Pouring Eggnog on Landsburg’s Christmas Carol
[UPDATE below.]
In my interactions with Scott Sumner, I picture myself as Luke Skywalker fending off Darth Vader. In contrast, when it comes to Steve Landsburg, I picture myself as Maverick to his Iceman: we’re on the same side, but I want to upstage him. (And yes I’m always the star in my daydreams. If you feel left out, get your own blog.)
Anyway, Landsburg recently reprinted his classic Christmas tribute to Ebenezer Scrooge, that went like this:
Here’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.
Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?
…
In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.
Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner….
If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one.
Now this is delicious in all the ways in which right-wing economists delight. But something about it has been bothering me, and it has to do with Landsburg’s static treatment of cash balances. (I can’t find the link now, but I think this was what bothered me a few months ago when Landsburg said he was using standard Milton Friedman analysis to talk about externalities with hoarding and a potential problem for Keynesians.)
For one thing, I don’t think it’s correct to throw intentions out of the analysis. Yes, the road to hell is paved with good intentions, but it’s also true that for most people the very definition of a crime involves intent. For example, to know if I murdered somebody, we have to get inside my mind and guess at my intentions. It’s not enough to establish that I ended the person’s life.
But put that aside, and focus just on the economics. Even here, I think Landsburg is leaving out a huge portion of the analysis. (You can follow the link to make sure I didn’t cut it unfairly.) I have to be brief, since it’s late on Christmas Eve and my son will probably be up and at them at the crack of dawn, so let me try it this way:
(A) Let’s say Ed Smith works 8 hours in exchange for a non-refundable, non-transferable front row seat to Carnegie Hall for tonight’s performance. Was E.S. an altruist? Of course not.
(B) Let’s say E.S. works 8 hours in exchange for three tickets to front row seats at Carnegie Hall, for a concert that occurs in 10 years. E.S. holds the tickets for the full decade and goes to the show. At any point in that time, do we call him an altruist? I don’t think so. (Assume he’s taking his buddies to the show, and we’re not talking about the “altruism” of taking his friends. If that’s tripping you up, then change it so the guy goes by himself to the show three nights in a row, starting 10 years from now.)
(C) Let’s say E.S. works 8 hours in exchange for two tickets to front row seats for a concert that occurs in 10 years, where the tickets are not tied to his specific name and he can sell them on the secondary market. Whether E.S. goes to the concert, or sells the tickets beforehand (and uses the proceeds to buy himself other consumption goods, let’s say), has he been an altruist? I don’t think so.
(D) Let’s say E.S. works 8 hours in exchange for a transferable ticket that can be used for any concert. At the moment E.S. is still holding on to the ticket. Has he been an altruist? At this point I feel boxed in. It would seem weird to me to say he is being altruistic until he sells or exercises, at which point he would become selfish.
(E) Let’s say E.S. works 8 hours in exchange for $160 in cash, which happens to be the price of a refundable ticket good for entry into any concert, now or in the future. If E.S. buys the ticket, has he been an altruist? What if he sits on the cash instead?
Does Landsburg really want to say that not only is E.S. being an altruist in (E), but that he is being a far better altruist than someone who donated the $160 to feed kids in Africa? If so, did Landsburg really want to be a quantum physicist when he grew up, and this is his compromise with the world?
UPDATE: Something else that is possibly relevant: Landsburg’s entire analysis crucially rests on the assumption that there is fiat money. But the fictitious Ebenezer Scrooge actually was embedded in a world where the pound was tied to gold (right?), so even on his own terms, Landsburg’s analysis doesn’t work. Take the “best case” scenario for Landsburg, where Scrooge gets a bunch of money and swims in it, then passes it on to his heirs who swim in it, etc. If that money happens to be $100 bills that aren’t backed by anything, OK we get where Landsburg is coming from. (I still think it’s a lot more complicated, because the misers are holding that cash presumably because they derive utility from the option of buying stuff with it.) Yet if they are swimming in gold coins, then how is that different from Scrooge buying gold watches and admiring himself in the mirror wearing them? Clearly buying gold jewelry, and passing it down to his heirs, wouldn’t qualify as altruism on Scrooge’s part.
