vote with your money - part 1

I wanted to do a post on economics of spending for a while now, and i’ve finally found the catalyst in this discussion at Atanu’s blog on Mukesh Ambani’s home. So brace yourself for a crash course on chaitanya’s economic philosophy.

Start with a question. Whats the surest and easiest way to get your voice heard … your opinion really counted. Voting in a public election ? well, you may be on the losing side, in which case, your opinion isn’t really implemented. Camp at a busy intersection with a loud speaker and make your voice heard directly to janta ? well, who knows, for most people, your sermons might be going in through one ear and coming out through the next, with the three pound gray matter busy processing more mundane concerns. Whats to rescue ? Is there no universal justice to afford an individual with the right to be heard ? There is. Remember the good old detective line .. “follow the money” ?

Yes, me thinks, your money is the surest and easiest way to get your voice heard. Courtesy, an invisible super computer known as the “Market”. No matter how small or how large the amount you spend, the market faithfully includes this choice in the supply-demand equation, and spreads the signal ever so silently through the market-o-sphere. The signal is never lost. And surely, the message gets to all the right places, and depending on the strength of the signal, will affect future production, pricing and demand.

Our spending signals are a reflection of our values and priorities, and our signals collectively taken, have a major impact on our economy, society and environment. With his billion dollar home Mr.Ambani is sending a signal into the market-o-sphere, that the best way he can think of to spend this money is on such things as hanging hydroponic plants, crystal chandeliers, man-made snow flurries and LCD monitors. Oh well, its his money, right ? But for arguments sake, lets note the “opportunity cost” here. By choosing to spend money on trivia, we are implicitly letting go of the opportunity to spend it on useful social programs, say an education program. What an opportunity lost !

My way of thinking about this is rather simple. At any point of time there’s limited amount of monetary capital in the world. We can either spend it on personal consumption or invest in programs for collective benefit which build up long term social and environmental capital. Its a question of consumption vs infrastructure spending on a societal level. The more we use for personal consumption above and beyond necessities, the lesser we allocate to programs that are good for long term health of society.

Some would argue that any consumption is good, as it generates jobs for people and keeps the economy going. Sure. But again, one has to look at the opportunity cost. The choice is not between employment of LCD makers versus un-employment. The choice is between employment of LCD makers versus (say) employment of teachers and fountain pen makers. Over the long term, sending the proper signals will simply shift employment and production patterns, reflecting our priorities.

What does this all mean to us personally ? My personal spending logic is pretty simple. Before i buy something, the question i ask is not just “can i afford it” ? . But also,

(1) Do i really need it ? If i don’t really need it and still buy it, i am wasting precious capital and sending a wrong signal into the market place that there is someone who values the product.

(2) Is there an alternative option that can provide me similar service, but at the same time is environmentally and socially responsible. Lets say i need to travel from Vizag to Mumbai. Why wouldn’t i reject air travel for train, and at the same time (a) spare the air of some co2 (b) contribute my share towards delaying peak oil (c) avoid sending a part of my money to the Saudi’s and so keep the money circulating within India where its definitely more needed. (oh.. i hear you. And my answer is that i doubt 90% of air travellers are really that “time constrained”).

But what about people who choose to spend on such things as man-made snow flurries , and personal jets ? Its their money, right ? Or should the big brother tax away the money and spend on social programs for collective benefit ? This brings us to broader questions about right to private property, right to spend, taxation etc. All these questions have been debated to death in the last few centuries, but i will try my level best to bring out a slightly unique perspective. Over to the next part.