On the Economic Concept of Time

“Time is money” as Benjamin Franklin once said.

This is a very simple concept that signifies both that money should yield an interest if it is borrowed in financial economics, and that when one person is wasting time nonproductively, one is in actual fact wasting money in managerial science. Both comparisons make sense; one should expect to pay an interest as we borrow money and to have an opportunity cost of our hourly-wage for every hour spent in leisure. In micro-economics, a budget is the constraint in which consumers make choices between products. Time works pretty much in the same way; there are 24 hours in a day which can be spent on a set of activities – some are physically constrained like food and sleep, some are productive like work or study, and some are leisure-linked.

But now this concept offers very little insight as to how much the time is worth in economic terms; at worse it is worth an interest rate compounded at a certain rate that reflects the borrowing risk, at best the wage one may earn in spending one’s time more effectively. Well, leveraging the adage, the two estimates of the value of time are not very close to each other, which could indicate the point is missed.

We could look at it with the value of advertising then. As the Web 2.0 giants have well understood, the more prospect consumers spend time on their website, the more the company can expect from advertising revenues. Facebook is an amazing example of this; with a potential IPO target price largely higher than the actual money the company is making. This is largely thanks to the way the company was able to capture surfer’s time – an average of 3 work-days per month and per user.

So, what is the advertising value of 1hour of our time on Facebook? According to the company’s website, 700Bn$ minutes are spent every months by users. The company target value at IPO is estimated between 35bn$ to 60Bn$ through forecasted advertising cash-flows and applying some a share price/earnings ratio. Squaring the math, the hour value of Facebook usage is between 0.00007$ and 0.00012$. And well, I’d like to think an hour of my time is worth a bit more than that…

Net, time may not be that easily quantified in money terms in the economic sense, let’s see if there is a different concept for it.

Common wisdom considers time on a qualitative scale in addition to the quantitative one. It is probably true, and could be easily captured in economic concept as utilities. This done, we can consider time as a quantitative unit that can be used in classical optimization theories. And time is a universal trade-off; unlike money, every human is born equal (or rather equal if one compare life expectancies around the globe). We all share pretty much the same economic constraint of time to maximize our utility.

Time optimization theories already exist, with the likes of the “7-habits of highly effective people”. Time needs to be harnessed to generate the highest utility through planning. The more one person likes structure and planning, the more the concept will work for her/him. Now, most people don’t use these theories, but the nature of them could actually be applied to anyone. If one’s utility is higher by not planning anything and just enjoying time on the moment, one would just not plan much and maximize one’s utility.

Saving time (as in speed) has a very different meaning to saving money (as in a bank account). This is about urgency and speed of doing things rather than about an accumulation. It has more to do with depreciation.

Considering time as a depreciating asset offers a great new light to its economic concept; when something has lost value through consumption, this value is lost for good. It would then suggest a linear negative curve of time available plotted against total time. This can work on any time-frame in human scale (if we were looking at it at the macro level, time should probably be extensible as it was seen with the 1’000 years edification of the Milan Cathedral). Like on one’s life or on one particular undertaking or project.

In the context of depreciation, time has a negative impact on effectiveness. The more time passes, the less effective one can be at generating utility as one won’t be able to accomplish the activities that need the most time – in order of lengths. No wonder then that time is something that people fight for; one’s own time and others’ time.

A light-hearted “I don’t have time” response is significantly more meaning-heavy that what it sounds: it is a politically correct or more socially acceptable way to say “I don’t want to do this considering my set of alternatives” – a constrained optimization process. Like with the typical “I don’t have time” quote, people tend to underplay the importance of time despite the difference it makes on their lives. How people spend their time is much more insightful than what they buy or what they say.

A lot of marketing research money has been put on what consumers buy, trying to understand why. Yet, very little emphasis was given to how consumers spend their time, with the activity of purchasing products or services only being part of it. Utilities are not necessarily maximized by spending money; the most anti-capitalist activist may actually get a higher utility by conscious choice not to spend money, in the form of social acceptance or pride in being different.  Time spent at work (and not spending money) even if it does not yield to an increase in salary in the short term can provide utility through professional realizations, improve one’s own perception of being a good employee or even one’s acceptance in a group spending their time in the same way.

The interesting paradox is that money tends to lie in the pockets of those not having time to spend it. Getting a deeper understanding of how people spend their time is not just interesting per se, but this is where the real insights on consumer behavior are.

In an industrialized economy moving towards more leisure and virtual services, it becomes more important than ever to not think in terms of money, but in terms of time – as contrary to the adage, both are not equal…

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