Bob: There are many many different scenarios one might work through, as you’ve indicated. But let’s take one of yours:
(B) Let’s say E.S. works 8 hours in exchange for three tickets to front row seats at Carnegie Hall, for a concert that occurs in 10 years. E.S. holds the tickets for the full decade and goes to the show. At any point in that time, do we call him an altruist? I don’t think so. (Assume he’s taking his buddies to the show, and we’re not talking about the “altruism” of taking his friends. If that’s tripping you up, then change it so the guy goes by himself to the show three nights in a row, starting 10 years from now.)
E.S. works 8 hours in exchange for three tickets to front row seats at Carnegie Hall. What exactly did he work at? Presumably he produced some physical output. Perhaps in three years some of that physical output will be used to provide an extra three seats at the show for E.S. But where is it in the meantime? You haven’t told us, so I don’t think your scenario is fully described. (In all honesty, I am responding before digesting the rest of your post, so maybe you do get around to this. But I don’t think you do.)
So let’s take a version of this scenario in which we *do* specify where the goods are in the meantime. Bob and Steve live in a Cobb-Douglas world where output is the cuberoot of KL^2. Bob and Steve are identical. They each own 8 units of (indestructible) capital and 8 units of labor. Each day, each of them combines his 8 units of capital and 8 units of labor and produces 8 units of output, which he consumes.
One day, Bob starts feeling miserly. Instead of consuming 8 units of output, he consumes only 6. That leaves 2 units of output to account for. Where do they go? Does he lend them to Steve, so Steve can eat more? Does he lend them to Steve, so Steve can add to his capital stock? Does he add to his own capital stock? Presumably he does some combination of these. Let’s see what happens if he adds to his own capital stock.
Tomorrow, Bob brings 10 units of capital and 8 of labor to the marketplace. Steve, as before, brings 8 units of capital and 8 of labor. Between them, they produce f(18,16)=16.64 units of output. At competitive prices (wage=.69336, rental rate of capital=.30816), Bob collects 8.6285 units of output and Steve collects 8.01217.
Now Bob stops feeling miserly and decides to take his reward, by consuming his entire income of 8,6285. Moreover, he decides to reap ALL the rewards of previous miserliness by eating the two machines he built yesterday, so that tomorrow he’ll bring only 8 to the market. (Eating the two machines is the equivalent of cashing in your tickets for theater seats; you spend down your earlier savings.)
Net result: Steve’s consumption blips up from 8 to 8.0217 during the period in which Bob is feeling miserly, and then returns to its old level once Bob returns to his old self.
Holy cow Steve, I only do figures up to three decimal places on the holidays. My answer will have to wait until next week.
UPDATE: Notice that this example does not require any fiat money.
Bob: You don’t need to work through any arithmetic to get the main idea, which is that your scenario does not tell us what becomes of the physical output E.S. produces in the years between his production and his consumption.
Steve, I think this discussion is influenced by the same “competing” set of ideas that led to the great savings debate about cash balances a while back.
Rather than rehashing it again, I’ll just make some quick comments that I hope can illuminate why I think you and Murphy kind of agree / kind of disagree.
Murphy’s position is that holding cash is “saving”, meaning saving for some future personal use in exchange. So if E.S. holds a sum of cash for a period of time, then Murphy’s position that E.S. is saving for his own benefit only, would clash with your position that he is being a boon to others by not tying up resources for himself thus making them available to others in the meantime.
This is why I think Murphy introduced the edit where he spoke of money being backed by gold. Here, by holding cash, E.S. would be “withholding” that gold from the market, such that other people can’t benefit from, say, owning a gold watch made out of the gold that backs the paper money E.S. is holding.
