Wednesday, November 3, 2010

The treadmill

I talked in my last post a little about how we spend huge amounts of our money competing with one another.  Certainly this is most evident in the city where the competition for space is tremendous and people end up spending literally 50% of their take home pay on mortgages that are made up of 80% location, 20% building.  It is considered normal around here to throw 40% of your money at competition for housing location and nothing else.  Of course the money spent to compete with others doesn't stop there at all as people in the city spend more for food, parking and other goods and services simply because there isn't enough space for everyone and this is the system that forces poorer people to live far away.

Another place we flagrantly spend our resources just to get ahead of each other is clothing.  How much of our clothing budget is actually spent on practical necessities and how much is spent on getting more, brighter, newer or more trendy clothes to outdo our rivals?  I know I personally wear jeans and tshirts that are usually 5 years old or so but I am not the norm - most people have huge amounts of clothing that is expensive or impractical or both just because they feel they need to keep up with everyone else's expenditures.  Cars, jewellery, technology and furniture are the same in that the lion's share of the money is only there because someone else needs to be impressed or placated with the expense.  We aren't trying to impress people with our possessions directly of course as they are simply a way to show how powerful we are by displaying how much money we can afford to blow on things we simply don't need.

People clearly base their ideas of what they will buy on what they see around them and not some internal sense of the proper value of an item.  It is well established in every kind of sales that in order to sell an item to the average person you must convince them that the item is much better than what some other people buy and simultaneously much cheaper than what yet another segment of the population buys.  If you show people 2 items priced at $40 and $100 you will sell a lot of $40 items.  If you present them with a $40 item, and $100 item and a slightly better $200 item they will buy the $100 item almost exclusively because the price suddenly looks like a bargain compared to the $200 item and they don't want to appear cheap by going for the lowest price.  That money is being spent on competition; pushing ourselves to buy what everyone else does rather than simply noticing that the $40 item is sufficient for our needs and getting that instead.  If you want to sell something that is pretty expensive compared to the prices people are used to you always plant an even more outrageous item right beside it to give the impression that the price you want to sell at is normal.

The question I find myself asking is "How much of our money is actually spent on the raw resources and services we want and how much is thrown away simply to outcompete each other?"  Obviously answering that question is incredibly complex because even defining the terms properly is challenging and the data required to do a thorough analysis would be immense.  I expect that for people living where I do the answer is going to be something like 85% or higher of expenses are purely competitive.  The price to actually create and ship all the goods we need is shockingly low compared to the cost of all the things we tend to acquire.


  1. "I know I personally wear jeans and tshirts that are usually 5 years old or so but I am not the norm - most people have huge amounts of clothing that is expensive or impractical or both just because they feel they need to keep up with everyone else's expenditures."

    Totally have to disagree with this statement. First off having a job outside the home does have dress requirements and therefore many people can't go with jeans/t-shirt (although I can at my job). But my biggest beef is with the most people comment. Not sure who you hang out with but "most" people I know get functional over fashionable for clothing and this includes the rich and not so rich. You're basically selling your argument on a made up fact (IMO).

    Having said that I do agree about the sales strategy as it does work that way for spontaneous purchases but again with my friends I know research and price matching goes into any decisions about purchasing stuff. Although they will argue the sound financial decision after if they neglected the research just to validate a hasty purchase.

    Maybe it's more the big city attitude that's reflected in your observations as opposed to the small city aspect I see here.

    Regardless I felt the need to escape the monotony of work and comment on your observation :)

  2. I think you are talking about "Conspicuous Consumption" - taken from

    Its a topic I took interest in as an undergrad majoring in Econ.

  3. You have to look at two different ideas of wasteful spending. The first is spending that we call wasteful because it doesn't seem like the person who is spending the money gets anything of real value to them out of it. The second is spending we call wasteful because from an economic standpoint it is a pure resource sink - like using time to figure out how to choose between two essentially equal options without learning anything in the process.

    I don't see how these things are wasteful in any sense. From an economic perspective people are paying for things, that money is going to other people who use it to pay for other things and so on. I think there is good reason to believe that funneling money to people who are already mega-rich is a bad use of money, but for the most part circulating money between people by paying for things at market rates is pretty much the definition of economic productivity.

    From a personal value standpoint, people are paying money for these things because they want them. Some people are motivated by a desire to compete with others around them, but a lot of people just honestly like things. They buy jewelry because they like it. They wear the clothes they wear because they like them. Observing that they could have more money if they didn't like fancy clothes as much is no more meaningful than observing that you could have more fancy clothes is you didn't like money as much.

    But when you bring up the value of your home, you are just dead wrong about how much price is based on speculation in the market and how much it is based on real value. Just because a price is driven by location doesn't mean it isn't a reflection of real value. A piece of land in downtown Toronto is materially more valuable than a similar-sized piece of land in the middle of one of the various northern islands in our arctic. Land, like anything else, is valuable because of what can be done with it. Since land can't be moved from place to place, what you can do with it is primarily dependent on where it is.

