The market domain and the social domain – further thoughts on commodification

As more activities are commodified, we face tough trade-offs

(Main image credit: Fabian Reus/Flickr)

I never thought I’d find the matter of commodification even half as interesting as I ended up doing after Diane Coyle’s first response to Branko Milanovic’s original post. For some reason it seems to resonate with a vague, hard-to-capture concern deep within my own mind. And this theme seems to continue to exercise both eminent economists, as both Diane and Branko have added further posts.

When, in response to these first posts, I blogged about commodification last week, I looked at it from a behavioural economics vantage point, as I saw a parallel with the challenge of saving for our retirement. Since then the topic kept on tumbling around in the back of my mind, and Diane’s and Branko’s recent articles triggered another behavioural economics angle: the tension between market transactions and social norms. Probably the classic paper illustrating how transactions can shift to the commercial domain from the social domain is Uri Gneezy and Aldo Rustichini’s “A fine is a price“. It describes how the introduction of a modest financial penalty in an Israeli day-care centre, intended to reduce the incidence of parents being late to pick up their offspring, had the opposite effect: people thought they simply paid for the extra time of the carers, and decided that was a good bargain. The fine paid off any guilt they may have felt for being late.

Externalities rule

Diane’s riposte to Branko’s original article points out that the commodification of many household chores has led to huge positive externality for women. Comparing this benefit with the loss of something as intangible as personal ties and mutual trust is not easy, but the argument that this loss is convincingly outweighed by the women’s gain is at least plausible at a societal level.

The question is whether ongoing commodification of ever more activities will bring further similar external gains over and above the (undisputed) efficiency or cost savings. If that is not the case, then it seems not unreasonable to question whether the overall trade-off is positive: many uncommodified trades come indeed with positive externalities in the social domain, which may get lost if they become commodified in one way or another.

We have a different, richer relationship with the butcher or the greengrocer than with the till operator in the supermarket. We have no relationship at all with the vending machine on the station platform that replaced the beverage and confectionery stall. We have a different, deeper relationship with colleagues of many years than with gigging contractors who are here today and gone tomorrow. And we have no relationship at all with the entry phone that replaced the receptionist.

Commodification means that the identity of the person with whom we interact no longer matters. Transactions may repeated, but if the other party is a different person every time, they become anonymous, and the only thing that remains is the commercial transaction.

Tragedy of the commons

There is something of a tragedy of the commons in this. Most of us do value the personal interaction with a familiar face, often even someone who knows a bit about our circumstances and who asks after our partner, our children or our goldfish. But the thing is, we cannot easily express this in financial terms, and when we choose to get our bottle of water and our chocolate bar from a machine rather than from old Fred’s stall, we don’t experience this as a trade-off.

coffeevending

“So long, Fred…” (picture: Lisa Borodkin/Flickr)

After all, the modest amount of money it would have cost us extra is just a tiny part of Fred’s income. In itself it barely makes a difference to anything. As our choice taken on its own doesn’t make Fred’s stall unviable, it is entirely rational: we save a few pennies, and we still get our coffee and our chat from Fred. But with every person who does like we do, Fred’s income drops a bit more, until eventually he has to close his stall. Before long, a machine will supply us with the coffee for our commute. There will, however, be no vending machine for the human interaction that is lost.

Making the right trade-off

The trade-off between the commercial domain and the social domain is not always immediately visible – as Gneezy and Rustichini found at the Haifa crèche back in 2001. When you introduce financial incentives, social norms can get crowded out. You would probably discover something similar if you decided to pay your children for doing chores: once it is clear that the quid pro quo for laying the table or mowing the lawn is extra cash, these tasks will no longer be part of the social norms in your household, and any new tasks are likely to be seen in the same light.

This is reminiscent of the Ryanair approach: anything that can be seen as having value – whether it is the ability to choose your seat, getting a snack or a drink during the journey, a checked bag, priority boarding and so on – gets a price tag.

Does this mean that the social domain should always have the upper hand? Of course not. As Diane points out in her latest post, “nobody really thinks there’s any social problem with buying your shoes and fridges in the market”.  Sometimes purely commercial transactions are just fine. Ryanair’s success is testimony to the fact that millions of people are quite happy to buy cheap flights, and to pay for any add-ons, rather than consider them as favours from the airline.

But it is good to be aware of the trade-offs that might follow from further commodification, and have an eye for what happens at the immaterial, social level as well as for financial gains. It’s a difficult trade-off because of the tension between individual and societal effects, but it’s also tough because comparing societal and financial consequences is not straightforward.

Still, engaging with our fellow humans is a big part of many transactions – if too much of that disappears, we become a bit more like the cold, unemotional, homo economicus. If we want to avoid that, we’d better be careful.

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About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics and tagged , . Bookmark the permalink.

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