Moreover, considering how Murphy adheres to the liquidity preference of interest, there is therefore an element of self-interested utility that accompanies the holding of cash. Thus, if anyone holds cash, they are getting something out of doing so, so I guess that’s why it would sound weird to say that a cash hoarder is being a boon to humanity.
In summary, I think the core principle here is that you and Murphy can be in full agreement by first agreeing on the nature of money.
If money is itself a “good” that derives utility in and of itself (what you call a “miser”), then that would lead to the conclusion that holding cash is not a boon to others, because you are “withholding” liquidity from the market. You are “reducing” the “good” that others can enjoy.
If on the other hand money is only a medium of exchange that derives no utility apart from its ability to be used as a medium of exchange, either sooner or later, then that would lead to the conclusion that holding cash is a boon to others, because you are NOT “withholding” real resources, that is, what money as a medium of exchange can buy, from the market. You are “increasing” the “good” that others can enjoy.
I think that is what Murphy was getting at by saying that he originally had a problem with how you were (to him) treating cash balances as too “static.”
So the question that you must agree on is, I think, on how to define money. If money is strictly a medium of exchange, then I think your analysis follows. If on the other hand money is also a good in and of itself, then I think Murphy’s analysis follows.
I’ll throw a monkey into the works by postulating that BOTH of you are right. E.S. would be helping both himself AND others by holding cash, because money is a good in and of itself AND money is also a medium of exchange. I mean after all, in the market holding money is an integral part of voluntary exchange, is it not? Don’t all parties benefit in voluntary exchange? I don’t think that E.S. has to be either a selfish person only, or an altruist only. He can be someone who benefits himself and others, since he is acting peacefully in exchanges.
How exactly does leaving 2 units of output translate into 2 additional units of capital. Of course, I understand how underconsumption translates into capital, but you leave this unexplained.
Joseph: The output has to go *somewhere*. It goes either to Steve’s consumption, or to Steve’s capital stock, or to Bob’s capital stock. I worked through the last of these three cases in detail. I encourage you to work though the others.
You’re example requires that consumer goods and capital goods are homogeneous.
Joseph: Yes. Examples, by their nature, make specific assumptions. This particular example demonstrates that the phenomenon Bob is criticizing is possible. That’s enough to refute the claim that said phenomenopn is *im*possible. A little reflection on the ideas driving the example will reveal that it would be easy to construct similar examples that didn’t make these particular assumptions.
Yes, I do understand how example-assumptions work. However, I cannot say that I can see how underconsumption translates into an automatic boon for others.
As I understand it, savings is merely deferred consumption. So, it could very well be that such underconsumption was engaged in to realize increased consumption in the future. Increased productivity does not necessarily follow from this, especially with regard to other economic actors. It could very well be that the increased consumption was in the form of leisure, which only benefits the actor in question.
The heart of saving is to increase future consumption. There is no hard and fast rule that states that the increased consumption provided by savings must benefit everybody. In fact, it can very often only benefit the saver in question. And, the entire reason that he does this is to realize greater utility in the future.
> However, I cannot say that I can see how underconsumption translates into an automatic boon for others.
It seems clear enough to me, from the basic premise put forth. Given scarce resources, less consumption by X means more potential (read: available) consumption by Y.
If me and my little brother are fighting over 10 jellybeans, and I could possibly take them all, yet I refrain, isn’t that brotherly love?
Yes, I agree that saving does free up consumption for others. I was thinking more along the lines of savings automatically translating into investment.
I should be more clear. I tend to think of savings in terms of saving for consumptive use and saving for productive use.
Eh, forget it. I think that I am able to wrap my brain around it now. Sorry for the diversion.
Not just homogeneous, but also entirely interchangeable.
Steve, I’m embarrassed to say this to you, but I really am too tired to deal with the math right now. I.e. I am just going to guess at what’s going on here, since I don’t feel like writing out derivatives, checking to see that the total product is exhausted while every factor gets paid its marginal product, etc. (I think Cobb-Douglas does that automatically, and maybe that’s why it’s so popular?)
