Freeman

ARTICLE

In Defense of Markets and Misers

People Don't See the Value of Dispersed Benefits

APRIL 01, 1998 by CANDACE ALLEN

Candace Allen is a member of the affliliate economics faculty at the University of Southern Colorado. Dwight Lee, a contributing editor of The Freeman, is Ramsey Professor of Economics and Private Enterprise at the University of Georgia.

Markets and misers are greatly under-appreciated for the same reason: people fail to see the value of the little things they both contribute. Lots of small benefits spread out over the entire population are difficult for people to notice, much less appreciate, even though the sum of these small benefits is large. On the other hand, concentrated benefits are easy to see and appreciate, even though they are not so large.

The apparent threshold below which benefits are difficult to see provides a basis for understanding the bias against market activity compared to political activity. There is a similar bias against misers as opposed to those who spend their fortunes, or better yet, give them away to charity. Misers have even fewer defenders than markets, and, as in the case of markets, they are criticized by those who benefit from what they are criticizing.

We are not recommending that people become misers, and such a recommendation would have no influence even if we made it. The life of a miser is an unattractive choice for most people, who quite rationally want to spend on themselves, or voluntarily share with others, the money they have earned. But those who choose to hoard their money deserve our gratitude rather than our ridicule. By considering some simple economics and recognizing the value of small benefits spread over large numbers of people, one can see that markets and misers are both sources of unintended generosity more beneficial than that dispensed intentionally by politicians or philanthropists. Before mounting a defense of misers, we examine briefly the tendency to undervalue market benefits and overvalue political benefits.

The Bias in Favor of Politics over Markets

In politics, large benefits are commonly sacrificed in favor of small benefits because the former are widely dispersed and the latter are highly concentrated. For example, a tariff duty receives popular support because everyone can see the benefit it concentrates on those who work in the protected industry, while few notice the much larger cost in the form of a small price increase spread over millions of consumers. Indeed, government activities, although they destroy wealth, are often popular because the benefits are concentrated and the costs are widely dispersed.

In contrast, market activities are often criticized although they create wealth. The market faces a tremendous public relations problem because it motivates the creation of widespread benefits in the form of better products and lower prices for the masses by concentrating costs in very visible ways on those who fail to serve the interests of others. Because the benefits of the market are so dispersed, they are largely ignored or taken for granted, while the market discipline that makes the benefits possible is denounced.

Similarly, because people have difficulty noticing and appreciating dispersed, as opposed to condensed, benefits, they also undervalue the contributions of misers and overvalue the contributions of philanthropists.

The Bias Against Misers

Consider the following example of a rich miser, M, and an equally rich philanthropist, P. Both were extremely and equally productive at creating wealth over their entrepreneurial careers. At age 50 they both retire, each with accumulated wealth of $10 billion. The similarity between M and P ends when we consider how they enjoy their wealth during retirement. Mr. M spends almost nothing, getting his greatest pleasure from keeping his money in a secret vault buried beneath his modest house. He has no friends, wife, or offspring with whom to share his enormous wealth, which is just as well, since he would be appalled at the thought of anyone, including himself, spending his money.

Mr. P is a jovial and generous man who spends lavishly on himself and his friends. He hosts extravagant parties in his mansions located in some of the most exotic parts of the world. These parties feature sumptuous feasts and the world’s greatest entertainers, and Mr. P’s private jets and luxurious yachts are constantly on the move transporting his guests from one party to the next. Mr. P’s spending on entertainment provides employment for cooks, pilots, yachtsmen, maids, butlers, house cleaners, interior decorators, and others. But even his entertainment budget cannot come close to exhausting his wealth in his lifetime, so P also gives away hundreds of millions of dollars to worthy nonprofit organizations such as universities, art museums, symphony orchestras, and operatic companies, creating enjoyment and employment for still more people.

Each man dies on his 85th birthday, Mr. M with his money forever locked in his hidden vault, and Mr. P having just spent his last dollar on the feast that finished him off. The question we ask is, which one of the two did more to benefit others? We have both asked this question of students in our economics classes and almost without exception they answer, Mr. P.[1] We suspect that those without any economic training are even more likely to answer, Mr. P. After all, Mr. P’s money obviously benefited other people, both by increasing their consumption and by providing them with employment. Mr. M’s money did nothing but sit in a vault, which may have provided M with some kind of perverted pleasure, but what could it have done for anyone else?

