How I Think, Part Four: Money is Weird
If you work for free, you’re doing whoever you’re working for a favor.
If you work for money but never spend it, you’re doing the world a favor[1].
Except...
When you buy someone’s goods or services for their set price, you’re doing them a favor.
When you work for someone at their set wage, you’re doing them a favor.
So,
?
But the favors are of different proportions. Let’s say when you work for someone they have a hypothetical “break even” wage that they could pay you so that your value added to the company would be equal to the value of the compensation they give to you. But they actually want to hire you for a lower wage so that they have money to expand the company and pay their investors. Let’s say they pay you 2/3rds of the “break even” wage. So you’re doing them a 1/3rd favor by working for them for this wage[2] (let’s say the “break even” wage would be $100k for a year and they gave you $66k and no other benefits). So you’ve given out $34k in favors this year.
Now you can stop and never spend your money. Or:
You can buy a $66k car that really costs the car dealer $55k. This gives out another $11k favor. So the total favors you’ve given out have been $45k. Is that the best you can hope for?
If you worked for the original employer for $0, you’d be giving out a $100k favor this year.
But wait, go back a step, the story isn’t finished when you buy the car. You’re not just giving the car dealer a $11k favor, you’ve given the distributor a $6k favor and the manufacturer a $4k favor and the iron refinery company a $3k favor and the iron mine company a $1k favor, based on their own profit margins. So maybe you’ve given out 34+11+6+4+3+1… $59k in favors. Are those numbers even close to being right?
But there’s more. All the employees at all of those companies are working for a higher wage than their personal “break even” wage, the wage at which they’d barely find it worthwhile to work at that job. And by giving their employers a reason to hire them, you’ve indirectly given them favors, too.
And even more. All of these people spend all of the money they’ve made and start giving other people favors, trickling down further… and you can probably imagine something similar happening with the company you were working for, since they have customers and suppliers… does that add up to more favors than $100k?
That was all a nice thought experiment, but let’s take a different tack: if everyone worked for money but never spent it, what would happen? That’s an impossible world. There’d be no one to work for (because no one would be willing to spend money to hire you, they are all saving their money too). So maybe my original assumption that you gave out favors by not spending money is flawed? I was assuming that it would do some kind of reverse inflation and make everyone else’s money more valuable. After all, money is basically an IOU from the rest of the world, and forgiving someone’s IOU is doing them a favor[3].
So how about this: Everyone works for money. Only one person, Mr. Purchaser, spends his money and everyone else just saves theirs forever. Suddenly money got a lot more powerful. Mr. Purchaser has literally all the money in the world and has pretty much infinite power, even if he only has $100k. He can make anyone do whatever he wants by paying them a penny, which is now worth about a million dollars[4]. So maybe all you’re doing if you choose to save your money forever is to give more power to the people who are willing to spend their money. So, probably net 0 or negative.
But what if you work for free? If everyone works for free, it’s some form of communism but without a governing body. People just do each other huge favors and hope they’ll get something from someone else. And efficiency probably drops by a ton[5]. Maybe some individual people can still recognize that there are more efficient jobs they can do. But it probably gets really hard to get large groups to work together, especially on long-term projects that don’t have a payoff until the end. So let’s say net negative.
What if companies still post salary numbers based on how much they would be willing to pay their employees, and employees still gravitate towards higher-salary jobs, but companies don’t actually end up paying their employees anything? Maybe that’s onto something, but in practice, I don’t see how anyone could be motivated to follow those rules (or work at all, for that matter).
I marked both of those as net negative, but in both of those instances, you’re still kind of giving people “favors”, since you’re giving them more power assuming they earn and spend money.
Everyone working for free v.s. everyone working for money but never spending it seem very similar. Maybe the difference is in which types of jobs you would value?
Okay, back to the car scenario. I think it might all depend on whether you actually value the car (whether it makes you happy? or something like that). If you do value the car, and you value it more than the year of work you put into earning it, then you received a net positive. And everyone you paid and worked for received a net positive[6]. But if you don’t value the car at all—let’s call this the “cardboard car”—then you did all this work for nothing: a net negative for you, though probably still a net positive for everyone you interacted with.
My thoughts are starting to go fuzzy. Let’s think about the flow of goods and services while pretending that the money is invisible, though we’re still imagining a capitalist society. If I don’t work, I can’t buy anything either. So I’m completely cut off from the flow of goods and services: net 0. If all I do is work, then presumably I’m adding value to the world if I’m doing things that other people, or myself, value (creating real cars, not cardboard cars). If the value of my work exceeds the cost to myself for working, this is a net positive. Otherwise, it’s a net 0 or net negative. How do I make sure I’m creating things of value? One possibility is to only work for myself, like by cutting down trees and building a log cabin that I value. Or I can work for money but only buy things that I actually value, like real cars (I worry that a lot of what people buy turns out to be cardboard cars, or at least 95% cardboard). Or I can do something more complicated, like trying to work in a field that creates things that other people really do value, like working in a real car factory instead of a cardboard car factory, or by only working for employers who are careful about this kind of thing when picking customers and suppliers, and I can make sure to only buy products from companies careful about that as well.
