It’s the Thought That Counts

October 2, 2009

This is a CLASSIC from Milton and Rose Friedmans’ Free to Choose that should be remembered when thinking about policy at all levels, from government programs to holiday gift giving.

Today all of us are paying out of one pocket to put money–or something money could buy–in the other.

A simple classification of spending shows why that process leads to undesirable results.  When you spend, you may spend your own money or someone else’s; and you may spend for the benefit of yourself or someone else. Combining these two pairs of alternatives gives four possibilities summarized in the following simple table:

[Had to modify the look of the table for the blog]

On Whom Spent:

Whose Money ¦You ¦Someone Else

Yours                               I                          II

Someone Else’s           III                       IV

Category I in the table refers to your spending your own money on yourself.  You shop in a supermarket, for example.  You clearly have a strong incentive both to economize and to get as much value as you can for each dollar you do spend.

Category II refers to your spending your own money on someone else.  You shop for Christmas or birthday presents.  You have the same incentive to economize as in Category I but not the same incentive to get full value for your money, at least as judged by the tastes of the recipient.  You will, of course, want to get something the recipient will like–provided that it also makes the right impression and does not take too much time and effort. (If indeed, your main objective were to enable the recipient to get as much value as possible per dollar, you would give him cash, converting your Category II spending to Category I spending by him.)

Category III refers to your spending someone else’s money on yourself–lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth.

Category IV refers to your spending someone else’s money on still another person.  You are paying for someone else’s lunch out of an expense account.  You have little incentive either to economize or to try to get your guest the lunch that he will value most highly.  However, if you are having lunch with him, so that the lunch is a mixture of Category III and Category IV, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either Category III–for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or Category IV–for example, public housing; except that Category IV programs share one feature of Category III, namely, that the bureaucrats administering the program partake of the lunch; and all Category III programs have bureaucrats among their recipients.

In our opinion these characteristics of welfare spending are the main source of their defects.

This analysis of the incentives underpinning the four different ways we can spend money touches so much, but we rarely discuss it.  This is a root cause to many problems.  We act as if these different incentives across the four categories of spending do not exist or that we can somehow fix it because its driven by evil things like greed, not realizing that it’s not evil.  It just the way things are.  I simply can’t make as a good of a decision as you, consistently, about what you value.

Consider the profit-motive, which is bandied by the Right as why capitalism works and the Left as the source of all things evil in capitalism.  The word profit has become a loaded word, which degenerates discussion about the profit-motive into “talking past eachother.”  Each side really has in a mind a slightly different definition when discussing it, which is rarely recognized or reconciled by both sides.

Perhaps we should refere to the profit motive as the Category I-motive or ownership-motive, to remove the stigma and emotion attached to profitThe profit motive is really the ownership motive. 

When we have to directly live with the consequences of our decisions (Category I spending), we own that decision.  That’s what causes us to take such care to ensure we economize and get value for our money.  That’s also why we judge Category I activity the true outcome of the decision.

Contrast that to the Category IV spending.  We don’t have to directly live with the consequences of that spending, so we don’t own that decision.  That’s why Category IV spending is largely judged on the intentions of that spending, not the outcome (“It’s the thought that counts!).  Think about how much spending in political programs (all) is justified on what it is intended to accomplish, rather than what it really accomplishes.  How many times have you heard–or said–“we just can’t let (fill in the blank with your favorite cause here) happen,” as justification for a government program, intervention or mandate?

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