Thursday, June 22, 2006

Stumbling on Chocolate: Of TV and Tofu

If economists and psychologists are going to collaborate, they really ought to learn more about each other’s discipline. I have in mind the field of happiness research, and my case in point is a statement by psychologist Daniel Gilbert, author of the rapidly climbing bestseller Stumbling on Happiness. I am perhaps a bit unfair, taking an incidental statement out of context, but the topic is interesting in its own right, and this provides a useful point of departure:

…when something makes us happy we are willing to pay a lot for it, which is why the worst Belgian chocolate is more expensive than the best Belgian tofu.


The first part of that statement can hardly be denied (at least by an economist), but the second part I would question. If chocolate and tofu were both produced by monopolists, the chocolate monopolists would indeed be able to charge more than the tofu monopolists, just because people like chocolate better. But I have a hard time believing that “the worst” Belgian chocolate is monopolistically supplied. Surely there must be plenty of very close substitutes, both from other Belgian chocolatiers who make slightly better chocolate and from foreign chocolatiers who make chocolate that is at least almost as good. No matter how much people like chocolate, these competitors would have incentives to keep undercutting one another’s prices until the price came down to the cost of production. And if chocolate cost less to produce than tofu does, then, no matter how much people prefer chocolate, it would cost less than tofu. The reason chocolate is actually more expensive is that it costs more to produce.

This analysis raises the broader question of why good things generally seem to cost more than not-so-good things. I have several answers. First, to a large extent, the premise isn’t even true. Most people, most of the time, would rather watch TV than eat tofu, and yet broadcast TV is essentially free (except for the amortized cost of the TV set) whereas tofu has a nontrivial cost. Second, many good things – for example, the best Belgian chocolate – are in fact supplied monopolistically.

But the main reason, I think, is this: it’s not so much that good things are expensive as that expensive things are good. Gilbert in fact makes this point in his next sentence, but my reasoning is different than his. A basic premise of economics is the idea of diminishing marginal utility: the more you already have of something, the less additional happiness you get from an incremental amount. Things that don’t cost much, we already have plenty of, so an additional unit is not that good. Things that cost a lot, we don’t have much of, so an additional unit is very good. So, for example, why is going to a professional theatrical production better than going to a movie? Of course there are many who will say that the theatre is an inherently better art form, but for most people, I think, the answer is this: going to a play is better because we don’t get to do it as often. In other words, theatre is better than cinema specifically because theatre is more expensive.

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10 Comments:

Anonymous mvpy said...

Well, Adam Smith discussed this issue too with respect to water and diamonds. That is, with water so necessary for life, why is water so cheap relative to diamonds? And, yes, its all diminishing marginal utility. Point is, the marginal unit of water is pretty worthless to us, relative to the marginal unit of diamonds; hence the higher price of the later.

But knzn, I thought you believed in habit persistance. Do you refer to all of wealth or specific goods? Since this view would severely undermine DMU, since of course marginal units become precious here (given habits etc). Also, if theres a variety of goods; say, like cars, boats, planes etc, how do you view DMU? The latter refers to a specific good, right? Does it hold less stongly, or at all, for an ever increasing variety of goods? Any thoughts?

Fri Jun 23, 12:32:00 AM EDT  
Blogger Macneil said...

I always have to wonder about the people who bash tofu.

I mean, it's something that some people obviously want and love. No one has tried to make laws making it mandatory that people eat it. A good libertarian should just say "that's freedom for you, you just don't know what free people will do next."

Instead, some view the very existence of tofu as some threat. You never see people have such reactions against basically any other food.

Sun Jul 02, 03:25:00 AM EDT  
Blogger knzn said...

Macneil, I don’t think either Gilbert or I meant to disparage those who do like tofu. But I think I understand what you mean. For many people tofu seems to have a very strong negative symbolic significance, probably symbolic of the guilt that they think vegetarians and health nuts are trying to impose on them.

mvpy, I think habit persistence refers to specific goods but with a lot of substitutability. For example, it is a big disutility to me that stores frequently discontinue products that I like. (Depending on how long they carry the product, it could in principle be worse than never having it in the first place.) However, it’s not so bad, because I can usually find substitutes, ideally substitutes that are similar products (e.g. one food item for another), but more generally, the availability of non-similar products as consolation is also important (hence the concept of “misery insurance”). But if my wealth were to decline suddenly, and I couldn’t afford the substitutes, that would be really bad. Whether this would “severely” undermine DMU is a matter of degree. Even though Trader Joes no longer carries “Bruttini,” I’m happy to have had several years during which they did, but the marginal utility of Bruttini to me is still a lot higher (at least it was when they first stopped being available) than it would have been if I had only tried them once.

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