How Money Is Spent

monopoly moneyI have written about this quite a bit, but I figured given the current debate about spending and the debt, it was a good time to revisit a fundamental economic truth that most people will never consider or understand. 

In the words of P.J. O’Rourke, “One of the greatest ironies of economics is that giving people money doesn’t make them richer.”  What he means by that is that wealth without value to its possessor is not wealth at all, but simply money.  If you don’t have a production stake in how that wealth was created, you will not use it to create wealth and benefit society.

Milton Friedman explained this concept brilliantly as The Four Ways Money is Spent.  Said Friedman, we always spends money in one of four ways.   

  • We spend our own money on ourselves in which case we seek value (as the producer) and quality (as the consumer). 
  • We spend our own money on others in which case we seek value, but care less about quality. 
  • We spend other peoples’ money on ourselves in which case we seek quality, but have no vested interest in value. 
  • Finally, we can spend other peoples’ money on other people.  In this case, we have no interest in quality or value. 

Government always and necessarily spends money in the fourth way.

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