In fact, it is easy to establish that Mr. M did more to benefit others than did Mr. P. One reason people are misled when comparing the benefits created by the two men is that they are unaware of the connection between the quantity of money in circulation and the general price level. But we believe people also ignore the contribution of Mr. M because they cannot perceive benefits spread thinly over large numbers of people, although the aggregation of those benefits is large. For much the same reason there is a bias in favor of politics over markets, there is also a bias in favor of philanthropists over misers.

To proceed with the case for Mr. M, one must recognize that both M and P created more wealth than the $10 billion that each amassed in his personal fortune. The $10 billion is the difference between the revenue each man received from selling his product and the cost of producing it. This difference is commonly called producer’s surplus. But consumers receive more value from products than they pay for them. Customers expand their purchase of a product to the point where the value they place on the last unit is equal to the price, with previous units being worth more to them than the price. The difference between the value consumers place on all the units consumed and the amount they pay (the price multiplied by the number of units purchased) is called consumers’ surplus. So our original assumption that both M and P were equally productive over their careers and that they earned the same amount of money (producer’s surplus) implies that their productive activity contributed the same amount to others in the form of consumers’ surplus. The question then comes down to how much each contributed to others with his $10 billion.

Comparing Their Contributions

Mr. P’s contribution with his $10 billion is easily seen because most of it was concentrated on a relatively few friends, employees, and nonprofit organizations. Mr. M’s contribution is easily missed because it is distributed over hundreds of millions of consumers. Mr. M did exactly as much as Mr. P to expand the supply of goods available in the economy, but by hoarding all of his $10 billion, he reduced the quantity of money available to spend on them. Increasing the supply of goods while reducing the supply of money is a guaranteed way to reduce the general price level below what it would be otherwise. Every consumer could buy a little bit more with his income than would have been possible had Mr. M spent his money.

It is true that the price level would not be noticeably lower than otherwise; almost no one would realize that he is able to buy more. Even if someone did realize it, he would not connect the additional purchasing power to the hoarding of Mr. M. But that’s the point. Mr. M’s hoarding will be providing a total benefit of $10 billion to others, but because it is so widely distributed no one will notice, or appreciate, his contribution.

The benefits misers provide to others would be easy to see if they were concentrated on a few. To consider an extreme example, just imagine how well off you would be if everyone but you began hoarding all the money they earned (except for the amount necessary for a bare subsistence), but continued to produce the same quantity of goods and services as now. You could buy almost everything produced in the entire economy with your income, whether you had the income of Bill Gates or of a welfare recipient. The lower your income, the less you would have available to spend, but the lower prices would be. In this case, it would be obvious that misers provided you with a great bargain. They would have produced for you and demanded nothing of value in return.[2]

Unfortunately for those of us who would like to specialize in consumption while almost everyone else specializes in production, there aren’t many people like Mr. M. Instead of ridiculing the few misers who do exist, we should be singing their praises in the hope of encouraging more people to become misers.

But even if you now understand the benefits Mr. M provides to others, you might still feel that Mr. P provides more. After all, he not only gave away most of his $10 billion to his friends and worthy causes (his personal consumption can be ignored since, as with most people who earn enormous wealth, it is a very small proportion of his total wealth), he also created lots of employment by keeping his money in circulation.[3]

In fact, Mr. P caused no increase in employment with his spending. He simply directed some workers into employment producing the things he spent money on (either directly, or indirectly through his contributions to charities) and out of other employment. Mr. M didn’t increase employment either, but he certainly didn’t reduce it. By reducing the general price level a little, his hoarding allowed millions of others to buy a little bit more with their money, with the increase in their total purchases equal to what Mr. M could have spent himself. The only difference between Mr. M and Mr. P is that M allowed others to decide where employment opportunities should be expanded with their purchasing choices. So while there is no reason to favor either Mr. M or Mr. P for creating employment, Mr. M’s hoarding is really more generous than Mr. P’s spending because the beneficiaries of hoarding can get what they want instead of what someone else wants for them.[4]