Anyway I think this part you wrote, lies at the heart of my quibble:
E.S. works 8 hours in exchange for three tickets to front row seats at Carnegie Hall. What exactly did he work at? Presumably he produced some physical output. Perhaps in three years some of that physical output will be used to provide an extra three seats at the show for E.S.
You say “some of that output”… But I think it should be all of it, in a certain sense. Where I’m coming from is that we can just label the thing E.S. gets in exchange for his labor “Consumption Good T,” where T denotes the time of availability. I don’t see why there should be something more altruistic when he makes T>current time. Yes, if he’s willing to defer consumption for a decade, that allows for more capital development etc., but by the same token he gets more physical units of consumption at that future date. So in competitive markets why isn’t that all washing out?
I see how I think your example works, but then by the same token, couldn’t we prove that anybody who sells his labor today is altruistic? Because he thereby raises the earnings of current capitalists, allwing them to consume more? So even someone who sells his labor today, in exchange for heroin today, is an altruistic like Mother Theresa?
(Again, normally I would double check all this with a specific numerical example to make sure I’m not speaking nonsense. Today, I’m just going with my gut–full of Christmas cookies–and hoping I don’t cringe when you reply.)
Bob: I think you’re right, actually. What’s really going on in this example is that Bob and Steve initially have identical tastes. Then Bob’s tastes change, which opens up an opportunity for mutually beneficial trade. The fact that Bob becomes more miserly is beside the point; any change in tastes will do, as long as it makes him less like Steve.
So I am prepared to back off this example.
The clearer case is where Scrooge hoards money. Since the rest of the world (i.e. the world minus Scrooge) provides money at zero marginal cost, he definitely does the world a favor by demanding it at a positive price (the price being measured in terms of forgone consumption).
The other clear case is where Scrooge (and his heirs) enjoy accumulating financial assets (not necessarily money) forever, planning never to spend them down. Then whatever they produce becomes available for others to consume.
If Scrooge is saving to finance his own future consumption, then I am loathe to call him a miser. A miser, I’d have thought, is someone who saves *for the sake of saving*, and hence saves forever. That person, surely, enriches the rest of us.
Landsburg’s story is cute, but not much more. It’s like the old line “Greed is good” — a superficially clever argument that is intended more to infuriate liberals into incoherence than make any substantive point. The central problem, as any casual reader notices, is that it creates a false equivalence between sacrificing a claim to material goods and merely deferring a claim to material goods.
When Bill Gates was the world’s richest man, he was not generous, because even though he didn’t go out and buy 100 billion worth of stuff, he had the option to. You could make the case that he was generous if he had lent out his money at less than the market rate of interest, and thereby sacrificed forever some of the time value of his money, but he didn’t do that (and almost no one does, so it’s beside the point). Bill Gates became generous when he gave his money to a foundation and gave up any claim to the goods it could buy.
But as long as you are deferring consumption, there are real resources available to other people. Bill Gates “having the option” to consume still means there is more consumption for other people in the meantime. Whether you want to say that is morally virtuous is not really important for the point, it seems to me.
Andy: Precisely.
I’m not seeing how he increases others consumption by failing to consume.
He starts off with money.
He can use that money to buy other goods in which case he deprives others of the use of those goods (it doesn’t seem relevant if they are consumer or investment goods).
or
He can keep the money in which case he deprives others of the use of the money (this makes more sense if its gold but I don’t see that it changes if its fiat money)
or
He lends the money in which case someone else decides how to use it. He may or may not get interest for this.
In any case he just does what increases his subjective utility and it not clear to me how in any of the cases he is freeing up resources for others to use – he is just causing them to be distributed differently.
“In this whole world, there is nobody more generous than the miser… If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one.”
That’s the whole point of the story, and it’s a fundamentally moral argument that a virtue, specifically selflessness, consists of sacrificing consumption so others can have more.
