CHAPTER 3: THEORETICAL CONTEXT WHAT IS NEEDED The theory necessary to understand the behavior of firms can be simpler than the theory necessary to understand the behavior of individuals. For example, when discussing the firm, it is usually reasonable to assume that the firm maximizes the real present value of the stream of future money incomes and expenditures. For some analytic purposes it may be necessary also to consider the risk of various alternatives, or the effect on stock prices. But it will seldom be necessary to consider ethical and social constraints such as the desire for community good will. And when such a constraint must be considered, it often may sensibly be thought of with respect to the present value of the firm rather than as an end in itself; this enables the objective function to be simple. Furthermore, one does not need to consider the number of hours the firm works in total or on average. Nor does one need to consider the effort the firm makes in one project or another, apart from consideration of all the real resources expended, unless some efforts made by individual employees affect them or their fellows negatively or positively in such manner as to affect the future smooth working of the organization. If one wishes to understand the economic behavior of individuals or ofnon-profit groups, however, the objective function often cannot be assumed to be so simple. Here a distinction is necessary: When economists discuss a firm, their interest invariably is in the firm's economic behavior. But some economists' interest in individuals and groups--for example, Becker's interest in household behavior, and Schelling's (1960) and Boulding's (1977) interest in conflict--is in understanding behavior for reasons that go beyond its economic effects, that is, for more general scientific reasons. In contrast, as noted earlier, the interest of this book is only in the acts of individuals and groups that affect the economic (or purchasing power) status of themselves and of others. This makes possible the omission of some elements that are necessary in the more general inquiry into human behavior that interests theorists of household and conflict behavior. On the other hand the subject of this book may require bringing into the analysis such elements as creativity and self- discipline that may reasonably be omitted from economic approaches to the study of human behavior for its own sake. ------------ add to refs Kenneth E. Boulding, Conflict and Defense (New York: Harper, 1962). Thomas C. Schelling, The Strategy of Conflict (Cambridge: Harvard U. P., 1960). -------------- THE NATURE OF THE QUESTION The general question being addressed here is: Will an individual or a group1 such as a nation undertake a particular economic ***opportunity which involves increased work effort? There are two types of sub-questions: (a) Will an alternative that would increase total money income--such as working more intensively or spending extra time weeding the family farm plot, or reopening the store door to serve a customer after customary closng time, or pushing back the closing time itself--be undertaken or rejected? Will an independent mason accept a small contract to fix a driveway, or a mathematics tutor take on another student, or a factory worker accept proffered overtime work this evening? And (b) Will an alternative that seems not to be "profitable" in money terms--such as building the world's highest cathedral in the Middle Ages, or contributing one's time to distribute food to the starving--be undertaken anyway? Questions of types (a) and (b) may both be considered as inquiries into the extent to which people act like the "homo economicus" in the popular caricature. But the aim here is not to throw light on that caricature, but rather to understand the output of economic goods by various individuals and nations at various times. A firm's decision problem may be characterized as choosing those alternatives among the available set which will produce maximum profit from its given stock of resources (including its line of credit); this stock of resources can be specified in advance of the decision. There is no benefit to the firm from leaving some resources unused, except perhaps the beneficial opportunity to do maintenance on its capital equipment, and such benefits can be reckoned objectively along with everything else in the calculation. The firm's decision process can be seen as first constructing a ladder of alternatives, and then selecting that subset of the best alternatives which together will yield maximum profit, using whichever technical criterion of profit may be appropriate. Not all of the resources available to an individual can be specified in the same fashion as for a firm, however. And therefore the individual's decision about a work opportunity is not perfectly analogous to that of the firm. The individual's opportunity-accepting decision may be modeled as a business-like decision subject to an additional set of constraints-- first, the constraint of the reservation price for additional work time, as determined systematically by the sort of time-allocation process among production and consumption activities that Becker analyzed (l965); and second, a large set of constraints related to the individual's own physical and mental attributes. The latter constraints may be thought of as somewhat like the variety of needs and tastes that influence purchasing decisions for consumption. But I believe they can all be fruitfully dealt with as a single variable which will here be called the "Drive-Effort" factor (DrEf). THE THEORETICAL FRAMEWORK OFFERED HERE For convenience, let us deal with simple decisions in which all consequences, except for the carrying-over of profit from period to period, occur within a single short period. That is, no long-lived capital equipment needs to be purchased, and no long-run contracts or customer relationships are involved, in the examples to be discussed. In such cases, the individual begins by comparing expected income in money revenue with outgo in expenditures on purchased inputs. If the income does not exceed the outgo, the opportunity need not be considered further unless there are other benefits to be considered, e.g., charitable benefits, the consideration of which may be deferred until later. That is, if total revenue (R) exceeds total expenditure (C), excluding the value of the decision-maker's time, the alternative will be considered further; if not, not. This calculation of the lower boundary of "gross profit" is the first step in the sequential decision- making process (one which is not mentioned by Becker, however, perhaps because it seems too obvious). Clearly, however, many work alternatives where R > C in money are not undertaken; the individual is limited by, if nothing else, having only 24 hours in the day. Economists have long used the notion of a "reservation price" (Davenport, 1913, p. 128) to explain why some alternatives with R > C are not accepted. But the matter was not understood systematically until Becker's l965 work, where he showed how to compute the reservation price as a function of the individual's income, wealth, time intensity of consumption possibilities, and time budget. Becker's Analysis Compared to This One. Our present interest in Becker's analysis is how a change in a person's wealth affects the the amount of time spent working. The answer may be read from Becker's equation _ _ (3-1) Summation over i (pibi + tiw)Zi = V + Tw ******* where pi = unit price of market good i bi = amount of given market good i necessary to produce a unit of Zi ti = input of time necessary to produce a unit of Zi, in combination with bi _ w = average wage per hour worked, assumed constant Zi = a commodity that enters the person's utility function V = "wealth endowment," the person's assets for spending in the current period summantion T = time endowment, = 24 hours per day Ti = time spent in consuming the ith commodity = tiZi Tc = time spent in consumption = Summation over i Ti If we assume (as Becker does in his main analysis) that there are constant returns in producing Zi so that bi and ti are fixed for the _given w and the prevailing pi, and if the Zi are those that are ******consumed in equilibrium, then dZi (3-2) --- = constant > 0. dV Therefore dTi (3-3) --- > 0. dV And dTc (3-4) --- > 0. dV That is, total time spent on consumption increases with an increase in wealth, which is commonsensical for most situations. And since the time spent on work, Tw = T - Tc, then dTw (3-5) --- < 0. dV That is, the amount of time spent working varies inversely with wealth, holding wages constant. This conclusion may also be found in Becker's expanded life-cycle framework (l976). The effect of wealth upon saving, a related issue from the standpoint of economic development, may also be seen clearly in the same framework. That expanded life-cycle framework also has clear implications for such phenomena as the effect of a change in life expectancy upon work and saving. Becker's system, however, was not framed to comprehend the sort of economic opportunity2 of main interest here. His formal analysis *** deals with a situation in which the wage is constant, that is, where the marginal earnings per hour equal the average earnings. Becker (1976, P.93) also mentions the situation in which "marginal wage-rates were below average ones," but he notes that in that case the key "resource constraint in [his relevant] equation would not have any particularly useful interpretation"; the situation of a farmer for whom there are diminishing returns to weeding illustrates this case. The most interesting economic opportunities, however, are those that have expected payoffs per hour _h_i_g_h_e_r than average payoffs to presently-undertaken opportunities. They are particularly interesting because they are unusually valuable (by their very definition) from a private as well as social point of view. They also are likely to be particularly valuable socially in the long-run because they represent change, that is, a break with preceding activity. There are two ways an individual or a nation can respond to a new high-payoff opportunity. One way is to rearrange one's entire set of work opportunities so that the high-payoff opportunity would have priority ahead of some existing opportunities that are presently accepted; in that case, some presently-marginal opportunities would probably be bumped out of the presently-accepted set. This would be roughly equivalent to a wage increase, and the overall amount of work might go up or down, as discussed by the traditional theory as well as by Becker. This response could be analyzed formally, but the complicated nature of the rise in "wage" would make the analysis complex, and in any case, such analysis is not necessary here. The new opportunity also could be responded to as an _a_d_d_i_t_i_o_n_a_l opportunity, while continuing to fulfill the previously-decided-upon work schedule. In this case, if the new opportunity can be accepted in greater or smaller amounts, rather than just yes-or-no, Becker's analysis implies that at least _s_o_m_e