Utility v. mortality

Intertemporal Consumption

SOURCE: Flickr user Tax Credits

How do you spend and save your money each day, within the context of your whole life? It sounds like a philosophical question, but it’s actually a rather essential economics question. And as with most economics questions, it has a really cool and convoluted name: intertemporal consumption.

Intertemporal consumption explores the way we spend money from our past, present, or future. When you spend your savings, you’re spending money from your past (accumulated income, among other things). When you spend your current income, you’re spending from your present (earned now, spent now). When you save or borrow, you’re shifting your consumption to or from the future (saving to spend it later, or borrowing to spend future income now).

The old-school economic answer to the question is that we humans, as rational actors seeking to maximize our own utility, divide our entire life’s earnings into equal parts, which we spend each year (like an annuity). Because we earn less when we’re younger, that means we would borrow more early on to support that rate. And, as we earn more, we borrow less and less, until our income exceeds our annuity rate and we then begin to save the surplus. Then as income declines post-retirement, we’d spend the balance.

While this all sounds entirely rational, and utility maximizing, it turns out it doesn’t test well against actual human behavior.

Behavioral economists have a different theory, suggesting that we have three independent accounts in our heads, from which we spend with different propensities: current income (which we spend easily), current assets (which we spend less easily), and future income (which we don’t spend easily at all). This tests better.

Why does this matter to arts and cultural managers? I thought you’d never ask.

This matters in lots of ways. The theories have obvious impact on how we consider philanthropy (both our own, and those of our prospective donors). They also have impact on how we encourage earned income among different age segments in our audiences. But what intrigues me most is how intertemporal consumption theory relates to how we decide to spend anything over our lifetimes — money, time, attention, energy — all of it in finite supply, all of it spread over decades, and all of it subject to momentary judgment each moment of our day.

So, what do we spend on action, what on reflection, what on sacred or silent time? And how does this grand calculus fit into our decisions about engagement with culture and creative expression?

Each of us makes choices every day to spend or save the resources we have accrued, or think we’ll accrue, across all the days we have. A rather large role for the arts manager and the arts organization is to encourage arts-weighted intertemporal consumption.

And, if you’re wondering to put each day in a larger context with the universe, see here (honestly, see here).