The problem is that deferring spending is not selfless. If I save for retirement, I am trading the claim to present goods for a claim to future goods (value of present goods plus compounded interest). Making “real resources available to other people” is only selfless if it doesn’t involve a trade — I have to give them the resources without demaning resources + interest at a future date.
The fact that Scrooge saves money rather than donating it clearly shows that he is trading a present claim for a future claim, rather than making any kind of sacrifice.
JM: I take a “miser” to be someone who accumulates savings strictly for the joy of having accumulated savings. Therefore he’s not trading present claims for future claims; he’s sacrificing his claims.
Nobody ever suggested (to my knowledge) that the old pre-conversion Scrooge was saving to finance some future orgy of consumption. He was saving because he liked being rich.
Steve wrote:
Nobody ever suggested (to my knowledge) that the old pre-conversion Scrooge was saving to finance some future orgy of consumption. He was saving because he liked being rich.
Steve, I get what you’re saying, and I admit it’s a grey area, but c’mon: Scrooge wouldn’t have been happy if he burned his cash. The only reason he was “rich” was that he could buy a lot of stuff if he wanted to.
Bob: Steve, I get what you’re saying, and I admit it’s a grey area, but c’mon: Scrooge wouldn’t have been happy if he burned his cash. The only reason he was “rich” was that he could buy a lot of stuff if he wanted to.
But surely the word “miser” means something other than “a guy with a low discount rate”. If your friend Jeeter were saving up for a monthlong orgy in Las Vegas, I don’t think “miser” would be your epithet of choice.
In any event, I think we are agreed on content. The argument applies to people who save because they value being rich, as opposed to those who save because they value future consumption. Admittedly such people are rare. That’s why books are written about them — and why we can all wish there were more of them.
Fair enough. I may do a postgame show on Monday (in a fresh post). You can chime in again if you think I’m shortchanging you.
I’m just glad you didn’t say honesty compelled you to tell me my post was idiotic, like you did with the other standup economist.
I’ll defer to Noah Smith on that point. See Reason 3 and Corollary thereto:
http://noahpinionblog.blogspot.com/2011/04/in-which-steven-landsburg-utterly-flips.html
I may be wrong in this, but I have always thought of the “miser’s” accumulation of savings to be more akin to consumption than anything else. Much like an art collector will accumulate paintings for their enjoyment, the miser obtains enjoyment by having piles of money. Also, from the perspective of other actors in the economy, that money is no longer available to them.
Joseph: Your analogy fails because the quantity of real balances is strictly determined by demand, not supply. So hoarding money does not reduce the quantity of real balances available to others. (Paintings, by contrast, are scarce.) This is quite standard monetary theory; my favorite source is Friedman’s Optimum Quantity of Money, but you can find this explicated in many many textbooks.
Here’s the current state of my confusion on this (and related) matters:
In the very short term, the supply of goods, services, and cash in circulation is fixed. At the margin the goods and services all have some value relative to each other. (E.g., that hammer is worth three loaves of that bread.) The value of any unit of currency depends upon this ratio: (total value of all goods and services)/(total amount of currency in circulation).
A person who produces more than he consumes will, all else being equal, increase the stock of goods and services available. This would inflate the numerator, which in turn would increase the value of the currency (and depress prices denominated in that currency). And vice versa. Similarly, a person who hoards currency would reduce the amount of currency in circulation. This would decrease the denominator and again increase the value of the currency in circulation. And vice versa.
Thus, I would expect Scrooge’s conduct to depress prices, with the result of helping consumers and harming competing producers.
A problem with this analysis arises when we look beyond the very short term. In brief, what does “currency in circulation” mean in the longer run? Landsburg assumes this problem away by stipulating that the people in question hoard their currency forever. That makes for a clean hypothetical, and may actually present a fair model for evaluating the market for perishable goods and services. But what about non-perishables?