  4. I think there is some confusion here because when I talk about throwing money away on competition I know that that money does not vanish but gets reinvested into the system. Just because I pay a lot for a condo does not mean that society is wasteful, it just means that my personal level of wealth goes down and I get one condo while someone else makes the reverse transaction. The idea I am trying to get across is that the amount of our personal wealth we spend simply outcompeting other people is huge, and the percentage of our incomes that actually goes to paying for the creation of the items we own is small compared to the percentage that goes towards ensuring that *we* get the item instead of someone else. Essentially I am trying to differentiate buying a diamond, which is only valuable because it is valuable (industry uses certainly give a floor to the price but that floor is so far below the current price we can practically ignore it) and a 2x4, which has a cost based on the time, metal, oil and other things we have to invest to harvest it from the forest. Lowering demand for 2x4s would lower the price a little, but lowering the demand for diamonds would cause the price to plunge to a tiny fraction of its cost.

    I look at it similarly in the cost of condos in Toronto, if people stopped valuing Toronto real estate highly then the cost would drop a ton because the cost of constructing the place is so much lower than the cost of buying it with current demand. Say only a few people wanted a condo in mid Toronto. What would it cost to acquire one? Answer: Drastically less than current costs. How about if we change Toronto to Thunder Bay? It would still drop in price a little, but not much. That difference is attributable to what I am calling competition.

    Say you want to dress up fancy. If everyone else dresses in a plain black coat every day of the year you can be fancy for minimal cost, just get a red coat. However, if everyone else has a tremendous wardrobe of all kinds of different materials, colours and styles you need to spend a lot to be fancy. In this case there is a substantial element of societal waste because we produce a huge amount of clothing that is only used to look fancier than the clothing someone else has and if we all had less fancy clothing everyone would feel just as fancy. In that case it is both individuals spending their wealth for clothing and society spending its wealth on clothing instead of other things. I agree that people do buy clothing just because they like it but their standards of what is enough and what they 'need' or just 'want' are based almost entirely on what those around them are doing.

  5. A transaction has at least two effects of which one is personal and the other public. If I buy a big gas guzzler because it makes me feel good and I have enough money to pay for the vehicle and the gas, I am fulfilling my own "need" of which I consider none of it wasteful. It brings me happiness or "Utility" beyond the money I paid for it (otherwise I wouldn't pay for it). However there is a "wasting" aspect that the public would perceive. Why should another person have to pay more for gas now (presumably because I use more gas, driving the price up for the public which is an unnecessary cost to get around) just because I want to drive a gas guzzler? Each individual's decision does make a small impact on the public and the sum of all individual decisions makes a large impact overall. When I see a single person driving their SUV or heating a 3,000 sq foot home or what have you.. I DO see it as a waste, but others may see it as a display of personal freedom.

  6. If everyone decided that they didn't want homes in Thunder Bay the price would fall just as dramatically. In Detroit there are plenty of houses available for $1 - and they only cost that much because the bank can't legally transfer real estate to someone without a payment, however nominal. The same goes for 2x4s. It doesn't matter how much it cost to make them, if suddenly the whole world decided they didn't want them then you'd be able to buy them for next to nothing. No one would be making any more, of course, but the existing ones would be available for pretty much nothing, regardless of the cost to produce them or the inherent value in them. Everything is equally susceptible to a change in public opinion about its worth.

    But of course we all know there *won't* suddenly be a drop in demand for 2x4s to the point that they can't be sold for more than they cost to produce. That's because we know that people actually use them for things. A drop in the price to less than what they are worth to produce could only happen if 2x4s were no longer worth producing - no one wanted them enough to pay to have them made. It seems unlikely.

    That's because market value is a good proxy for real value. That people are willing to pay more for one thing than another should be taken as an indication that the more expensive thing probably has more real value. That's why we use the market to price things, because we believe it is better at choosing prices than any other system we could come up with.

    That condo in Thunder Bay that is worth only 30% of what your Toronto condo is worth may be bigger and nicer. On the other hand, if I have a job as a Bay St. lawyer and I'm making $200,000 a year, then the Toronto condo is worth something to me and the Thunder Bay one is worth literally nothing. There are a lot of high paying jobs that exist in Toronto that simply don't exist outside of major urban areas.

    As for the fashion industry, maybe you can argue that that industry in particular produces things of value only relative to themselves. I'm not sure whether that's true or not. But I think the idea that prices are based on competition doesn't really hold. All prices are based entirely on competition. At the same time, the reason we live in a society that bases prices on competition is because it seems to be the best way to approximate real value.

