Sunday, September 21, 2008

The 4 Ways to Spend Money by Milton Friedman


 
In his book Free to Choose, Milton Friedman described four ways to spend money.

1. You spend 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.

2. You spend your own money on someone else - You shop for Christmas or birthday presents. You have the same incentive to economize as in the first case 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

3. You spend 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.

4. You spend someone else's money on someone else - 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 case 3 and case 4, you do have a strong incentive to satisfy your own tastes at the sacrifice of his, if necessary.

All welfare programs fall into either case 3—for example, Social Security which involves cash payments that the recipient is free to spend as he may wish; or case 4—for example, public housing; except that even case 4 programs share one feature of case 3, namely, that the bureaucrats administering the program partake of the lunch; and all case 3 programs have bureaucrats among their recipients.

   
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