Addicted to Harlotry — Part 3: Capital Investment

In Part 1, I introduced the concept of rational addiction and argued that failure to account for it causes us to underestimate the benefits that other people receive from certain activities, which may lead us to believe that there is something unnaturally wrong about their high levels of consumption.

Then in Part 2, I explored the ideas of a supply-side version of rational addiction in which past production of some good or service makes it less costly to engage in future production of that good or service, using as an example the difficult job of caring for the very sick and elderly.

Please join me now for the thrilling conclusion.

You’ll notice that I started out talking about the demand for goods like video games and heroin, but now I’ve switched to talking about the supply of labor for nursing and firefighting and prostitution. The idea of extending rational addiction and intertemporal complementarity to the supply side is an idea I came up with on my own. It’s a pretty obvious extension of some basic economic ideas (economists often extend theories of consumption to things we don’t usually think of as consumption), and I don’t think it would be controversial, but I wanted to try to find actual economists saying something similar.

It took me a while. My research skills don’t go much beyond Google, and I didn’t have much luck at first. Searching for obvious things like “economics of prostitution and rational addiction” got me a lot of hits for stories about drugs addicts who engage in prostitution to feed their habit. I didn’t do much better when I stretched my knowledge of economic jargon to search for phrases like “prostitution and intertemporal complementarity” or “intertemporal cross-elasticity of supply.”

Eventually, I did stumble across what I was looking for, and really, it should have been obvious.

It’s common to use the word “capital” to mean money, as in capitalizing a corporation, but to an economist, capital refers basically to tools. That is, to the things we make in order to improve our ability to make other things. To a baker, capital is the kitchen and cooking utensils. To an airline, capital is the airplanes and all the associated airport facilities and service equipment. To a web publisher, capital is the website hardware and software.

(Note that capital goods are not consumed in the process — that would be raw materials — and things like land are not capital goods because we don’t have to produce them.)

Because capital goods have to be produced, however, they take away from production of consumer goods. So every business has to decide what capital it needs to achieve the desired level of production, and it has to expend effort to first produce (or spend money to buy) capital goods before it can produce the consumable goods it will sell. You have to have a kitchen before you can bake some bread, you have to buy airplanes before you can sell travel tickets, and you have to build a website before you can monetize page views.

Because the stock of capital must be accumulated at some cost before it can be used to produce the salable goods and services, it is an investment. This is why money invested to start or grow a company is called “capital”– it’s used to buy or build the real economic capital.

Much of the reason we in the industrialized nations live so much better than the rest of the world is because we have accumulated a huge stock of capital. Here in the United States, we produce $11 trillion in consumer goods annually because we have an estimated $28 trillion in private and government-owned capital.

But there’s more to capital than just what is owned by business and government. Economists consider many personally-owned durable goods to be personal capital, in that we don’t consume them directly but we use them to produce other goods and services that we consume. Cars produce transportation, refrigerators and stoves produce meals, and homes produce housing. To account for this, we have to add another $22 trillion in residential assets, bringing the total stock of U.S. capital to about $51 trillion.

Even that figure is only a fraction of all the capital in the U.S., because not all capital is physical goods like factories and airplanes and homes and cars. Some capital is intangible.

Consider why a surgeon makes far more money in a day than most other laborers: Because he knows how to perform surgery. That’s a skill he acquired by paying for an expensive education and spending a great deal of time training. Developing the ability to perform surgery required a sacrifice, an investment of money, time, and energy that could have been spent on other things. But having made that investment, he now profits from being able to produce an incredibly valuable service. In other words, a surgeon’s training and skill is a form of capital. It’s an example of what economists call human capital. Indeed, to an economist, a surgeon consists of little else but human capital.

Because it’s intangible, human capital is kind of a squishy concept. You can see physical capital like airplanes and factories and tools, and you can trace the transactions involved in its purchase or construction, but human capital is created and forever invisibly encoded in the mysterious convolutions of the human brain. This makes it less obvious than it probably should be. But just because it’s impossible to see doesn’t mean it’s any less real.

Estimation of the stock of human capital is difficult because it doesn’t show up in most accounting records — it has to be deduced from other numbers and from estimates of its effects — but by all estimates the U.S. stock of human capital is gigantic. I found a study from 2006 that estimated the U.S. stock of human capital was an incredible $212 trillion — more than four times the current stock of physical capital. As much as our way of life in the U.S. benefits from our accumulation of capital, most of that capital is held in the minds of our people. We live as well as we do because of what we’ve made ourselves into.

And some of us, to bring this post back around, have made ourselves into people who can tolerate unpleasant jobs.

If you take on work that others consider unpleasant because it simply doesn’t bother you, then you are exploiting your personal natural resources. Just as people with good voices can more easily become singers, people with a limited sense of smell can more easily become garbage collectors, and people who don’t mind having sex with lots of strangers can become happy hookers.

