Absolute and relative
By: Koen Smets
Tags: Psychology, Behavioral Economics

Absolute and relative

To understand the world, we need to be able and willing to adopt both an absolute and a relative perspective

Did you see that video, a few weeks ago? It was widely shared on social media, and has been viewed nearly 1.5 million times (with other copies many more times) since it was posted. This was not entirely surprising: the surreal sight of an airline passenger repeatedly punching the seat in front of him does indeed have great viral potential.

It concerned, of course, a case of air rage, a conflict over the position of the seat back. The puncher, seated in the last row of the plane (where the seats do not recline), was seemingly most unhappy with the fact that the lady in front of him had reclined her seat. The internet promptly split into those who took her side ( “I paid for a seat with a button, so I can bloody well press it”), and those who took his side ( “I paid for this seat and I am entitled to a modicum of comfort for my knees”). Despite the tribal division, one thing appeared to unite both camps: the greedy airlines are to blame for this kind of conflict.

Is it greed?

That the airlines have a hand in this is beyond doubt. As Men’s Health reported following an earlier ‘reclining seat wars’ incident, “The average seat pitch-which is the legroom between seats-was 35 [89 cm] inches during the 1970s. But today, it’s just 31 inches. Somewhere over the last four decades, we lost four inches.” This was in 2015, and in the meantime, more shrinkage has taken place (according to SeatGuru, the pitch on the flight in question is 30 inches).

Given the size of a plane, designers have a considerable degree of freedom regarding how many seats they put in it. Further apart means more space per passenger, closer together evidently means less space. But that is not the only thing that matters, of course — there is, as so often, a trade-off being made. Closer together also means more seats, hence more paying passengers, and hence more profit for the airline.

But it’s a lot cheaper! (image via twitter)

See: it is greed! Or is it? More seats closer together also means that the fixed cost of flying the plane from A to B (the lease of the aircraft, the fuel, the crew, maintenance cost and so on) can be spread over more passengers, and that the cost per passenger can come down. Jeremy Horpedahl, an economist at the University of Central Arkansas, worked out that a round trip from New York City to Los Angeles in 1969 cost $304.50, the equivalent of 92 hours’ work at the average hourly wage at the time of $3.31. Nowadays, the same flight costs $500–600, corresponding to 21–25 hours’ work at the average hourly wage of $23.87.

Now it would be ridiculous to argue that this reduction in the cost of air travel by 75% in real terms is entirely the result of squeezing passengers more closely together. But every little helps, in an industry that is not renowned for its huge profitability. According to the International Air Transport Association, net profit per passenger across the industry in 2019 was around $5.70, down from $6.22 in 2018.

So, the accusation of greed seems somewhat overblown. Horpedahl observes, by the way, that the “golden age of flight”, with 35 inch of seat separation and all the other trimmings is still available for $2,000 in business class — which, remarkably, is equivalent to approximately the 92 hours of work you needed to make the trip in economy class in 1969 (it’s even a bit less). But unlike our (grand)parents back then, we now have a choice: pay what they paid for a similar, superior experience, or travel in a more modest and less spacious way, saving three-quarters of the cost. The space available has shrunk over half a century in absolute terms, but so has the cost of flying. Does that make us worse off overall in relative terms? That is not so obvious.

Tricky inflation

Inflation is one of the economics concepts that is widely known outside the professional sphere. We ordinary citizens experience it as rising prices: stuff gets more expensive over time. For example, the list price of a Toyota Corolla in 1980 was $4,348. The latest 2020 model costs $19,600. The difference corresponds with an annual price inflation of about 3.8%. But wait (the economists say), we’re not comparing like with like. A 2020 Toyota Corolla is equipped with more gadgets than even a 1980 Rolls-Royce contained — a backup camera that shows you how to park, a USB port, pedestrian detection, lane departure alert, eight airbags — I could go on. More importantly, not just these, but many more features were absent in its 40-year old sibling, from air conditioning to LED lights and remote locking, and of course a much superior engine, transmission, brakes and so on.

If both models stood side by side, with zero miles on the clock, at the same price of $19,600, hardly anyone would opt for the 1980 version. So, the economists say, to calculate the true inflation, we need to take into account the fact that the new car is so much better than the old one. So let’s say that a hypothetical 2020 model, equipped like the 1980 model would be worth $11,400 in today’s money. That brings down the price inflation rate to 2.4% per annum.

In 1980, someone earning the average hourly wage of $4.82 would have needed to work just over 900 hours to buy themselves a brand new Toyota Corolla. If their income had increased in line with the car price inflation (taking into account the improvements to the car) of 2.4%, their hourly wage would now be $12.64. The price inflation of the car and the wage inflation were the same over the last 40 years, so what could be fairer?

Which is cheaper? That depends (images: RLGNZLZ CCBY and Toyota)

But there is a slight problem. Look at the number of hours someone at the average wage will now need to work to buy a new Toyota Corolla — it’s about 1,550 hours, or about 17 weeks longer than in 1980. Yes, the car is massively better than the one available 40 years ago, but it has become a lot less affordable. If there were a car available at the 1980 specification, it would be more affordable — but then again, if my grandma had wheels, she would be a wagon. (What this simplified example suggests also applies more generally: adjustments are made for quality improvements in manufactured goods, and these percolate into the consumer price index.)

So we observe an intriguing phenomenon: stuff simultaneously gets ‘cheaper’ (in the sense that you get relatively more for the same equivalent amount of money), and ‘more expensive’ (in the sense that it has become less affordable in absolute terms). Are we better off, or worse off compared to 40 years ago? That is not so obvious.

Like the duck-rabbit or the old woman/young woman illusion, what we see depends on what we look at. It is true that the amount of space in airline seats has shrunk, but it is not the whole truth. It is true that you get much more car for your money in 2020 than in 1980, but that too is not the whole truth.

With such ambiguous situations, there is often an absolute perspective and a relative one. To fully understand the reality of what is going on, we had better consider them both — and beware of strong claims based on just one perspective.