Thursday, August 20, 2015

Preferences, not poverty.

Economics is tricky business. It seems straightforward to apply simple rules like supply and demand, but unless we understand how markets reveal information, some economic conclusions can seem counterintuitive.

People are wary of data that says that the cost of living has fallen, even for the poor. If we take today's standards and apply them backwards, it can seem like we've stagnated. But prices and purchasing decisions of the past are full of information about the people who made them, not guidelines for measuring the lives of (very different) people today.

Are food prices rising? In the 1970s while today's trendier meat, like oxtails, would have been pretty cheap, you could have a helluva time getting fresh asparagus in January. Canned vegetables, or maybe frozen as more households purchased freezers, were more likely on the menu. Technology (shipping, preserving, refrigeration) had something to do with the different food people wanted, but the real key is understanding how preferences have changed with income.

When hard, manual housework was replaced by technology and women were able to enter the workforce, time was short and a large portion of earnings went toward the basics. Enter: TV dinners and instant coffee. I'd wager you'd take any frozen dinner today over a first-gen TV dinner, but it was better than women trapped as house servants. We got a bit richer and demanded higher quality foods that could be cooked quickly – here come microwaves, Shake n' Bake, and Hamburger Helper.

Only recently have we become rich enough for a mainstream return to slow food, but our perception of what counts as luxury has changed, so it's hard to remember the constraints we’ve overcome. We're living totally different lives, even if we're eating the stuff our grandmother used to eat again. A few generations ago, in-season produce was a treat because it was fresh. Today in-season produce is a treat because it's local. Nostalgia paired with today's standards can do funny things.  

Applying the wrong standards goes both ways. Concern about the 'inability' of millennials to become homeowners is fuelled by assuming our parents' preferences apply to the purchasing decisions we're making today. There's no mystery to the fact that that millennials, who don't purchase houses and cars, find the resources to travel, eat out, and use on-demand transportation - they've simply made different choices. Their preferences have been shaped by watching a housing market crash fuel a worldwide recession, and by realizing that homes aren't necessarily smart investments. Why sink assets into owning a home when all we want is somewhere to live? Why sink them into a car when alternatives are affordable? We are rich enough - finally! - to stop worrying so much about material things if we'd rather not.

Prices and purchases tell us about the way people actually were and are. They don't stop us from achieving any particular person's version of how things should be. Choices expand when we overcome constraints, and different preferences don’t imply poverty.

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