Economic analysis is not limited to the market alone.

Summary:

– Economic analysis is not limited to market analysis alone;

– Phenomena occurring « outside » the market are relevant to economic analysis;

– They can have a broad impact, for example on economic cycle fluctuations or on the financing and effectiveness of social programs.

The economic press often focuses on market phenomena[1](car and aircraft sales, international trade, changes in a sector’s share of GDP, etc.). There are several reasons for this. The first, obvious reason is that most economists study what happens in the markets. A second reason is that the market is more easily visible and measurable. Prices and quantities can be observed. In addition, administrative, accounting, and tax obligations mean that many of the transactions that take place there are recorded somewhere.

It is interesting to note that economists such as Adam Smith (1723-1790) began to take an interest in the market at a time when it was less prevalent than it is today. This bias has, in a way, continued. However, there is dynamic research on the economic mechanisms that take place outside the market. These are interesting because they interact with the market, modify it, are modified by it, and also have their own autonomy. In particular, they can compensate for the absence of certain markets. For example, the family is an entity that can fill the gap left by certain private insurance policies. The most obvious example is that of spouses pooling their incomes. In this case, if one of the members loses their job, the fact that the other still receives an income acts as a form of partial unemployment insurance.[2].

If the economy were limited to the market alone, then one could almost say (with some exaggeration) that there was no economy before the industrial revolution. Of course, markets existed, but much of human economic activity was separate from them[3. Nevertheless, in one way or another, there were processes of production, exchange, insurance, etc. Today, economic life is closely linked to various markets, but what happens outside the market is still an important part of economic life.

The best way to convince oneself of this is to reread the first paragraph of Gary Becker’s seminal article, A Theory of the Allocation of Time ( 1965). In it, he sets out a fact that is difficult to refute: even a working week of fourteen hours a day, six days a week, leaves half the time free for activities such as sleep and leisure. In general, citizens of developed economies work far less than seventy hours a week, six days a week. The decrease in annual working hours over the last fifty years[4]has automatically increased the amount of free time available.

In this article, we present various examples showing how this « non-market » time changes and enriches economic analysis. We also illustrate its economic importance.

Domestic production and GDP

This « non-market » time can be used in particular for domestic production: cleaning, cooking, repairing one’s home, etc. This activity is by definition economic. To be convinced of this, one need only note that an hour of cleaning purchased from a service provider has a cost in euros. The latter is recorded in GDP. However, if a family member performs these various tasks, they will not be included in GDP. They will not fall within the scope of the market and will not be recorded in it. Nevertheless, in this process, a service (similar to one that could be purchased on the market) has been created.

The time spent performing domestic tasks is therefore not neutral from an economic point of view. The most commonly used measure of a country’s total production, GDP, is therefore an underestimated measure. For example, a study by INSEE estimates the value of this domestic work to be between 15% and 71% of GDP[5]. Even the lowest estimate (15%) remains a significant value that gives an indication, for example, of the potential size of a market such as that for home help.

This can have other important consequences for economic analysis. Let us imagine, for example, a hypothetical case of two countries, A and B, with per capita GDPs of 100 and 110 respectively. At first glance, B is richer than A. But if, at the same time, domestic production in A is 20 and that in B is 5, then A is in fact richer than B.

More specifically, in a 2008 article, House, Laitner, and Stolyarov (2008) attempt to understand the extent to which GDP growth in the United States between today and fifty years ago may be overestimated in relation to the increase in well-being. This period saw an increase in women’s participation in the labor market. Given that women previously performed a wide range of domestic tasks, it is possible that part of the measured increase in GDP is only due to the fact that part of domestic production has moved into the market sphere (and thus does not contribute to an increase in well-being). For example, a woman entering the labor market who was previously caring for her children full-time can now hire a babysitter or daycare. GDP will increase by the amount of the woman’s salary entering the labor market. But it will also increase because a service that was not previously recorded in GDP (caring for children) is now part of the market (daycare or babysitting services). However, this second effect does not increase a country’s production (this production already existed but was not recorded). It is simply a substitution of unrecorded production, because it is non-market, for market production. The authors estimate that 2.5% of 1999 GDP would have been domestic production in 1959. This suggests that part of the increase in GDP over this period did not contribute to an increase in well-being. In fact, part of this increase is due to the fact that production previously not recorded in GDP has entered the market. This phenomenon only artificially increases a country’s production.

Domestic production and expenditure

The domestic production perspective has also made it possible to explain certain empirical regularities. For example, it has been observed that agents significantly reduce their spending when they retire. This observation appears to contradict life cycle theory, which suggests that individuals should want to smooth their consumption over time. This empirical fact would be particularly problematic if agents anticipate a higher retirement pension than their actual retirement pension. Indeed, if an individual decides to retire at a given time t because they believe they will have a sufficient pension, but then realizes that they must reduce their spending because their actual pension is lower than expected, the result is a largely suboptimal situation. This situation may, for example, suggest a need for public intervention to better inform individuals about the future amount of their pension.

