Friday, October 26, 2007

Is Spending Ever a Waste?

Since I can't be bothered learning economics properly, perhaps a knowledgeable reader can help me out. I tend not to spend much, because I tend not to want much and spending money on things I don't especially want seems wasteful. Further, as a youngster I inherited a vague sense of outrage at the excesses of the wealthy. But I wonder whether this is justified.

Some disjointed thoughts:

1. Where's the waste? Spending money merely shifts it, so it is still there for the recipient to spend on more worthy things. It's not as though you're burning it.

2. Even if one's spent money were destroyed, this would not matter since money is not wealth. If you print or burn money, this does not change the wealth of society, right? Perhaps money is better understood as a claim to a portion of society's total wealth. (Something like: if I own 1% of the circulating cash, I can purchase 1% of the wealth.) In this zero-sum game, counterfeiters make me poorer, and people who bury or burn their bills make me richer.

3. Trade need not be zero-sum, mind. Both parties may obtain greater value from what they receive than what they gave. Or, I suppose, the reverse. So: better take care that our trades are for the better, not the worse!

4. That's easy enough when bartering goods. But what is the value of money? First attempt: Time is money. While working crappy student jobs for $10 an hr, I could ask whether each $10 of spending was worth an hour of work. It rarely was. But maybe that just indicates that I should have quit sooner. Then we are back to the question of how to value my savings.

5. Second attempt: what is the value of money? Whatever else I could buy with it, I guess.

6. Then it seems to follow that at least spending cannot always be a waste. Even if I don't want to buy anything all that much, I should get whatever I want most. (It may be in the future though, in which case I should presently save.)

7. Purchasing creates incentives. If I buy frilly lace, this is a vote for a world where more labour is put into preparing frilly lace. If I don't want this, I should put my dollars in a different ballot box. (This is also why you should never give money to beggars.)

I guess that's the notion of wastefulness I'm after. Spending is not simply a transfer of money from one person to another (pace #1), it also exerts influence over labour. There's no point encouraging people to spend their time and effort doing things nobody cares about. So it would be a waste to pay them to do this. The transfer of money is neutral, but the time and effort they expended is a deadweight loss.

Does that all sound roughly right? (I'm beginning to wish I'd done some intro econ in undergrad...)

9 comments:

  1. 1) I guess it depends on what you mean by waste but I presume one might ask 'what is the carbon footprint of the transaction' as well as 'are you acting rationally (as opposed to overpaying)' and "are you acting as a 'good economic citizen' by actiong appropriatly in response to price signals" (which i guess is related to your (7)

    2) I suppose they do. A bank can make you poorer by lending money and richer by building it's reserves.

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  2. I've never studied economics formally either (and also wish I had), but here are two thoughts:

    GNZ is correct to state that externalities can be a waste resulting from your expenditure of money.

    On (6), this is the other thing that sprang to my mind: Spending money flamboyantly in the short term is called "wasteful" because in the long term there are no doubt better ways to spend it: On a house, kept as insurance should you become unemployed, and so on.

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  3. (7), I think, is more difficult to clarify by the voting metaphor than it looks. When we vote, the candidates are laid out for us on the ballot in a way that's (relatively, in any case) easy to identify. But when I spend my money, this is not so, and we run immediately into the question of, "Under what descriptions am I 'voting' for things?" For instance, when I give money to a charity, I may be 'voting' for that cause, or that particular charity, or for tax breaks, or any number of other things. And this is interesting, I think, because voting is actually a pretty good metaphor for this issue of incentives; talk of incentives immediately raises the question of what I am giving incentives for, given that my spending can be interpreted any number of ways.

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  4. 4) and 5) are the answers an economist will give you. The main idea is opportunity cost: if there is another set of goods (including leisure) you can consume which will fulfill your preferences better, then part of your spending is wasted.

    Think economists will be more skeptical about 7). If frilly lace is what the people want, then having the market allocate more resources into producing it will make the people more fulfilled. You can claim that frilly lace is socially wasteful, etc, but economics tend not to judge the moral status of preferences. If people want it, then it isn't a waste.

    Other forms of waste according to economists will be not minimising costs when producing goods, which causes less to be produced in aggregate. Then there is the misallocation of productive resources, as said in your second to last paragraph.

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  5. 2. Yeah, when the GOV prints more dollar bills it makes you poorer, even.

    5. Money is worth the most valuable thing you could buy with it. Everything (almost) is worth its opportunity cost and value.

    7. In general, you do vote with your dollars. But it is not at all clear what giving to beggars is voting for. In fact, I think that this is an over-generalized application of the purchasing creates incentives truism. For instance, giving money to families with staring children has been definitely shown to decrease birth rates and rates of starving children, not increase it. Whether giving money to beggars puts economic pressure on their being more beggars depends on whether you think that its increase of aggregate demand (which is uncontroversial) is greater than the its decrease in aggregate supply (which is also uncontroversial).

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  6. Presumably, to spending money on something is to express that it is valuable to you. So I don't see that you're ruling much out when you say that "there's no point encouraging people to spend their time and effort doing things nobody cares about."

    If nobody cares about frilly lace, then nobody will spend money on it. When people do spend money on it, that shows that frilly lace has value, and rightly encourages its production.

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  7. Not necessarily. People are complicated creatures. For example, sometimes we buy things just because we're expected to, and not because we actually want the product. The point of my #7, then, was that it's at least wasteful for me to buy things I don't want. (Note the first-personal focus. I'm trying to work out what I should do, given that I don't actually value frilly lace or whatever. It changes the case to abstract away to generic third-personal theorizing.)

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  8. That's all very insightful for someone with no econ background. I generally agree with everything there, from an econ perspective.

    OTOH, from a utility maximization perspective, who has your money isn't a neutral question. Wealthy people will usually derive less value from a dollar the next time it is spent than poor people will. The dollar will still not be destroyed, but that one transaction will have more positive impact if spent by a poor person.

    arthur: frilly lace may have negative externalities in the form of raising your status at the expense of other people. If you count those externalities in its cost it is probably wasteful. OTOH, it might have positive externalities in improving other people's aesthetic experience, but I find this more likely for, e.g. gardens or nice architecture than for frilly lace.

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  9. I think you're basically getting to the economically correct answers in the end, Richard.

    These 3 scenarios are roughly equivalent (assuming equal quantity and quality for the lace):

    A. you buy some frilly lace that you don't want and won't use at all, take it home, and bury it away in your closet forever.

    B. you go into a lace store and burn some of their frilly lace; then you pay the store owners the price of the lace for the damage.

    C. you own some frilly lace that you use regularly; your friend accidentally burns it and you have to go out and buy some new lace.

    The third scenario has the same structure as the broken windows parable.

    In all 3 cases, you are out the price of the lace with no other net change, which is a waste for you as an individual. Now you'll either have less money to spend on other stuff, or you'll have to work more in order to get that much money back (or some combination of the two). Most likely it will be the former, especially given how you value money and your labor, at the margin, in #4.

    Society as a whole (including you and everyone else) has lost some perfectly good frilly lace (either to fire or to your closet). Either there will be less frilly lace out there to be enjoyed (by the people who enjoy that stuff), or additional frilly lace will need to be created (requiring raw materials and labor, and possibly creating pollution). Most likely it will be the latter, since we have (I assume) a relatively well functioning and competitive lace market.

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