Also, philanthropy in the form of gifts to nonprofit charitable organizations, although universally applauded, actually does less good than the unheralded contribution of Mr. M. Although such organizations do provide value, they face a serious handicap because they are nonprofit; without the feedback of profit and loss, they don’t know if they could be producing more value by using their resources in other ways. Furthermore, even if such information were available without market-generated profits, these charities lack the incentive to direct resources to their most productive employment.[5] On the other hand, most of the value Mr. M contributes to others is transferred through private firms responding to the market information that makes it possible to provide consumers the greatest value at the lowest cost.[6]

Another drawback to giving money to nonprofit charitable organizations is that much of it goes into appeals for more contributions rather than into promoting the organizations’ stated objectives. Indeed, in many cases, well over 50 percent of the money collected by nonprofits goes into fund-raising activities, often referred to euphemistically as educational expenditures.[7] Some expenditures providing information to potential donors are justified, just as are advertising expenditures by private firms. But, unlike most nonprofit charitable organizations, private firms provide their products to those who pay the full cost for them. So if private firms don’t reinvest most of their revenue into maintaining and improving their products, advertising won’t do them much good. Not surprisingly, as a percentage of revenues, private firms spend much less on advertising to attract customers than nonprofit charitable organizations spend to attract donors, who typically have little motivation to monitor how their contributions are spent. So less of Mr. M’s contribution is eaten up in appeals and more of it actually gets to the beneficiaries.

Mr. M’s dispersed contributions may go unnoticed and his behavior may be ridiculed, while the highly visible contributions of Mr. P are lauded and his generosity praised. But Mr. M is actually providing more benefits to others.

Unintended Benefits

Our purpose has been to explain how misers provide benefits to others more effectively than do philanthropists and why, despite this fact, misers are ridiculed, while philanthropists are revered. From the outset we noted that markets and misers are underappreciated because their contributions are spread thin. But there’s another reason: the contributions of both markets and misers are unintended. Indeed, the amazing thing about markets is that they channel the pursuits of largely self-interested people into a pattern of social cooperation that benefits everyone even though that is the intention of no one. Similarly, misers do not intend to benefit others, yet their actions do more good than if that had been their intention. So even if the contributions of markets and misers were noticed, most people would deny them the moral virtue that is so easy to assign to those who intend to do good. In contrast, the contributions of both politics and philanthropists appear to be intentional.

A final point: because the benefits of markets and misers are conveyed impersonally, people expend little effort (and therefore use few resources) attempting to secure special favors from those creating those benefits. In contrast, because the benefits of politics and philanthropists are associated with the intentions of identifiable donors, much of the value of those benefits is dissipated as people compete for their favor.

We are not sure that defending misers is the best way to make a case for the market. But we are sure that if people properly understood the market, and how it contributes so much to all of us, misers would not need to be defended.


Notes

  1. Only in Lee’s classes have a few students picked Mr. M, but that was almost surely because they have learned from previous experience to choose the answer that seems less reasonable.
  2. A solid economic defense of misers is given by Walter Block, Defending the Undefendable (San Francisco: Fox & Wilkes, 1991 [1974]), pp. 105–109. Also see Steven E. Landsburg, Fair Play (New York: The Free Press, 1997), pp. 200–03.
  3. The employment created by spending money was the most common reason students in one of Allen’s classes favored Mr. P when asked who contributed more to others.
  4. Of course, when P gives money to charities they have a lot of latitude on how they spend it. But even here, by choosing the type of charities he does, P is exerting more control on how his contribution is spent than is M. Also, we are not arguing here against gift giving. After all, the giver of gifts receives satisfaction also, and this should be taken into consideration. But if we recognize that the miser is making a gift every bit as generous as the philanthropist’s, we should also acknowledge that the miser receives satisfaction from making his gift as well, the satisfaction of hoarding all that money.
  5. Of course, people who work for nonprofit organizations can benefit from any excess of revenues over costs, but this benefit has to take the form of additional expenditures within the organization. So any excess revenues (profits) are quickly converted into inflated costs rather than directed into more productive uses.
  6. For more on the disadvantages of expanding philanthropy at the cost of reducing the activity of private firms, see Don Boudreaux, “Bill Gates, Philanthropist,” “Notes from FEE,” The Freeman, January 1998.
  7. For a detailed discussion of the fund-raising and spending practices of some of the country’s best-known nonprofit charities, see James T. Bennett and Thomas J. DiLorenzo, Unhealthy Charities: Hazardous to Your Health and Wealth (New York: Basic Books, 1994).

Filed Under : Free Markets

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April 1998

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