I realized that during this post I’ve been thinking about the effort of work as a negative, which can sometimes be outweighed by a high enough value. But it’s possible that work is a positive even by itself. Sometimes while working, I feel “in the zone” and happy and fulfilled, and sometimes I feel bored or miserable. Depending on the opportunity cost of the work, sometimes this is probably a positive and sometimes a negative. Maybe the next best thing I could be doing is actually worse for me than work. So a large part of maximizing value is probably dependent on what type of work I choose to do and how it affects me personally, not just how valuable the product of the work is. I.e., I should try to pick jobs that pay me much higher than my “break even” wage, based on how much I like the work and how much they pay me.
If I imagine a world without any money, but where everyone is somehow able to coordinate and act rationally for the good of all… I would tend to think that everyone works a lot, like 80 hour weeks, and there’s a much higher portion of people working in what are right now high-paying jobs, and everyone only receives goods and services that actually make them happy. This probably isn’t too far off from what would happen if everyone in our capitalist society gained perfect knowledge about their own desires and which jobs would be best-paying and most-fulfilling for them, plus gained infinite patience and motivation to work hard when it will end up paying off in the end[7].
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Identical to giving away the money by distributing it to everyone on earth based on how much money they currently have.
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...although you could potentially be putting someone else out of a job, or forcing them to work a slightly less desirable job. But the company would presumably only choose to hire you over that other employee if you were more qualified, meaning that the company, at least, is glad that you applied.
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After all, now they can feel free to ask you to babysit for them, and they’ll only owe you one favor, not two. Some part of me still thinks it’s not a favor to forgive this. I guess if there was a physical IOU certificate, and you had it, and you could give it to them in exchange for them doing a favor for you, so that you could keep passing it back and forth whenever you saw an efficient way for them to help you… but then instead of continuing the cycle of net positive effects, you burned the certificate or locked it in a vault, that would be bad. In reality, though, they could just print a new certificate and start the cycle again.
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Not that they’ll ever spend the penny on anything, since they’re one of the people who never spends any money, but let’s pretend they still have motivation to earn it.
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Like how soup kitchen volunteers are probably not using their time very effectively to help people. Volunteer work by default doesn’t have points attached to it, so it’s hard to tell how well you’re playing. Granted, if everyone started focusing on volunteering for things that made them feel good, maybe things would actually turn out pretty well. Nah, in the long run they’d probably be worse off.
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I guess “net positive” here refers to you working, earning money, and spending it, instead of doing nothing at all, whereas previously I was just thinking about the spending aspect.
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Or everyone might turn into world-class criminals.
Note that everything is relative and marginal (“compared to what, for what increment?”). I don’t think “favor” is the right word for surplus from trade, as it goes in both directions, and is unmeasurable. If you buy a car for $66K, the dealer makes $11k profit, but also has effort and employment costs, so that’s not net. And you’re getting more than $66k of value in owning the car (or you wouldn’t have bought it—you’re not intending to do a favor, just making a trade that benefits you and happens to benefit them). So they’re doing you a favor as much as you doing them one.
Which is to say that the “favor” framing isn’t very helpful, except in motivational terms—you may purposfully take a worse trade than you otherwise could, in order to benefit some specific person (or even a group, if you’re weirdly altruistic enough). But most economic analysis assumes this is a very small part of trade and work choices.
The key insight in figuring out the work and purchase decisions is that most things have different values to different people. A given hour of effort in an endeavor you’re relatively skilled at (“work”) is worth some amount to you, and some amount to an employer. It’s worth more to an employer than to you, and your pay for that hour will be between those values. For simplification reasons, and measurement difficulty, and preference for stability, it’s usually traded in bundles—agreement to work 40+ hours per week for multiple weeks. That doesn’t change the underlying difference in valuation as the main transactional motivation.
I don’t understand this. What use is money that is never spent? Why would Mr. Purchaser’s penny induce me to do anything for him?
This is a pretence too far. The imaginary world you are describing is incoherent.
Money is the slack in the system of trade that saves us from having to exchange only by barter or informal systems of credit — doing each other good turns, in your terminology. In Adam Smith’s words, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”
If I imagine that, my thoughts run to hive minds in which there are no people as we know them today.
Adam Smith continues: “We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” A sentence that could have been penned by Dale Carnegie.
Yes. Unless the other costs of letting you work there exceed the value you add. For example, if you actually damage something, waste other people’s time, or just if you occupy a chair in a very expensive and small space.
Generally yes, unless the work has big negative externalities.
Yes.
The apparent paradox is that two things happen at the same time. People create value by cooperating. Also, people engage in a zero-sum competition for the created value.
*
There is a simple story which says that if people only engage in mutually voluntary trade (also assuming perfect information, perfect rationality, et cetera—I said it was a story), the result is a net improvement for everyone.
Well, that story is not true (even under the unrealistic assumptions). It is a good approximation, on average—the societies where people engage in mutually voluntary trade (with sufficiently educated population, not too many scams, et cetera) are on average a nicer place to live than other societies.
And yet, it is possible for one person to get worse as a direct consequence of a mutually voluntary trade of everyone else. That’s because different people have different abilities. And if the only thing you can ever produce is X, and someone else starts producing large amounts of X and selling it very cheaply… you just lost the only thing that helped you survive in this system. For everyone else, getting more of X more cheaply is a good news. So, from a global perspective, this is a good news. You should feel happy for your fellow citizens as you slowly starve to death. Our society is build on stories like this… and it is much better than the alternatives where people starve to death without making everyone else happier as a side effect.
...back to the original story: Yes, by never spending the money you’re doing the world a favor, but by giving it to a specific person, you’re giving that person an advantage at the zero-sum part of the game.