amount of the additional opportunity would be accepted. This can be seen directly from the following reasoning: Assume that the present set of work decisions implies that the value of the marginal unit of time spent in consumption equals the value of the marginal unit of time spent in production. If the latter value increases, the work-time decision must change (work must increase) as a new point of equality of the marginal quantities is determined. These two ways of looking at the matter correspond to different responses over the life cycle of an opportunity. When the opportunity first appears, and before there is time to rearrange commitments, the opportunity must be dealt with as if all else is fixed and the new one must be an addition. But with the passage of time, commitments loosen and the new opportunity can be dealt with as its priority would suggest. Without further analysis, it can be seen that a rich new opportunity would _e_v_e_n_t_u_a_l_l_y lead to less work, _c_e_t_e_r_i_s _p_a_r_i_b_u_s, by making the person wealthier (by way of increasing the income from the now-fixed-into-the-schedule better opportunities, which can now be seen as an "endowment" or "wealth" in Becker's analysis). But even expanded, Becker's framework would not complete the story. This is clearly seen when we notice that some alternatives which pass the Becker time test are not undertaken. To repeat, examples include (a) work which is unethical or unpleasant or dangerous to the reputation; and (b) work which requires leaving one's family and friends. These examples undoubtedly could be squeezed into the Becker framework by supplying some shadow prices, but this would be so tortuous that it would do serious violence to the time- allocation analysis. A more recent paper by Becker (1983), circulated after the first draft of this book was completed, expands his framework and includes a concept of effort that helps to delineate the difference between the context of his interest and the context of this book. Becker equates effort with the expenditure of energy, whereas I equate it with a much wider range of personal goods such as reputation, and with accepting pain, as well as with the use of human energy. Becker's definition enables him to plausibly assume that the total supply of effort by a person is fixed over the period of analysis, which may be a reasonable assumption for some applications of his theory. But the essence of the analysis offered here is that it applies to contexts in which the total effort is variable rather than fixed. The difference between Becker's and my approaches does not hinge on different biological assumptions. It may be that the supply of effort over an entire lifetime is indeed fixed, either at birth or later on, in which case more effort being exerted this year implies less capacity for effort next year, or else it impliesa shorter lifespan within which to exert effort; such may or may not be the case, but either way it has no implication for the analysis given here (though if it is grossly not the case, it might complicate Becker's analysis)2.1. Rather, the analysis offered here is intended to fit a case in which the focus is upon a particular period within which a person may or may not change total effort -- a given month or year or decade -- whereas Becker mainly focuses on allocation of some total within a conservation-of- energy framework. In the present framework there may also be an increase in effort expended on work at the expense of effort expended on consumption, as in Becker's analysis, but that case serves to bring out the difference between Becker's and this analysis even more sharply. An increase in economic opportunity in Becker's framework --typically an increase in the wage rate -- may lead to greater or less expenditure of total effort in work, because capacity to enjoy non-working time by buying more commodities is increased by the wage increase; this is exactly analogous to the possibility of a backward-bending supply curve of work time. But such a possibility does not exist within the framework offered here because the new opportunity is considered as being separate from the old opportunity set, and in the "temporary" period under analysis the new opportunity does not replace the old opportunity set. To illustrate: Imagine that to induce you to work shoveling manure for the next hour instead of sitting at your desk, a person offers you a sum three times as great as you have ever earned for an hour's work. There is no way that the offer can decrease your effort during the next hour (apart from unusual psychological twists not under consideration here) and it may increase it; such is the subject of the analysis offered here. Becker's analysis suggests that the manure- shoveling offer may decrease the total effort for the day or lifetime beginning with this hour and the offer, and that might well be the case. But in the framework offered here, the decision for the subsequent hours is assumed to be made separately of the decision for this hour, and will use different data, to wit, the increased wealth (or "property income," in Becker's framework) at the start of the next period (compared to the wealth if the manure-shoveling opportunity is not offered or accepted), which may reduce effort later on. And this subsequent reduction in effort is also an important part of the analysis offered here, and is part and parcel of many of the applications. But that subsequent reduction is not part of an allocation process, but rather the result of an allocation having been made separately. The