Four Ways to Spend Money   

Back in the 1970’s, I saw Milton Friedman on television explaining the four ways to spend money. I’m pretty sure this was after he had won the Nobel Prize for Economics. Dr. Friedman was a keen observer of both human nature and economics. Although he had some discord with Ludwig von Mises and Murray Rothbard, he was still a champion of free markets and the freedom of choice. He was an excellent spokesman for libertarian ideals, as well. 

Dr. Friedman described the four ways to spend money in a very simple manner, one could: spend their own money on themselves; spend their own money on someone else; spend other people’s money on themselves, or; they could spend other people’s money on someone else. 

Here’s how it goes. 

Spending One’s Own Money On Themselves

People who spend their own money are usually very cautious. This is because they know what it took to make it and its personal value is the measure of what they are willing to give up for something they want. This is referred to as the “subjective value” of a product or service. In other words, the question they ask themselves is:” Is the product or service that I want worth more to me than what’s in my pocket?” When people spend their own money, they look for the greatest value at the least expense. This is the most efficient way to spend money. 

Spending One’s Own Money On Someone Else 

People who spend their own money on someone else are usually just as cautious as when they spend it on themselves. Sometimes, emotional attachment will make them less frugal and they may spend more. Anyone who has purchased a gift for their wife, husband, children or other loved one will understand this. This kind of spending, however, is still efficient, though maybe only to a slightly lesser extent than personal, self-centered spending, because the person spending the money still knows what it took to earn it. 

They still look for the greatest value for the least expense.

Spending Other People’s Money on One’s Self 

This kind of spending can be seen when an employee of a company is given an expense account or a company credit card. The employee is given permission to spend the company’s money on themselves, usually for travel, lodging or meals during business trips while representing the company. Here, the employee is less cautious about what is spent on these things. As an example, the employee may eat at a Five Star restaurant, rather than at a fast food joint or a diner. They may check into a classier hotel rather than a travel lodge. 

They are not as concerned about spending a little more than they have to because it’s not their money. They may still be throttled by a fear of losing their job if they spend an obviously high amount on these expenses, but, generally, they are not as efficient in spending other’s money on themselves as they would be spending their own money on themselves. 

Spending Other People’s Money on Someone Else 

This is the least efficient way to spend money. The person controlling the purse strings could not care less about getting the greatest value at the least expense because it isn’t their money and there is an unending supply of it. There is no concern for frugality because there are no consequences to be suffered by the person spending the money unwisely. 

This is the way those in governments spend money. This is why government employees earn more than their private sector counterparts doing the exact, same jobs. This is also why projects done by the government usually cost five times more, and require five times as much time to complete, than similar projects in the private sector.

 “Bridges to nowhere” are perfect examples of how those in government will spend the People’s money on projects that would be considered fool-hardy by the private sector for lack of profitability. 

It is also why union negotiations with those in local, county, state and federal government for wages and benefits ALWAYS wind up in sweet deals for the unions. Government negotiators could not care a whit about where the People’s money ends up or how it is encumbered in the future and, by some warped vision of the common good, these negotiators are often lauded as great public servants! 

A common expression we often hear is “you get what you pay for” but not where governments are concerned. Here, you get much less than you pay for. When those in government start being held accountable for the way they spend the People’s money, perhaps we may start to see some impact upon the so-called “public” debt.