  7. I agree with Sthenno in a sense (on a micro scale), but I have to disagree with him on a macro scale. A buyer and a seller will engage in a transaction when both sides view a net gain from doing so... in this sense, there is no "waste." But what about the non-paticipants in the transaction who are indirectly affected by it? For instance, a man with $10 million is a philanthropist, but also an avid rock collector. He could spend his money buying 4 pounds of moon rock or he could donate it to a church who will hire a construction company who will hire employees to build a dozen homes for a low income housing project. In either case, the Philanthropist may get 20U (Utility) from either the rock or the donation, making him happier. In the first case, the seller of the moon rock and the Philanthropist are the only ones to benefit from the transaction. In the second case, many others may benefit. Is there "waste" in the first example? Not to the two making the transaction, but perhaps to a whole community, viewing it from their perspective, there is an incredible waste.

  8. I think that one of the "problems" with the market is that it can only arrive at values for things with input from a large number of people. It's a wisdom of crowds thing. A million people in a market economy will be pretty good at setting prices that reflect the real value of things, but one person is terrible at it. This is why planned economies never seem to work out.

    The problem is that when you talk about one millionaire buying a moon rock, you aren't really talking about the market economy functioning. One person has a moon rock and another person wants it. Maybe a few very rich people want it, but three eccentrics outbidding each other over a novelty isn't the market at work.

    I think there is a good reason to suspect that the more concentrated wealth is in the hands of a few the worse the market works. Unfortunately, market economies seem to have a tendency to concentrate wealth. Then again, every other form of economy anyone has every tried has also concentrated wealth in the hands of the few.

    I don't mean to say that I think markets are some great or magic thing. In a way, I think its really disappointing that they are the best we've been able to do. Unfortunately, though, none of us are actually smart enough to say that a moon rock isn't worth $10M. Is there a hard-to-measure benefit to the whole world of there being a market for extremely priced oddities? That may be the same market that is supporting the value of historical works of art. That may be simultaneously ensuring the important art from the past is preserved and creating space for new artists by increasing the general impression of the worth of art. If no one was willing to pay exorbitant amounts for things that the majority of people thought had no value, perhaps society would suffer greatly for it. None of us knows, and none of us will ever know.

  9. I would agree that free markets are probably overall the healthiest way we can distribute scarce resources. However we have found that making laws to encourage or discourage market behavior have been useful in society. Suppose our Philanthropist was a drug lord instead of a rock collector? Or perhaps a gambling addict? Or maybe the leader of a huge prostitution ring? Totally free markets don't have restrictions on what goods and services can be traded, but societies have developed laws limiting or prohibiting certain transactions from being legal. Now, one could argue that the reason society places these laws into existence has to do with safety, morality or religion. However, I would make the argument that society makes these laws with a more economic perspective - it deems allocating scarce resources to wasteful endeavors unappealing (at the macro level). Developing laws in order to curb "wasteful" spending does come at a cost - that cost is freedom in the market. The question then becomes how much freedom are we willing to give up, to ensure that private people invest "wisely?"

  10. I like the market, but I don't like when people talk about the "free market" because we have always had laws to restrict the market and they are really necessary. Breaking up monopolies, if nothing else, seems terribly important. Like I said, when one person controls too much stuff, you can lose the actual benefit of the market and basically have it replaced by a planned economy - planned by that one extremely wealthy person for their own benefit.

    But many of the laws that are in place to limit certain things from being bought and sold are really purely there to enforce stigmata, not to control the market for the public good. Prohibited drugs have much more monopolistic supply than legal ones (alcohol where I live is distributed through a government controlled monopoly, but that's a little different). The laws that prevent prostitution in Canada (recently struck down in Ontario, thankfully) outlaw "living off the avails" which is incredibly economically wasteful since it basically devalues currency that is obtained through sex work.

    I think the idea of making laws to tell people how they can spend their money is going back to the idea that somehow we know better than the collective needs/wants of the society as to what is valuable. I like laws that limit anti-competitive behavior and laws against theft and fraud. Laws against drugs and prostitution probably hurt us economically while providing an extremely questionable social benefit.

  11. I think laws against prostitution are completely ridiculous but laws against some drugs seem warranted. There are lots of hard drugs that have absolutely no use aside from the high they give that are really dangerous. Drugs like marijuana aren't physically addictive and have minimal medical risk - the same cannot be said for crack or acid. Outlawing those drugs seems useful to me, though even then the 'war on drugs' is probably really bigger than is necessary or optimal.

    I tend to agree that making laws to curtain monopolies is probably the most important thing to do to keep a healthy market economy. That is, once you have strong property and crime laws of course.

  12. The free market does ultimately cause many unpleasant externalities, that left unchecked, corrode society other than monopolies. Pollution, child labor and unsafe food and drug distribution to name a few. A pair of economists even won the Nobel for showing how slavery was more efficient than use of the labor market in the American South of the 16th and 17th century. Like I mentioned earlier the laws made to discourage these externalities may be rooted in morality or safety - but ultimately they make the macro economy "better" or as Sky first postulated, less wasteful in the bigger picture.