“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” – Henry Hazlitt
Some of my friends have strong opinions about how other people should spend their money. When I say “other people,” I mean (a) politicians, (b) corporate heads, and (c) wealthy individuals. My friends don’t have strong feelings about how poor people spend their money. They seem to feel that poor people see so little of it they should be allowed to spend it as they please.
This point of view was highlighted for me recently when my friend and colleague BB wrote about his own predilections for spending: He buys chateaux.
Chateaux, as you probably know, are what we call those big, cavernous mansions that lords and ladies built for themselves all over the French countryside. Chateaux were very sensible structures back when you had to protect yourself from Anglo-Saxon hordes and when you disposed of your waste by tossing it out the window.
Today, they are less than efficient. “Chateaux are obsolete objects, as outmoded as a horse and carriage in Paris,” Bertrand Le Nail, a management consultant to chateaux owners, recently told the International Herald Tribune.
I happen to have some firsthand, erfahrung experience in chateau buying. Several years ago, inspired by the francophilic frenzy BB was suffering from, I spent a few months helping him shop for his first one. The purchase price, less than a million dollars, turned out to be – as I had predicted – a mere down payment on what turned out to be a huge investment in expansion, refabrication, and rebuilding that has taken a good part of BB’s spare wealth since then.
Of course, he didn’t learn from this folly. Just last year, he went out and bought another one. I can’t remember the rationalizations he used to persuade me and the rest of his advisory team that this was a solid investment. Let’s just say they were brilliant.
But lest you join the little bandwagon of critics, complainers, and crotchety old curmudgeons who condemned him, let me remind you of a fundamental law of financial physics: Money doesn’t disappear unless you actually burn it. So long as it is used, it really doesn’t make too much difference how it is used.
Take BB’s chateaux, for example. Let’s see what has happened to the millions of dollars invested in them.
By my estimation – and I must admit I have seen no numbers and have almost no idea about what the costs of local labor are in France – more than a dozen contractors received the equivalent of hundreds of thousands of dollars apiece to perform various chateaux-improving tasks as replacing roofs, floors, bathrooms and kitchens … installing new plumbing and electrical systems … building new sewage systems … repaving roads … redecorating rooms … installing furniture … and so on.
The people who directly benefit from this kind of work are, for the most, part middle-class French business owners who – thanks to BB’s purchases – were able to pay hundreds of their workers (common, God-fearing masons and carpenters and electricians and other laborers) a decent wage for doing it.
Of course, despite the thousands invested in plumbing, the toilets will never flush properly. Despite the thousands invested in electricity, the lights will still flicker. Despite the thousands invested in new roof tiles, leaks will still happen. C’est la vie.
The big point … my original point … is this: As silly as BB’s chateaux purchases may seem, the money spent is not wasted. In fact, not one penny is. It has all ended up benefiting the simple, quotidian lives of typical French workers.
French chateaux (along with Tuscan villas) comprise only one product group where wealthy people can quickly and enjoyably dispose of lots of their unneeded money. My own preference for wasting money is currently “fine” (i.e. really expensive) Latin American and European art, Swiss watches, and Ritz hotels. I can’t justify these expenditures any better than BB can explain his chateaux purchases. But I am quite certain that all of the money I spend … every single nickel of it … makes its way back into the pockets of others who have their own way of spending it.
Some of my friends think that excess money is more wisely spent by giving it away to people who need it. They feel this way not only about how BB and I spend our money, but also about how corporations spend their profits. They point out that if we gave all this money away, we could feed and clothe a lot of poor people.
What they don’t understand, of course, is that every dollar NOT spent on products and services – even those dollars that go to charitable causes – is a dollar that will not go to the working person who would have gotten it otherwise. If, for example, I forwent the last painting I bought and spent it instead on “helping” the homeless, a certain number of homeless people and people in the homeless-people business would benefit from my largess. But a certain number of people involved in selling art – including brokers, clerks, accountants, and postal workers – would go without that exact same amount of money.
By giving to charity instead of buying things, you are not making the economy richer. You are simply redirecting your money from the conventional working class to a class of people who either don’t work or who help out people who don’t work.
On the face of it, that may look like a good thing to do. It is exactly this notion that gives moral energy to economic theories such as socialism and communism. The idea is that it is better for society as a whole if excess money is redistributed to those who need it. “Those who need it” usually includes the poor and the working poor, but can also include farmers who have been hurt by modern farming technology, factory owners and workers who face competition from abroad, scientists working on unpopular projects, and artists creating art that nobody wants to buy.
Every dollar spent on such causes – even tax dollars (for what are tax dollars except forced redistribution of somebody’s idea of “excess” money?) – is a dollar that will not go into the pocket of some honest workingman. Dollar-wise and human-benefit-wise, the net sum total for the economy is exactly the same. But it does beg the question: Is an economy better off when people are not allowed to spend their excess money the way they want to?
From a whole-economy perspective, money can’t be wasted unless it is actually destroyed. Even money that is saved or invested isn’t wasted, because it goes directly into the banking and brokerage industries … which distribute it to all sorts of other industries … which distribute it, again, to workers all over the world.
Since the way we spend our money makes no difference to society as a whole, I think the way I spend my money is up to me. And I think it’s up to you to spend your money the way you want to. So let’s agree to allow each other the liberty to spend our money as we please – and then let’s see if we can get our government to come around to this way of thinking.[Ed. Note: After reading Michael’s thought-provoking essay today, you’ve probably got your own ideas about this very controversial subject. So let’s talk. Tell us what you think on Speak Out.] [Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]