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December 21st 2009 print

Peter Smith

Spend, spend, spend

Why can most people count their own money and work out how much they can spend and then lose that ability and become delusional once they are in company?

The whole is no bigger than the sum of parts 

Emergence of something different from the coming together of numbers of elements is not unusual in the natural or man-made world. Presumably life was created that way and evolution continues the process. Numbers of engineering, physical and chemical processes result in something new and different being produced when elements combine or are combined. To give a prosaic yet dramatic example: a cathedral starts its life as rocks and sand and other elemental materials. We can all agree that the cathedral when built is much more than the sum of its parts. At the same time, we should all be able to agree that the weight of the cathedral is exactly the same as the weight of the materials combined in its construction. 

Equally, if one hundred of us were to combine our money (suppose we had $1000 each) we would have $100,000; no alchemy will convert this sum to a bigger sum. Suppose there were 50 million of us and we each had $1000 as before; then we would have $50 billion. We would not have some multiple of $50 billion. The mere fact of us coming together with our wealth would not of itself create more of it. You might say: stop! This is all obvious. But apparently it isn’t. 

I am on the executive committee of a residential strata. There are 101 apartments in the strata and therefore 101 quarterly strata fees coming in from owners. This is a lot of money and you can see how it affects decision-making. The same constraints that might be applied by individual apartment owners to expenditure are a little less rigorously applied. There is no irresponsibility but frugality suffers a little. There is a sense in which money is more available because we are 101 not just one. You can sense the beginning of that view that the whole that is available to spend is bigger than the sum of the parts. 

On a larger stage, this kind of thinking is evident often within those companies that go out of business. Usually, it is true, they go out of business because they are making the wrong products at the wrong time or they are grossly inefficient. But often we see contributory expenditure patterns which are disproportionate to revenue. This can be put down to greed, to irresponsibility and sometime to sheer crookedness, but there is often the sense that those spending the money were simply beguiled by the size of the company into thinking that normal expenditure constraints had become redundant. Large expense accounts; lavishly appointed offices; private planes and so on. 

When we go to the largest stage of all: to nation states, it seems at times that there is no effective limit on expenditure. It may be salutary for a time within Iceland, Greece and Dubai that they have had to be bailed out but this consciousness of their own limitations will pass. Adam Smith contrasted private frugality with the public prodigality, so the current state of affairs is not new.   

Special interest groups and the media within nation states often lose all sense of frugality when they talk about what government should do. More public housing, universal high quality health care, more teachers, affordable preschool and child minding, more and better public transport, paid maternity and paternity leave; and this, and much more, must be done while lessening energy efficiency to save the planet. The list is endless, in keeping with thinking that government coffers are endless. Nothing apparently is beyond the power of government to do and to give; usually only some mean-minded, lacking in empathy, conservatives are in the way. Unbridled demands on the one side are, at least, partly ratified on the other by political over-promising. 

While conservative political parties are not immune to overpromising with taxpayers’ money; left-wing parties seem more wedded to the concept and have a stronger track record. Take the United States. The federal government debt in the US now stands at over US $12 trillion and rising; about $100,000 per household. This is the tip of an iceberg. State and local government debt and unfunded liabilities would take this figure much higher. You would think this would dominate political decision-making and result in sharp and material cut backs, as would happen with a household or business budget. But in contemplation by Obama and his Democrat colleagues are a massive extension of health insurance coverage; a new jobs expenditure bill and the introduction of a cap and trade system to further enfeeble the economy. 

There must be a psychological theory to explain it all. Why can most people count their own money and work out how much they can spend and then lose that ability and become delusional once they are in company? If we knew that we might find a cure. 

Think what this would mean. It would certainly shift the political compass to the right. No-one would believe any more in a government free lunch. Governments would balance their recurring budgets and go into debt only for the purpose of building or buying productive assets; not redundant school halls or ceiling batts. Kevin Rudd really would be a fiscal conservative. Governments would have less need to impose capricious taxation. The private sector would operate in a more certain environment. Energy spent on extracting unfunded largesse from governments could be diverted to other more creative tasks. It all sounds too good to be true, as undoubtedly it is.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics