There is an inherent bias in the economic way we view the world. On the one hand, you have the spenders who get all the nasty names: extravagant, spendthrift, profligate, excessive, reckless, degenerate, debauched, immoderate (not so sure about that last one). Then you get the savers, who get to be called frugal, wise, prudent, sensible, economical.
We seem to forget (in general) that the whole thing is more of a scale. Perhaps something like this:
Historically, we’ve tended to punish the spenders and reward the savers. Consider Bretton Woods, where the modern financial system was conceived. John Maynard Keynes was all about saying “You can’t just punish the debtor nations for importing more than they export – you have to make sure that the creditor nations can’t over-export endlessly!” But America was the world’s creditor nation at the time – and it was having none of that (I wrote about it first here).
I have two quotes from Adam Smith that I’m going to throw in here (because they’re entertaining). The first:
“Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.”
The rich select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labors of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvement. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society…
Which is quite longwinded. So let me paraphrase:
Let the rich hedonistically spend their money in the pursuit of vanity! When they buy hundreds of cars, they provide employment for thousands of people. Through their own selfishness, the money flows from the haves to the have nots. Let the money flow.
I’m not sure that always works – but certainly, advocating the accumulation of wealth, rather than the accumulation and enjoyment of it, is not particularly well-balanced.
Bastiat and his broken window fallacy
To digress slightly, there is an economic parable that often gets told, written by Frederic Bastiat in 1850*:
*thanks Wikipedia for the translation.
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation – “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
The basic economic idea is this: if you ignore opportunity cost, then you’re not seeing the whole picture. Breaking windows is economically-neutral because the money spent on repairs would be spent elsewhere.
But it seems to me that there is an even greater fallacy in Mr Bastiat’s parable: that the money would otherwise be spent. Which is certainly not always the case – especially where wealth inequality is more concentrated.
Why I’m talking about this
I like to go out to awesome restaurants. And I also like to buy nice things. And going on holidays that combine both of the former with sightseeing.
But there is some inner guilt – perhaps it’s Catholic? – which says that one ought not to be doing such things. Maybe because there are poor starving people in the world and you shouldn’t be having so much fun. Or something like that.
The guilt – it’s unnecessary.
- Providence has wrought what it has wrought. Gratitude can sometimes be simply enjoying what gifts were given.
- The act of consumption does not immediately imply moral degeneracy. Spending does not mean spending unwisely. Provided that you’ve planned things appropriately (and not excessively), then spending some of your excess is generating employment and livelihood for countless people. It’s the ultimate win-win.
- Part of the reason for working is to get what you want. And doing so doesn’t mean that you’re a bad person. Frankly, even the saints got to enjoy nice things from time to time. We need stop with all the puritanism – it’s as unattractive as blatant hedonism.
Modern economics is obsessed with the concept of scarcity and the most efficient allocation of scarce resources.
But it needs a makeover, because there is also the question of surplus. Practically speaking, much of what we have is in excess of what we need – and given that, surely part of our thinking should involve the reallocation of plenty?
It’d be a nicer way to see the world.
And on a different point, feel free to do a little shopping. ‘Tis the season.
Let the money flow.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.