Wednesday, November 09, 2005

Other People's Money

Was surfing Wikiquote and found these great words by Milton Friedman.

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

-Fox News interview 2004

3 comments:

Jason Briggeman said...

David, I like your last few posts, but I have had nothing to say about them.

Anonymous said...

I take it Friedman never heard of concepts like "personal responsiblity" or "financial restraint" or "self-control" or "alturism". Wait, this was on Fox. Can you even say those words? Well I'll keep this in mind when it comes to buying X-mas presents.
Jason

David said...

He's saying all things being equal, people will care less about buying for others than buying for themselves.

All of your points are valid, and they can (and often do) come into play if we remove the assumption.

Personal Responsibility. This is really already part of the equation. When you spend your own money on yourself, you are acting responsibly; you are being efficent.

Financial Restraint. I assume this speaks to the 3rd scenario and it happens then for two reasons: you gain satisfation from saving others money or you save yourself from being punished by saving money. If someone you don't care about (or are really indifferent to) who also lacks the influence do to harm to you hands you money and asks you to go out and get a soda for them, you are unlikely to take the time to find the best deal (assuming you just don't pocket the money). You will buy the soda that's easiest for you to buy.

Self Control. I assume this is for number 3. Again, I will do it if I have a reason to.

Alturism. This seems like number 2. It's true that people give money to others. But they don't do it because they are insane; they do it because they gain happiness from other peoples' happiness. In a way, they are buying their own gift: the gift of feeling good about themselves because they "gave away" money.

Of course, government cares little for these things because for it to work it requires either a personal connection to the other party in question or some punishment mechanism. The average person doesn't have the former and since we can't punish on the margin, our vote is insignificant for most spending (especially a single person's vote). Thus Friedman's point still applies.