It’s the Thought That Counts

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.

A simple classification of spending shows why that process [spending other people’s money] 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:

[Modified table for the blog]

Category:  Whose Money, On Whom Spent

I:  Yours, You

II:  Yours, Someone Else

III: Someone else’s, You

IV: Someone else’s, Someone else

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.

It’s always good to think about this as holiday season comes up.  We do a lot of Category II spending this time of year.  While we have the best intentions of buying gifts that we think someone else might like, we are faced with time, budget and creativity constraints, so we end up buying gifts to meet our preferences — which is usually to say that we bought a gift.  And that’s exactly why we attach a gift receipt to it.

Don’t you love it when you receive a gift without a gift receipt?  What really goes through your mind?  This person is rather confident in their gift giving abilities.  Looks like I’ll have to put this in the spring garage sale.

Of course, giving gift cards and money converts Category II spending into Category I.  Seems like a nice trick, but why does it always feel like a cop out?  I’m not sure it’s anymore of a cop out than picking the first thing off the shelf.  Perhaps it really is the thought that really does count.

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9 thoughts on “It’s the Thought That Counts

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  5. This a continuation from our discussion on your entry The 0.000179%

    Well…if I can’t convince a well-informed libertarian that it’s much better…then I’m hardly going to bother trying to convince city officials. It’s all about convincing…see my response to a libertarian’s critique of pragmatarianism.

    Regarding consequences…if a tree falls in a forest and no one is around to hear it, does it make a sound? If I misallocate my taxes and there are no consequences, does it matter? If I thought it didn’t matter…then why would I bother directly allocating my taxes? If I’m an environmentalist…then I’m only going to bother directly allocating my taxes to the EPA if I believe that there are positive consequences for doing so.

    It’s not Cat IV spending…it’s Cat I & II spending because, as an environmentalist, I would believe that everybody would benefit from environmental protection. If I was a hawk, then I would believe that everybody would benefit from national defense. If I was a libertarian, then I would believe that everybody would benefit from law enforcement. If I was a liberal, then I would believe that everybody would benefit from public education, infrastructure, public healthcare, public welfare, etc.

    As a pragmatarian I believe that we would all benefit as a society when everybody is given the freedom to maximize the benefit that they derive from their tax allocation decisions.

  6. “Well…if I can’t convince a well-informed libertarian that it’s much better…then I’m hardly going to bother trying to convince city officials.”
    There are two ways of convincing me. One way is to show it to me working in practice. The second is to adequately address my concerns.

    “If I thought it didn’t matter…then why would I bother directly allocating my taxes?”
    My family members, who raised me to be personally responsible and self-reliant, will choose to support programs that reduce personal responsibility and self-reliance just as they support politicians who support such programs. Why? Because the intentions sound good to them. Even when presented with evidence that the programs they support achieve the opposite of their intentions, they still support such programs because they feel like “at least they tried” or “they just need to get the right person to fix them”.

    “It’s not Cat IV spending…it’s Cat I & II spending because, as an environmentalist, I would believe that everybody would benefit from environmental protection.”
    And you may be wrong. How would you know? Again, you’d be more focused on the intentions and the conspicuous and selfish benefits of being able to say “I supported the environment”, rather than the actual results produced by the things you supported.

    • Again, it’s already working in the non-profit sector. That’s enough evidence in my mind. But it’s not enough evidence in your mind. How can we both see the same exact thing but disagree over the evidence?

      You have enough evidence in your mind to support libertarianism. But where do you see this working in practice? Personally, I’ve seen enough libertarian evidence to know, in my mind, that there’s not enough evidence to truly know what the scope of government should be. Again, we both have seriously considered libertarianism but disagree over the evidence. Why is that?

      It’s fine to disagree over the evidence…but the question is…how tolerant are we of other people’s interpretations of the evidence? If other people can misinterpret evidence…isn’t it entirely possible that we can misinterpret evidence as well? Isn’t that the point of tolerance? Obviously there’s no point in being tolerant if we never make mistakes.

      Pragmatarianism would allow you to allocate your taxes according to your evidence…and it would allow me to allocate my taxes according to my evidence. If somebody does come to have “irrefutable” evidence then people’s tax allocation decisions would reflect the “irrefutable” nature of their evidence.

      • It’s not enough evidence for me because non-profits are funded with voluntary contributions, not forced.

        “You have enough evidence in your mind to support libertarianism.”
        I don’t support libertarianism. I believe in liberty. It seems right not to infringe on the freedoms of others.

        That’s one reason I don’t care for your idea, because it forces people to make a forced contribution to government.

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