That’s a rather contrived example because Carl’s opportunity cost of time is higher that Alice’s cost of time and yet it’s Carl who ends up spending his time and not Alice. I also don’t understand in which sense there is a “social surplus” when Bob hires Alice. Alice creates value, that value is shared between her and Bob, both get $5 profit which is usually understood to mean something different from “social surplus”.
In particular, note that “Carl’s choice reduces social surplus from $10 to $7” solely because Carl’s time is more expensive than Alice’s.
Typically people volunteer when their opportunity cost of time is low. People whose jobs they “replace” typically have higher opportunity cost of time—in other words, volunteering frees up other people to go do other useful things.
In economic jargon, social surplus includes the private surplus (aka economic profit) for all individuals. Though I just looked up the jargon and it seems that “economic surplus” is more common jargon, so I should probably have used that to avoid confusion.
In particular, note that “Carl’s choice reduces social surplus from $10 to $7” solely because Carl’s time is more expensive than Alice’s.
Yes, the details of my example relied specifically on Carl’s opportunity cost of time being in between Alice’s and the rate Alice is currently paid. This doesn’t always happen. But it can happen, and we wouldn’t detect it if we didn’t think of the portion of the surplus captured by Alice.
It is true that if Carl had a lower opportunity cost of time, then his volunteering for the job would increase social surplus. But he’d still be inclined to overestimate the social surplus generated if he didn’t account for Alice. For instance, let’s say Carl’s time had an opportunity cost of $13. Then, by volunteering for the job, he would increase the social surplus from $10 to $12. But if he didn’t account for Alice’s part of the surplus ($5) then he’d mistakenly think that he’s increasing the surplus from $5 to $12.
Also note that even though volunteers often have lower opportunity cost of time per hour, they’re also often less efficient. For instance, a high school student may have lower opportunity cost of time than I do per hour of doing Internet research, but he may also be a lot more inefficient at it. When we account for this inefficiency, volunteers may have opportunity costs higher than those of paid workers. Again, this may or may not happen in a specific situation. My point was simply that one needs to consider the interests of the people taking the job as well, particularly given that one is second-guessing the market mechanism that would generally push in the direction of optimal allocation.
But he’d still be inclined to overestimate the social surplus generated if he didn’t account for Alice.
Not necessarily. You are assuming that if Bob doesn’t employ Alice, Alice stays unemployed and sits there twiddling her thumbs. In the context of the whole economy that is not true. Alice is likely to go out and get hired by Eve, leading to her producing similar economic surplus. In that case, Carl does not need to account for Alice and estimates his contribution correctly.
It’s simple on a basic level. Carl and Bob together can produce some value. Whether Carl volunteers or is getting paid affects only how the economic surplus is divided between Carl and Bob. From the society’s point of view it doesn’t matter, the same economic surplus is produced.
And if you are arguing that Carl will crowd out Alice, well, so will Alice crowd out Deborah, another person who would like to work for Bob but cannot because the job is taken by Alice.
volunteers may have opportunity costs higher than those of paid workers.
A lot of things may happen. Are you arguing that this case happens often enough in real life so that people should prefer not to volunteer?
given that one is second-guessing the market mechanism
Volunteering does not second-guess the market mechanism. It’s point, often, is precisely to compensate for shortcomings of the market allocation judging these shortcomings from the point of view of the one who is volunteering.
Note that you gave a fully general argument against any allocation of resources other than by the market. Are you sure you want to go there? :-D
Not necessarily. You are assuming that if Bob doesn’t employ Alice, Alice stays unemployed and sits there twiddling her thumbs. In the context of the whole economy that is not true. Alice is likely to go out and get hired by Eve, leading to her producing similar economic surplus. In that case, Carl does not need to account for Alice and estimates his contribution correctly.
The concept of opportunity cost already takes into account Alice’s next best opportunity. The $15 figure I gave takes into account the other options she’d have if Bob didn’t hire her.
