Milton Friedman on Spending Money – four ways to spend

Four Ways to Spend Money

Here is a Milton Friedman valuable insight. Four ways to spend money:

1. Spend your own money for yourself
2. Spend your money for sombody else
3. Spend somebody else’s money for yourself
4. Spend somebody else’s money for somebody else

Of all these, what our government is very good at is the fourth way.

Anyway, let’s begin with the first item. When you spend your own money for yourself, the tendency would be, which is true all the time, you want to have the best services and goods in exchange for every cent you have. Meanwhile, what is ‘own money’? In practical sense, an equity, an asset, a penny that does not belong to anybody but you is what we call “own money”. It is sometimes a proceed for yourself derived or earned while doing some risk, like going out for work everyday. Because of that, having the knowledge that you spend substantial effort to acquire it, it is somehow unavoidable that your mind requires the maximum satisfactory return for the least possible amount of money you can shell out. You want to eat the most delicious food your available money can buy, the best clothes for yourself at a discounted rate, acquire the highest rebates, maximizing the rewards you earned, etc… (highest quality for least cost)

The second way is quite the same with the first. However, we spend our own money for another party, like buying a gift for someone. Quite the same with the first one but there is a difference we must clearly understand when it comes to the satisfaction we felt from doing it. In here, you clearly derived your self satisfaction not from the direct consumption of the goods you bought but from the belief that the gift was well-received and that the person who received it is happy. In strict sense, it is a satisfaction derived from a perceived satisfaction of another person. When you buy someone a gift, however, you may not long for the goods as you desired it when you buy it for yourself but still you have to spend the least possible money to acquire it. The intensity of your desire to have the merchandise then be given to someone is not as great as it when you buy it for yourself. You buy the goods having in mind that the quality is enough not to be disliked by the receiver at the same time not costing you so much. (not highest quality for a least cost)

The third one will be spending other’s money for yourself. In here, a visible difference from the first two is palpable. When someone gave you money to be spent for yourself, the tendency would be: you buy everything you want no matter what the cost is. However, provided that the quality of the merchandise is still there and you know you will be satisfied. After all, you still consume it for yourself. (still highest quality but for whatever cost)

The fourth is very different. When somebody gave you money to spend for somebody else, lot of different things happen. First, no matter how much you try to, you will not be concerned how much will be spent and also not concerned with what the quality of the merchadise or service would be. Economizing is the least of your concern and, as derived from number 2, you will not be so concerned on whatever you will get in return because after all it will be given to sombody else. Second, because you have nothing at stake both on cost and satisfaction, the only thing you have to think about is to facilitate spending. (i-don’t-care-quality for whatever cost)

Again, of all these, what our government is very good at is the fourth one. SOCIAL WELFARES. All these welfares has cost of course. And we come to ask at this point, where will they get the funding? We dont have to think hard where. A very small but hugely significant portion of it is reflected in anyone’s payslips. Later on we will learn why the fourth item is dubbed i-don’t care quality….

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About GoldenErro

i love liberty
This entry was posted in Monetary History, Monetary Insights and tagged , , , , . Bookmark the permalink.

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