If I anticipate that Scrooge has stockpiled a bunch of cash, and that this cash will someday return to circulation (after he dies?), how does that influence the price at which I sell non-perishable goods? If we imagine that producers have the same mindset as the people we meet in Ricardian Equivalence hypotheticals, we’d expect them to price non-perishable goods to meet not merely current demand but anticipated future demand; in other words, to price their goods in anticipation of inflation.
Thus, Scrooge’s miserly conduct may have contemporary effects on the markets for non-perishable goods. Moreover, the practice of taxing Scrooge’s non-circulating cash may also produce contemporary effects on the market for those goods.
This issue is not entirely hypothetical. If you imagine that some percentage of people literally keep money in their mattresses, and that a larger-than-usual share of the population is reaching a stage in life when their consumption will exceed their production, causing them to dip into their cash reserves, we might expect this concept of “currency in circulation” to increase. Arguably this dynamic should tend to inflate the price of non-perishable goods today. (Now, perhaps Fed actions swamp this effect; I can’t say….)
Just a thought or two to add to this discussion.
Bob is surely correct that, if Scrooge discovered that his hoard of cash had disappeared, he would feel aggrieved. He surely values the money he has accumulated.
But Steve is also surely correct that Scrooge saves for reasons other than future consumption. He does not intend to spend his savings.
How can this be? Why does Scrooge value money that he does not intend to spend? Isn’t that irrational? Isn’t saving only deferred consumption?
Not necessarily. I suggest that Scrooge may be hyper risk-averse, and buying a yet more preferred psychic good.
Let me explain.
Scrooge does not intend to spend his savings in this sense: he does not propose to consume them eventually by hook or by crook.
Rather, he intends to spend his savings in this sense: he will spend them if and only if other special conditions apply.
What are these other conditions? Answer: calamities that might befall him. Scrooge is saving, for a rainy day.
Indeed, he may be saving for some apocalyptic inundation, given his single-minded hoarding.
Scrooge’s savings are a form of insurance. They cushion him from psychic worry. He foregos present and future consumption his money would afford him–that is, he foregos such consumption indefinitely–in order to satisfy a need higher up on this preference ranking, and one that can only be satisfied if he does not spend his money, namely, his need to feel confident about the future. In one sense, he “consumes” the satisfaction of his need first, before consuming whatever else his money can buy. Moreover, if he could hoard faster, he would, as he would satisfy his more pressing psychic need sooner.
This resolution of the paradox above also seems to solve two other puzzles (at least, what for me were puzzles).
1)
Suppose inflation is running rampant. (It’ll happen someday Bob!). I contemplate my retirement. I know inflation will eat into my savings. The $100 I save today may be worth, say, only $50 some years from now. Still, I save. Isn’t that irrational? How could I possibly prefer less tomorrow over more today, without precipitating some sort of praxeological meltdown? (I dread the look on Hans Hermann Hoppe’s face.)
The answer is that I am worried about my future, so that putting away something–even much less than I could avail of today–eases my worries about the future. In the above case, easing my present worries over the future is worth more than $50 today.
2)
Insurance companies make a profit. Doesn’t that mean that people tend to be suckers, overpaying for payouts multiplied by risk? No. Again, their “overpayment” reflects a way of easing worries about the future.
Indeed, I propose that the enrichment that insurance companies enjoy, by way of profit, when people pay premiums to ease their worries about the future, is directly analogous to the enrichment other people enjoy, by way of power prices or interest rates, when Scrooge saves to ease his worries about the future.
In both cases, there is an exchange (one explicit, the other implicit) of a psychic benefit for a sum of money.
In the extreme case where Scrooge burns his cash, he’s only helping others with money, and helping most those with the most money. He’s harming those with negative cash balances, if their income is sensitive to deflationary pressures. In the real world, those who need help are not the people he’d be helping. It may be altruism but it’s one of the worst possible ways of distributing one’s altruism. Like donating to Harvard.