Friday, March 23, 2012

Tradeoffs

Economists love to think about tradeoffs (or opportunity costs, as they call them). Any money we spend can't be spent on something else, so if I use $2.50 to buy a strawberry milkshake it means I'm not using that $2.50 to get the chocolate one or the mint chocolate chip one.

That's pretty easy to think about. But it also means I'm not getting a bus fare, a light bulb, or anything else with that $2.50. And if I buy that strawberry milkshake, according to standard economics it means there's nothing else in the world I would rather buy with that money.

I don't think we're usually that rational.

For one thing, it's unpleasant to think about negatives. We like to think about what our money does get us, rather than the infinite variety of things it doesn't get. Also, there are so many alternatives that we can't really consider them all every time we spend money.

I once saw a flippant proposal that we draw people's attention to this in a gruesome way by labeling all prices in Dead Child Currency. If it costs $800 to save a child's life, each $800 spent on anything else . . . you get the idea.

I used to make myself think that way. Before I parted with any money, I'd ask myself what it could do for a woman in Africa. (It doesn't have to be her, but that's who I always imagined.) Did I value my new jeans more than her month's groceries? More than her children's vaccinations or school fees? Could I make that tradeoff?

Sometimes I made it and felt awful afterwards. After spending $2 on a caramel apple in the fall of 2008, I had one such episode of weepy regret that was the last straw for Jeff. He decided that part of his income would go to a spending allowance for us both which could not be given to charity. For several years now this is where our mandolin strings, birthday presents, clothes, vacations, and milkshakes have come from. It's also the source of non-optimal donations we make to public radio, etc. It's not a large budget by American standards, but it's made for a lot less angst.

I recently met a young man who was seriously thinking these things over. “But isn't it right to think about the tradeoffs?” he asked. I think it's good to go through a period of thinking that way. Just like when you live in another country for a while you start being able to understand prices without converting back to your own currency, when you start thinking about all your spending in Vaccination Currency or Mosquito Net Currency it becomes habitual. Your spending habits can't help but be affected.

I also think there's only so much grief we can carry. I cannot go the next 70 years counting dead children on every receipt. I would break.

So my advice is to spend a while really noticing that tradeoff. Notice whether you really do value the milkshake more than a child's vaccination. And then, after a time, make yourself a budget that reflects those values. Set aside money for unnecessary things that make you happy. Do what you think will nurture you to age 100 as a generous and strategic giver. Because that, in the end, is what will help the most people.

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