The decline of relational goods in the production of well-being

Aloys L. Prinz and Björn C. Bünger

Institute of Public Economics

University of Muenster, Germany

In this paper we attempt to show why the importance of relational goods compared to conventional goods and status goods threatens to decline in contemporary societies. In our point of view, the development of the relative significance of these three types of goods is not a consequence of preference changes but of significant alterations in the opportunity costs of time (see e. g. Hamermesh/Lee (2003)). These opportunity costs are influenced by the alternative categories of time usage, most notably spending time for earning money via working. The massive capital input into industrial production increased labor productivity and, hence, wages to such an extent that time not spent working became expensive. This holds especially for usages of time which are not prone to higher productivities as, e. g., socializing with friends or caring for others.

In addition to the theoretical analysis outlined in the following, we will also present in our paper empirical evidence for a shift of importance between the classes of goods, especially the decline of relational goods and the raise of status goods, which impact on modern society is e. g. shown by Or (2000). According to Or's empirical analysis, the lack of status is the single most important factor for premature death in OECD countries.

In this paper it is assumed that households are ‘producing' their own well-being by means of three types of goods: conventional (consumption) goods, relational goods and status goods. Conventional goods are defined as goods that can and will be consumed alone (privately). In contrast to that, relational goods are consumption goods that mainly und usually are consumed in groups (within the family, with friends etc.). Status goods are a special variant of conventional goods: they are defined as that kind of goods which consumption opens the door to a socially higher peer group by sharing its consumption habits.

To analyze the dynamics of consumption of these goods, a Lancaster approach (Lancaster, 1971) is chosen. Well-being - in form of physical and psychic well-being - can be produced via conventional goods, relational goods as well as status goods. This means that the household ‘produces' well-being by combining the respective goods. Moreover, it is assumed that conventional goods are best suited to meet needs of physical well-being whereas relational goods are best at ‘producing' psychic well-being. Status goods are placed in-between conventional and relational goods. However, to produce (physical and psychic) well-being, households are endowed with time that may be used for earning money or for non-working activities. Time is the most important input factor as it is the source of income as well as the resource to produce relational goods. In contrast to relational goods, conventional goods and status goods can be bought on the market with the household's income.

The dynamics of the demand for the three kinds can be described as follows: Initially, i.e. in a low income state of the economy, conventional goods and relational goods define the households' efficiency frontier in Lancaster terminology. In contrast to them, status goods may not belong to this frontier at this state of economic development where time is relatively cheap and status goods of all kinds are rather expensive.

Suppose now that the production of goods by firms becomes cheaper due to higher capital input. As the labor productivity in the industrial sector increases, a point may be reached where an efficient combination of conventional and status goods on the one hand and of status goods and relational goods on the other hand exists. With further increases of productivity a situation may result in which relational goods are no longer on the household's efficiency frontier. The reason is that the time input into the household's production of relational goods is too expensive to remain efficient since there is no increase of productivity in using time to produce relational goods. Even conventional goods, too, might be no longer efficient: Due to the increased physical and psychic well-being via status goods, conventional goods could also become negligible. In such a scenario, status goods are dominant with respect to conventional as well as relational goods. This would imply that both, physical as well as psychic well-being might best be met with status goods.

The most important point of this theoretical analysis is as follows: Although the households' preferences concerning physical and psychic well-being do not change, the structure of the demand for the respective goods may change quite drastically in the direction of status goods. The reason is that the opportunity costs of time are the driving force of the efficiency substitution dynamics.

References

Hamermesh, Daniel S. / Lee, Jungmin (2003), Stressed Out on Four Continents: Time Crunch or Yuppie Kvetch? NBER WORKING PAPER SERIES, Working Paper 10186.

Lancaster, Kelvin J. (1971), Consumer Demand - A New Approach. New York, London: Columbia University Press.

Or, Zeynep (2000), Determinants of Health Outcomes in Industrialised Countries: A Pooled, Cross-Country, Time-Series Analysis. OECD Economic Studies No. 30, 2000/I, 53-77.