point of contact between Becker's and this analysis -- the point at which they are consistent -- is the effect of "property income" or "wealth"; an increase leads to reduction in work effort. And this helps highlight the difference in the approaches: Becker implicitly envisions an increase in wage opportunity as extending over a lifetime, within which long period it has an effect like an increase in property income, along with its main effect, leaving the overall impact ambiguous. My analysis envisions the new opportunity as applying to the present short period apart from later periods (even if it will extend to a lifetime), and the resulting increase in wealth at the end of this present period is analyzed separately as such; hence both effects -- within this period and within the next -- are determinate. -------------------- INSERT III-11R The increase in amount of time worked when a market opens up to hitherto-subsistence farmers illustrate the difference between Becker's theory and the Drive-Effort hypothesis; A market opens up trade opportunities where there were none, and therefore increases the Drive-Effort Measure. It would be hard to deduce this result from Becker's theory. One could view this phenomenon simply as an increase in "wages," but it would hardly be simply an increase in a constant wage level, which makes difficult a deduction from Becker's time theory. -------------------- THE PRESENT THEORY GENERALLY STATED The Drive-Effort Concept. Earlier it was noted that many elements other than money and time cost may influence a person not to do a piece of work. Consider these examples as representative: (a) the expenditure of physical and mental effort which leads to fatigue and/or pain; and (b) the loss of reputation and the incurring of social disapproval for undertaking work which is against social customs (e.g., breaking a strike, or working with a lower caste). Not all of the work-resisting factors operate in any given situation, of course. But it is reasonable to think that all of them are monotonic, and to the extent that they operate, all increase their force with the amount of time spent working at a task. If so, we can treat them all as a single negative factor--a "cost"--incurred when a person works. Let us label "Drive" (denoted "Dr") the tendency to respond with work to a particular set of conditions, and "Effort" (denoted "Ef") the force which a person exerts in order to overcome the congeries of work-resisting forces.3 Drive is equivalent in *** magnitude to the amount of effort a person _w_o_u_l_d_ _b_e_ _w_i_l_l_i_n_g to expend in response to a given set of conditions. When discussing the motivation of the individual or group, Dr and Ef may be thought of as the joint concept Drive-Effort (DrEf), the objective work effort that one is willing to expend in a given situation in response to the subjective driving impulse. In some contexts it may be appropriate to speak of Dr and Ef separately, while in other contexts it is appropriate to talk of DrEf as a single concept. Throughout this essay, the effort that one _w_o_u_l_d expend must be distinguished from the work effort that one _m_u_s_t expend in order to actually undertake a given opportunity. These concepts will be specified more precisely in the formal analysis of monopoly and duopoly in Chapter 6. The Drive-Effort measure may be viewed as a synonym for "incentive." Economists frequently use the term "incentive," and in fact, many regard it as fundamental concept of economic analysis. But in current economic waiting, incentive is an ambiguous concept. It may be intended as objective--the price or expected payoff for an activity. Or it may be thought of as subjective, as in a phrase like "That payoff will not be an incentive to her." The approach suggested here should be helpful in separating these two meanings, Drive-Effort standing for the private subjective meaning of incentive (which can, however, be measured objectively by the scientist, if so desired), and price or expected payoff representing the public meaning. Hopefully, this essay makes a contribution by rendering the incentive concept more precise, and then showing how application of the concept as defined rigorously can lead to a variety of useful conclusions. The actual work effort required by, or done in response to, a particular opportunity may be less than the potential Ef, of course. Drive-Effort plus time plus money wealth may be thought of as "full wealth," following Becker's usage. That is, we may think of three inputs into a revenue-producing alternative: money expenditures, time, and work effort. (Reputation and other dimensions might also be added.) An alternative conceptual approach, which is not followed up here but which some might find helpful, is to think of effort as a dimension of "effective" work time just as the skill of the person deriving from the person's human capital is an element of "effective" work time. Sociologists and psychologists will point out that, for humans, the mental states or properties commonly called values and attitudes are part of the causal nexus involving Drive-Effort. The model4 that ***underlies the treatment of these matters in this paper is as in Figure 3-1. ---------- Figure 3-1 ---------- Values and attitudes Economic circumstances Economic behavior In question is the promptness with which values and attitudes respond to changes in economic circumstances; if they were to respond instantly, we would not need to consider them as having an independent existence in this context. An example (taken from Ronald