Wednesday, September 05, 2007

Common Good and the Personal Consumption of Yachts

Consumers concerned about strengthening the global economy and helping the poor often justify personal discretionary expenditures by stating that their spending creates jobs. For example, they would say that you buying a yacht for your lake provides vital employment for the workers in the yacht industry. This contribution to the yacht industry is also a contribution to the world economy, so you can float around your lake in peace knowing that you’ve made the world a better place. But you would be mistaken.

There are many measures (or definitions) for “welfare,” so we want to avoid becoming too distracted with a precise formulation. Let it suffice to say that the global welfare is highest when basic goods and services (food, shelter, heath-care, etc.) are widely affordable.

Two obvious factors determine the affordability of basic goods. Following the law of supply and demand, the production of more goods keeps prices lower. For people to afford the goods, they must have employment. Let’s recap: Employment and production are the faith and works of an economically healthy society. Production without employment is empty, since produce does no good to those without income to buy it, and employment without production is dead, because it’s not worth the effort to work for nothing.

Now let’s tie this back in with personal consumption. Does buying a yacht help the economy? Let’s think about it. Does it create employment? Check. Does it produce basic goods? NO! As a result, you’ve got a team of yacht-builders out there who are making a living for themselves but are not increasing the supply of goods that are desperately needed by the low-income sector.

One question remains. If you’re not going to spend your money on a yacht (or a car or a servant servant or a nice computer or any other form or luxury consumption goods), what is the best thing you can do with the money that will help the poor? This question is far more difficult than it may seem at first glance.

The pop-culture response is that you should just give all the money away to a reputable charity. This is usually a step in the right direction, but you have to be careful because the science of philanthropy is young, and economists have only begun to study the effects of local anti-poverty efforts on the global economy. Despite the difficulty determining the best place to put your charity, the bottom line remains: you feed the poor more efficiently if you pay them to produce the things they need instead of paying them to work for you. Take your pick. If you care about the poor, you'll dock your yacht.

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