But if you take on work that others consider unpleasant because you have become used to it through experience, then your tolerance for that unpleasant job is the result of an investment in your human capital. Like any other investment, it comes at a cost, partly of time and energy, but also at the cost of enduring the initial unpleasantness needed to build up tolerance. The logic for this is the same whether you’re a nurse getting used to the burden of caring for sick people, a fireman running into burning buildings, or a prostitute having sex with strangers.

I’ve been playing a bit fast and loose with the definition of rational addiction, in that I’ve mostly been talking about the effects of intertemporal complementarity, the mechanism by which present consumption makes future consumption more beneficial. But rational addiction is more than that. The theory of rational addiction assumes that people are aware of the phenomenon of intertemporal complementarity and take it into account when making decisions. That’s what makes it rational.

Engaging in certain types of “addictive” behavior is a rational thing to do. From the first time our parents convince us to try some new type of food, or take us somewhere we don’t want to go and tell us we’ll make friends there, aren’t we always finding ourselves in situations where perseverance pays off?

The rational nature of these kinds of decisions is especially clear if we switch to the supply-side view and think in terms of investment in personal human capital. We go to school so we can start careers, and we take crappy jobs so we can learn skills to get better jobs. We take music lessons so we can play an instrument, we exercise so we’ll have better health, and we take a thousand falls off surfboards so we can learn to ride the big waves.

I should conclude by pointing out that I can’t actually prove any of this. In my defense, I’m not really describing a theory so much as a point of view based in some not-terribly-controversial economic theories. The scientific question would be whether those theories actually apply to prostitution. It’s hard to imagine that they don’t, since they have been shown to apply to just about everything else, but given the illegal and hidden nature of prostitution, it seems nearly impossible to get the kind of data you’d need to prove it.

For example, if it becomes known that prostitution will be less profitable in the future — either because it will cost more or pay less — then these theories both predict that prostitution should begin dropping off immediately, either because rationally addicted prostitutes will face a reduced value of future prostitution, which by intertemporal complementarity means that present prostitution will also be less valuable, or because prostitutes who are investing in their ability to tolerate unpleasantness will be facing a reduced return, discouraging that investment.

Even if given a natural experiment, such as a jurisdiction deciding to increase the penalty for prostitution (thus raising its cost for prostitutes) at some point in the future, it would be difficult to distinguish the effects of rational addiction or human capital investment from other effects, such as prostitutes who switch to other work early because they don’t want a period of unemployment, or who work harder to build up a savings buffer before the costs go up. It’s hard enough to do those kinds of studies when everything is out in the open with honest bookkeeping.

So what’s the point of all this? If you’ve stuck with me through all five thousand or so words, you may have been wondering if I have a point. I think I have a few of them.

The first point is that I like thinking about stuff like this. I warned you up front that this would be a one of my long thinking-out-loud pieces. I’ve meandered from prostitution to addiction to video games, and linked them all together with my understanding of some economic theory. I also managed to tie in some national capital stock accounting and a couple of personal stories about a difficult time in my life. It’s the kind of thing I enjoy reading, and I certainly hope you do too.

(If not…sorry. I’m planning some cat blogging later.)

My second point is that there’s nothing special about how and why most women become prostitutes. You don’t have to assume that prostitutes are brainwashed and turned out by evil pimps in order to explain how they get into the profession or why they stay in it. Ordinary theories of economics seem to offer reasonable explanations. Economists have long been making similar findings with regard to illegal drug dealing — once you find a way to convert the risks of prison and street violence into equivalent dollar costs, drug dealers make risk-vs.-reward decisions just like every other economic actor — and I expect that similar results would be found in detailed studies of the economics of prostitution. As Maggie McNeill often argues, prostitution is not much different from other jobs, except for the sex. And getting arrested.

My third point is that I think a lot of people don’t get the second point. The phenomena of being “turned out,” of becoming numb to the horrors, and of getting caught up in “the life” are not unique to prostitution, and getting used to unpleasant work is not evil in and of itself. Failure to realize this leads to believing in nonsense such as “false consciousness,” brainwashing, and ubiquitous-yet-hard-to-find human trafficking rings.

My fourth point is that I suspect our attitude towards people with chemical addictions influences our attitude towards people with rational addictions. After all, both types of addiction produce similarly unusual behavior as seen from the outside. Depending on our views, we may think of junkies and alcoholics as either morally weak or tragic victims, so it’s not surprising that many people take the same view of video game addicts and sex workers.

Re-reading all this, I should probably clarify that I’m not saying that prostitution is a good thing for women, and I’m not encouraging more women to become prostitutes. The economic theories I’m talking about are positive, not normative. They depend on no moral judgement. If I’m right, they describe what happens, but they are in no sense a prescription for what should happen.

Even the staunchest advocates for sex workers agree that prostitution is not for everyone. Some prostitutes may find it liberating, but for many others, it’s just a way to pay the bills. And for most women, it’s something they’ll never do. I can’t possibly decide what would be best for any woman. As a libertarian, of course, I would leave that decision entirely up to her.