Now, you may believe that for most people, the wage for a job is very close to the opportunity cost, i.e., there is little surplus to workers (this would be true if a lot of workers were competing for a job). In that case, my consideration doesn’t apply, i.e., we don’t have to worry much about displacing a worker because the worker wasn’t getting a huge surplus from doing the job. The question of whether a particular job fits this scenario is empirical.
It’s simple on a basic level. Carl and Bob together can produce some value. Whether Carl volunteers or is getting paid affects only how the economic surplus is divided between Carl and Bob. From the society’s point of view it doesn’t matter, the same economic surplus is produced.
That is correct, but the choice here isn’t between Carl volunteering and getting paid, it’s between Carl volunteering and not doing the job. See also my next paragraph.
And if you are arguing that Carl will crowd out Alice, well, so will Alice crowd out Deborah, another person who would like to work for Bob but cannot because the job is taken by Alice.
Yes, of course. But the market takes care of that by allowing people to bid on price. But when a person volunteers for free, they are in essence subsidizing themselves as workers, “picking winners” as it were, and therefore interfering with the market mechanism.
A lot of things may happen. Are you arguing that this case happens often enough in real life so that people should prefer not to volunteer?
In my comment, I noted that due to lower efficiency, the opportunity cost to volunteers for a given amount of production may be worse, even if they have lower opportunity cost per hour.
Volunteering does not second-guess the market mechanism. It’s point, often, is precisely to compensate for shortcomings of the market allocation judging these shortcomings from the point of view of the one who is volunteering.
That’s what I meant by second-guessing the market mechanism.
Note that you gave a fully general argument against any allocation of resources other than by the market. Are you sure you want to go there? :-D
Yes, I think there is a strong prior against interfering with the market mechanism. The prior can be overcome in many cases, but the first step to making a strong case for overcoming the prior is to first understand how the mechanism is operating. If you don’t account for the welfare of particular members of the population when you do your analysis, you’re likely to be led astray.
the wage for a job is very close to the opportunity cost, i.e., there is little surplus to workers
I think there is some confusion here between opportunity cost of time and costs of producing value. They are not the same thing.
Consider someone whose skills are in demand, for example a statistician with skills and experience to deal with the Big Data. He can pick from a number of jobs and the top tier of jobs available to him all pay around $200K/year. He selects one of these jobs and is paid $200K/year.
What’s his opportunity cost of time? $200K/year. What’s his wage? $200K/year. You are saying that he does not get any economic surplus and this does not seem to be true at all.
Yes, I think there is a strong prior against interfering with the market mechanism.
While I am sympathetic to this view, it strikes me that it is not very compatible with supporting charities (including EA) or, say, government social safety net programs.
I deliberately chose a simple example to keep it simple. The full macroeconomic analysis is trickier. I can write a more detailed explanation that does an analysis with more people (each replacing another). I’ll do so later when I have the time.
There’s an a priori economic reason to believe the argument.
That’s a rather contrived example because Carl’s opportunity cost of time is higher that Alice’s cost of time and yet it’s Carl who ends up spending his time and not Alice. I also don’t understand in which sense there is a “social surplus” when Bob hires Alice. Alice creates value, that value is shared between her and Bob, both get $5 profit which is usually understood to mean something different from “social surplus”.
In particular, note that “Carl’s choice reduces social surplus from $10 to $7” solely because Carl’s time is more expensive than Alice’s.
Typically people volunteer when their opportunity cost of time is low. People whose jobs they “replace” typically have higher opportunity cost of time—in other words, volunteering frees up other people to go do other useful things.
And again, jobs are not benefits. Jobs are costs.
In economic jargon, social surplus includes the private surplus (aka economic profit) for all individuals. Though I just looked up the jargon and it seems that “economic surplus” is more common jargon, so I should probably have used that to avoid confusion.
Yes, the details of my example relied specifically on Carl’s opportunity cost of time being in between Alice’s and the rate Alice is currently paid. This doesn’t always happen. But it can happen, and we wouldn’t detect it if we didn’t think of the portion of the surplus captured by Alice.
