You set out to buy a TV and discover that for the £100 TV you have your eye on, you can save £10 by driving half an hour across town. You do so because you save 10%. That's obviously a bedroom TV so you also look for a main-room TV, this time for £2000. You discover that this TV is also on sale across town - for £1990. But you decide your time is worth more than that 0.5% saving, so you don't go.
According to my book on Economics you are being irrational. Your time is either worth £10 or it isn't.
I can see the point of view, but I'd wager that most people would act in line with the above. I wouldn't call this irrational: it's rational so long as you understand what people are deciding upon. And that is happiness, a psychological measure that standard Economic theory isn't altogether good at. People are happier when they think they're getting a great deal. They will spend 10 minutes on online price comparisons to save 50p on a DVD, but won't walk 100 extra yards to a shop that's 50p cheaper for orange juice, even if that only takes 2 minutes.
The discipline's de facto get-out-clause is that, however distasteful its proposed rules, if it accurately predicts the real-world, its a good theory. So there's surely a problem for it here. People don't think of money in the strict mathematical sense that Economics would like them to.
Its time for more subtlety in modern economic theory - and a change perhaps in some of its fundamental ground-rules. This is one of the thoughts of Richard Layard, Professor Emeritus at LSE. He's at a St Paul's Institute Event on Tuesday and I'll be there to report back.