However, Mark Aguiar and Erik Hurst (2005 and 2007) have shown that this observation can be explained in large part by the fact that retirees spend more time on consumer spending and increase their domestic production. In particular, retirees with more free time tend to pay less for the same type of goods, making more intensive use of all the promotions offered by the same store. Furthermore, these authors showed that, despite the decrease in food expenditure at retirement age, neither the quality nor the quantity of food consumed decreased upon retirement. We can therefore see that taking domestic production (an « off-market » phenomenon) into account helps explain certain empirical observations.

Domestic Production and the Economic Cycle

What happens outside the market can also have an impact on the economic cycle. In particular, several studies have shown that certain phenomena, which classical cycle models could not reproduce, could be explained once domestic production was taken into account[6].

This type of macroeconomic approach seems to be validated at the microeconomic level by recent work by Aguiar, Hurst, and Karabarbounis (2011), which shows that during the Great Recession in the United States, a significant portion of the additional « free » time wasused toincrease domestic production.In particular, they show that 30% of the working time lost during the recession was allocated to domestic production. This figure is not insignificant and demonstrates that domestic production reacts to the economic cycle. Furthermore, it shows that the decline in spending during a recession is partly offset by an increase in domestic production. Domestic production therefore plays a partial role in insuring against shocks.

Informal Care and Aging

In our aging societies, one of the fundamental issues is the ability of individuals to cope with age-related problems, particularly loss of mobility. If family solidarity is strongly developed in a country, then the state or the markets may have a lesser role to play in providing assistance to the elderly. This is particularly important in order to assess the costs of aging in terms of public finances, for example. This type of phenomenon can also generate direct and indirect economic costs. For example, a person may leave their job to care for a sick relative. They may also be forced to devote less time to their children’s education, which may result in a decline in human capital in the future compared to its potential level.

For example, one might think that, as a result of aging, the number of people in nursing homes will increase significantly. Lakdawalla and Philipson (2002) highlight an effect that may alter this conclusion: the fact that increased longevity may be accompanied by a reduction in widowhood (by reducing the differences in longevity between men and women).

Indeed, an increase in male longevity reduces the number of widows and, mechanically, increases the number of elderly people living as couples. A spouse can provide informal assistance to a person with mobility problems, for example. This phenomenon seems to be confirmed at both the micro and macro levels. The presence of a spouse seems to halve the likelihood of entering a nursing home. Similarly, the increase in the male-to-female ratio has a negative impact on the number of people in nursing homes[7].

This is important, for example, when assessing the future cost of dependency. If increased longevity increases the likelihood of being in a couple, then not taking this effect into account would result in an overestimation of the cost of dependency (for example, for the state in the presence of a public insurance system). More broadly, not taking into account family solidarity and how it is changing risks skewing (upwards or downwards) the assessment of the potential costs associated with aging.

Conclusion

The way individuals allocate their free time, the way family insurance works, broader exchange phenomena, etc. can have significant consequences for the economy. These phenomena, which take place in a way outside the market, are studied by economists. This is particularly because they are linked to areas that we perhaps more often associate with the economy: financing of social programs, variations in the economic cycle, insurance markets, etc. For example, family solidarity can compensate for the absence or poor functioning of traditional insurance markets subject to moral hazard or adverse selection problems.

This is an important area of study, fundamental to understanding the economic phenomena around us. The studies presented above[8]show in particular that the effects of « non-market » phenomena can be economically significant, hence the importance of studying and taking them into account.

References

– Mark Aguiar, Erik Hurst, Consumption versus Expenditure, Journal of Political Economy, vol. 113(5), pp. 919-948, October 2005.

– Mark Aguiar, Erik Hurst, Life-Cycle Prices and Production, American Economic Review, vol. 97(5), pp. 1533-1559, December 2007.

– Mark Aguiar, Erik Hurst, Loukas Karabarbounis Time Use During Recessions, NBER Working Papers 17259, 2011. (also published in the American Economic Review, 2013)

– Gary Becker, A Theory of the Allocation of Time, The Economic Journal, vol. 75, No. 299, pp. 493-517, 1965.

– Fernand Braudel, The Dynamics of Capitalism, Flammarion , 2008, First edition 1985.

– Jonas Fisher, Why Does Household Investment Lead Business Investment over the Business Cycle, Journal of Political Economy, vol. 115, pp. 141-168, 2007.

– Christopher House, John Laitner, Dmitry Stolyarov, Valuing Lost Home Production of Dual Earner Couples, International Economic Review, vol. 49(2), pp. 701-736, 2008.

– Darius Lakdawalla and Thomas Philipson, The Rise in Old-Age Longevity and the Market for Long-Term Care, American Economic Review, vol. 92(1), pp. 295-306, March 2002.

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