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.