M6. Why hasn’t anyone adjusted median income statistics to make them more useful?

By Jonathan Andreas, 2014/05/31

The last article discussed median household income, but what we really want is median individual income, so why not just measure the income of individuals? This kind of data is also available: median earnings for workers. This solves the household-size adjustment problem, but it creates a much bigger problem for use as a welfare statistic: it leaves out the majority of the population. Most people are not working (for market wages) and this statistic only includes people who are working. Any welfare statistic that excludes the majority of the people from the analysis is a bad statistic of general welfare.

Mutilitarianism has helped create an ontology which has limited economists’ imaginations. An ontology is a belief in what exists and the ontology of an academic discipline describes the boundaries of what is valid to study (and think about) and what is invalid. One of the ontological failures of mutilitarianism is its obsession with markets. Most people don’t get any annual market income at all. So if we would measure the median market income of the population of the US, it would be approximately zero. That would be ridiculously misleading because everyone must have a real source of annual income (in money or in-kind) or they will die of deprivation. Only a minority of the population works full time for a market wage because most people are unemployed, housewives, students, retired, or have some other reason for not “working.” Note that even the traditional definition of “working” uses a market-based ontology. Many people who are not “working” are still doing useful work.

The most important economic institution for distributing resources to individuals is not market exchange, nor government exchange, it is gift exchange which primarily happens within households. Most economists miss this because of their mutilitarian blinders which focus on selfish motivations for market exchange. Economists pay little attention to the more altruistic motivations for the kind of gift exchange that happens within households. But even our most capitalist corporations would collapse if people had no altruistic motivations, so altruism is intrinsic to capitalism. For example, the most important market is for labor (about 2/3 of GDP) and most laborers could profitably lie, cheat, and shirk much more than they do if they were purely selfish. Most suppliers and customers could also profitably lie, and cheat more than they do if they were purely selfish. For example, if I were purely selfish, when I buy mail-order plants, I could claim that all the plants died as soon as I got them and then I would get free replacements. The mail-order nursery has no way of knowing the truth and I have no need to maintain any reputation with a particular nursery when there are many other companies I could also trick. But somehow, these mail-order nurseries exist and they honor their plant guarantees. It can only be explained by altruism.

The household is the most important institution in economics because it is where the majority of people (the median!) gets most of their economic resources, but economists pay very little attention to what goes on in households. The most prominent analysis of the household that exists in economics is characterized by Gary Becker’s mutilitarian efforts to show how much household behavior can be explained by selfish motives. It has been an extremely successful effort, but selfishness is only part of the equation and to truly understand the best way to calculate median income will require going beyond these past efforts. But in the absence of a comprehensive analysis of how economic welfare is distributed within households, we can begin measuring MELI using the same sort of arbitrary protocols for dividing resources among individuals within households that are used to adjust household incomes for making poverty calculations.  Hopefully, MELI will become an important statistic and the greater importance of calculating MELI will give more impetus to help increase the study of the household, the most important economic institution for the median person.

In some ways, this would be a return to the roots of economics which comes from a Greek word,  οἰκονομία, that means “management of a household.”

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