Freedman) is attitudes toward, and values about, having children. The views commonly referred to as Jewish, Islamic, and Catholic religious thinking surely have affected (and still affect) the number of children born in poor countries with high child mortality. But families originating in those high-fertility communities come to have much lower fertility when they move to economically advanced countries, despite continuing the same religious affiliations. (For example, in the United States, fertility of Catholics is now nearly the same as fertility of Protestants.) The shift in fertility does not take place immediately upon immigration, but rather requires at least the good part of a generation. So it seems that values and attitudes markedly affect fertility behavior in the shorter run, but less so or not at all in the longer run. This suggests that values and attitudes themselves change under the pressure of economic circumstances. By the same reasoning, it would be reasonable to expect a lagged change in DrEf and in observed work effort after wealth has changed. --------------- INSERT III-15E Perhaps a word about other intermediate state concepts would be helpful here. Speaking in the vernacular, a ceteris paribus reduction in a person's wealth makes a person more "hungry" and increases the person's "needs". I assume that this will increase a person's "drive", the latter being a psychological concept, though psychologists may postulate some circumstances in which a reduction in wealth may reduce rather than increase drive, e. g. by discouraging a person. The increased drive would seem to be experienced as greater "desire" for the payoff from a given opportunity, and perhaps leads to higher goals being set, because the persons "needs" more. On the other hand, a psychologist might postulate that in some circumstances an increase in need (using the word "need" loosely now, and to be distinguished from the psychological concept of "need for...") may cause a lowering of aspirations and goals, and hence perhaps less drive, because of a complex of other psychological mechanisms. But for the purposes of economic analysis it seems useful to assume a monotonic function of the sort embodied in the Drive-Effort Measure. And a monotonic formulation has the advantage that it can be tested empirically; a non-monotonic function cannot be tested so easily. With respect to opportunity, the psychologist may wish to view the relationship as including linkage through expectancy of gain, and perception of the probability of success or failure. And opportunity may alter the structure of wants and values in complex ways. There seems nothing in such more complex theorizing about the psychological mechanisms that runs counter to the Drive-Effort hypothesis, however. ------------------- Should We think of DrEf As Fixed in Quantity? Unlike the situation with respect to time, it does not seem sensible to attribute to a person a fixed amount of available Drive- Effort; there does not seem to be a reasonable way to measure DrEf as a proportion of a fixed quantity. For example, DrEf trades off with sleep; additional sleep increases one's capacity to endure pain, but reduces the amount of time available for work. That is, acknowledging the composite of factors involved in DrEf complicates the notion of a fixed quantity of time available to the person for work and the consumption of goods (assuming sleep is not a consumption good). The intellectual problem, then, is to model DrEf with respect to the conditions which affect its strength in a given individual or nation at a particular moment. A word about a possible confusion: The analysis offered here is addressed to differences in the propensity to exert effort due to differences in persons' financial situations and economic opportunities. The analysis is _n_o_t addressed to changes in propensity to exert effort due to previously-exerted effort. For example, the lesser propensity to exert additional effort during the ninth hour of a work day than in the first hour (assuming it to be the case) is not part of this analysis, even though there are obvious links between the two ideas. --------------- INSERT III-16D Throughout, it is implicitly assumed that all other personal characteristics except wealth are held constant when two wealth states are compared. And specifically, the person is assumed to have the same social class background in both states; a comparison of behavior in different social classes is never intended. -------------------- Toward A Continuous Consistent Theory In Becker's analysis of time allocation, the size of the payoff attached to an opportunity does not affect the work decision as long as the expected payoff is above the present marginal wage rate. But we know from a variety of evidence that the size of the payoff _d_o_e_s matter. Furthermore, a given payoff will have different effects upon various individuals and nations that work for the same wage. For example, some workers in a given job will accept the offer of overtime work while others will not. Of course we have plenty of ad hoc explanations--this one has a date tonight, that one needs extra money because his wife just had another baby. But as Becker (with Michael, l976) argues particularly strongly, such ad hoc explanations leave us unsatisfied because we cannot systematize them with broad general principles, or integrate them with the rest of economic theory.5 The ***next chapter aims to make some advance in that direction with regard to the acceptance or rejection of economic opportunities. This essay may be viewed as offering a theory of the formation of the taste for work, where no such theory now exists. Of course this line of analysis does not describe the behavior of persons for whom the work has evolved into being a pleasure in itself, and where the output of the work is very little used by the worker, such as in science and art. D/l36A,#2 Effort3 85-36 9/24/85 FOOTNOTES 1Hereafter the term "nation" will be used instead of group unless the subject is a group other than a nation, such as a town or an ethnic or religious community. 