It is true that if Carl had a lower opportunity cost of time, then his volunteering for the job would increase social surplus. But he’d still be inclined to overestimate the social surplus generated if he didn’t account for Alice. For instance, let’s say Carl’s time had an opportunity cost of $13. Then, by volunteering for the job, he would increase the social surplus from $10 to $12. But if he didn’t account for Alice’s part of the surplus ($5) then he’d mistakenly think that he’s increasing the surplus from $5 to $12.
Also note that even though volunteers often have lower opportunity cost of time per hour, they’re also often less efficient. For instance, a high school student may have lower opportunity cost of time than I do per hour of doing Internet research, but he may also be a lot more inefficient at it. When we account for this inefficiency, volunteers may have opportunity costs higher than those of paid workers. Again, this may or may not happen in a specific situation. My point was simply that one needs to consider the interests of the people taking the job as well, particularly given that one is second-guessing the market mechanism that would generally push in the direction of optimal allocation.
Not necessarily. You are assuming that if Bob doesn’t employ Alice, Alice stays unemployed and sits there twiddling her thumbs. In the context of the whole economy that is not true. Alice is likely to go out and get hired by Eve, leading to her producing similar economic surplus. In that case, Carl does not need to account for Alice and estimates his contribution correctly.
It’s simple on a basic level. Carl and Bob together can produce some value. Whether Carl volunteers or is getting paid affects only how the economic surplus is divided between Carl and Bob. From the society’s point of view it doesn’t matter, the same economic surplus is produced.
And if you are arguing that Carl will crowd out Alice, well, so will Alice crowd out Deborah, another person who would like to work for Bob but cannot because the job is taken by Alice.
A lot of things may happen. Are you arguing that this case happens often enough in real life so that people should prefer not to volunteer?
Volunteering does not second-guess the market mechanism. It’s point, often, is precisely to compensate for shortcomings of the market allocation judging these shortcomings from the point of view of the one who is volunteering.
Note that you gave a fully general argument against any allocation of resources other than by the market. Are you sure you want to go there? :-D
Thanks for responding.
The concept of opportunity cost already takes into account Alice’s next best opportunity. The $15 figure I gave takes into account the other options she’d have if Bob didn’t hire her.
Now, you may believe that for most people, the wage for a job is very close to the opportunity cost, i.e., there is little surplus to workers (this would be true if a lot of workers were competing for a job). In that case, my consideration doesn’t apply, i.e., we don’t have to worry much about displacing a worker because the worker wasn’t getting a huge surplus from doing the job. The question of whether a particular job fits this scenario is empirical.
That is correct, but the choice here isn’t between Carl volunteering and getting paid, it’s between Carl volunteering and not doing the job. See also my next paragraph.
Yes, of course. But the market takes care of that by allowing people to bid on price. But when a person volunteers for free, they are in essence subsidizing themselves as workers, “picking winners” as it were, and therefore interfering with the market mechanism.
In my comment, I noted that due to lower efficiency, the opportunity cost to volunteers for a given amount of production may be worse, even if they have lower opportunity cost per hour.
That’s what I meant by second-guessing the market mechanism.
Yes, I think there is a strong prior against interfering with the market mechanism. The prior can be overcome in many cases, but the first step to making a strong case for overcoming the prior is to first understand how the mechanism is operating. If you don’t account for the welfare of particular members of the population when you do your analysis, you’re likely to be led astray.
I think there is some confusion here between opportunity cost of time and costs of producing value. They are not the same thing.
Consider someone whose skills are in demand, for example a statistician with skills and experience to deal with the Big Data. He can pick from a number of jobs and the top tier of jobs available to him all pay around $200K/year. He selects one of these jobs and is paid $200K/year.
What’s his opportunity cost of time? $200K/year. What’s his wage? $200K/year. You are saying that he does not get any economic surplus and this does not seem to be true at all.
While I am sympathetic to this view, it strikes me that it is not very compatible with supporting charities (including EA) or, say, government social safety net programs.
I deliberately chose a simple example to keep it simple. The full macroeconomic analysis is trickier. I can write a more detailed explanation that does an analysis with more people (each replacing another). I’ll do so later when I have the time.