mechanism for coping with increased savings.

Second, the crash in stock and real estate prices has wiped out a lot of wealth. People who saved in the past have lost a lot of money. People who want to save today find it difficult to find safe ways to store their wealth.

Our current system doesn’t make saving easy. Better ways are needed for people to save and borrow money. Somehow savings needs to be decoupled from economic output and the value of savings needs to be made more stable over time.

It seems to me that many economists don’t have a clear vision of how they would like to see the economy function. They don’t stop to consider what kind of world they would like to live in. How should people be treated? What rights should people have? Are there outcomes that are unacceptable?

Instead, economists focus on studying markets, assuming that markets are the best system for organizing economic production. While some tweaking around the edges may be needed to fix specific problems, they believe that the outcomes that markets produce are generally good. If people fail to thrive in a market system, it is because there is something wrong with the people. The market is not to blame.

It seems to me that it is better to focus on ends instead of means. We should decide what it is that we want the economy to do and then evaluate the performance of market economies against the objectives we set.  It isn’t enough to want an economy that makes people happy. We need objectives that are concrete and measurable. If the objectives of the economy are well specified, economics can be approached much like engineering is. Different tools and methods can be evaluated in how well they meet the stated objectives. People can argue about the objectives on ideological grounds. Given a set of objectives, economic systems can be analyzed to see how effective they are.

The challenge is to state the objectives of the economy in a way that is broad enough to capture the diverse needs people have while being specific enough to be measurable. While I don’t have an exhaustive list of objectives, here are a few that I think are key:

• The economy needs to be universally accessible.
• The poorest people need to have enough money to be healthy and participate in their community.
• The economy needs to be sustainable.
• People need to be able to save and borrow to match the timing of their needs with their earnings.