2Throughout the book, the concept of opportunity should be understood as the opportunity _p_e_r_c_e_i_v_e_d by the individual or nation, just as for Hicks and Becker wages are assumed to be those known to be available by the individual. 2.1There certainly is some relationship between the capacity to exert effort in short contiguous periods, say a day or even a week or month. And there is common belief in even longer carryover, as expressed in such expressions as "She is worn out by a hard life". But I do not know of any scientific evidence on the quantitative nature of such a relationship, if it really exists, and therefore a rational person would lack data for a lifetime allocation. In addtion, there are all the uncertainties of life that bedevil a lifetime allocation of wealth with respect to saving and consumption, as well as the issue of discounting. So even if lifetime allocation were an appropriate context for the line of analysis presented here -- which it is not -- the process would be fraught with grave difficulties. 3A few notes on the relationship between the Drive-Effort concept as used here, and the common terminology of psychologists: (l) The work activity under discussion here is instrumental rather than consummatory, i.e., persons are assumed to want money for what it will purchase rather than for the sort of gratification misers might get. (2) Historical determinants of behavior such as habit, learning, and genetic and other structure are assumed the same for the comparisons being made. The only "internal" condition that varies is wealth, which may be thought of as corresponding to the psychologists' concept of need. (3) The opportunities under discussion are assumed known to the individual or group in question, and have the same probability in all comparisons unless otherwise stated. A brief outsider's review of the psychological literature on motivation and drive (aside from the physiological level) suggests that there is no consensus on the use of these and related terms, and there is disagreement about whether there might be any meaning in the concepts for which the terms could stand; some theorists suggest that these intervening variables might be done away with completely. But psychologists' disagreements about these concepts in general should not call into question our use of them as intervening variables in this context for two reasons: First, the measures of input (wealth, opportunities) and output (work, innovations, etc.) can be rather well specified in most of the applications we are interested in. Second, it is possible to get independent measures of the intervening drive variable, and this has in fact been done as in such studies as Galanter's, when he asked people the effect upon their psyches of various sums of money (described by Stevens, l959 pp. 55). It may be that the relatively clearcut status of the concept of drive in the context of this paper might offer opportunities for psychologists to exploit in clarifying the theoretical status of the concept. ---------- INSERT III-19F The reader for whom the relationship between my terminology and that of other social scientists is important should take notice of the discussion of "needs" earlier in this chapter. ------------------ 4This model is heavily influenced by Freedman's discussion of values and fertility (l96l-62). 5Becker and Michael put it this way: For economists to rest a large part of their theory of choice on differences in tastes is disturbing since they admittedly have no useful theory of the formation of tastes, nor can they rely on a well-developed theory of tastes from any other discipline in the social sciences, since none exists. Put differently, the theory which the empirical researcher utilizes is unable to assist him in choosing the appropriate taste proxies on a priori grounds or in formulating predictions about the effects of these variables on behavior. The weakness in the received theory of choice, then, is the extent to which it relies on differences in tastes to "explain" behavior when it can neither explain how tastes are formed nor predict their effects. To illustrate the reliance on 'changes in tastes' in interpreting observed behavior, consider the following examples. If a household's utility function has heating fuel as an argument then its tastes must change seasonally to explain why it purchases more fuel in the winter (when the price of fuel is usually higher). Or, couples must experience a shift in preferences toward snow removal services and medical care services and away from sporting goods equipment and high-cholesterol foods as they age since the market prices of these items are not related to age and yet expenditure patterns appear to change with the couple's age. Of course, by incorporating an intuitively appealing explanation in each case, economists usually interpret these observations in reasonable ways. The important point, however, is that the received theory of choice itself is of modest use in that undertaking. (Becker, l976, p. l33)