Economist Writing Every Day

I’m a big fan of Friedrich Hayek. I first read his work in an academic setting. But many people first encounter him via The Road to Serfdom, his book that outlines the political and social consequences of state economic controls. I always meant to go back and read it, but it usually took a back seat to other works. Now, I’m slowly making my way through.

A lovely snippet includes Hayek explaining the popular sentiment that “it’s only money” or that money-related concerns are base or superficial. Such an attitude is especially common when people recount their childhood or family life during times of financial difficulty. The story often goes “times were hard, but we had each other”. Similarly, a popularly derisive trope is that economists ‘only care about money’ [, rather than the more important things].

At the same time, people are often very concerned about material matters or concerns that money can alleviate. So what gives? Well, in equilibrium, the consumer enjoys the bundle of goods for which the marginal value per marginal dollar spent is equal across all goods. The implication is that an exogenous change to the quantities consumed only affects the relatively lower valued units of your consumption bundle.

For example, if your optimal bundle includes 6 ice creams and 4 popsicles, and then an accident changes the consumption bundle to 7 & 3, the result is that you’re only thinking about the utility implications among the least valued units of those goods. After all, you’re still enjoying the first 6 ice creams and first 3 popsicles as you had before the accident. So, being ‘shoved’ from your optimal bundle is relatively small potatoes for your utility outcome.

The same logic plays out if you experience a relatively small income shock. Be it positive or negative, you still consume the goods that yield the highest marginal utility. You only change your consumption bundle among the lowest valued units. Furthermore, most income shocks are small, such as a 1-time home repair or finding $20 on the ground. So, it’s easy for people to refer to ‘merely pecuniary’ concerns dismissively.

But the same logic is still applicable in the context of larger income differences. That archetypal man who was raised with love and family, but wore a humble wardrobe? The former were more important and the latter less so. We know as much because the latter more readily changes with income.

Hayek’s point is that liberal economies are so rich, that individuals view income shocks as relatively trite. We are not accustomed to making painfully hard trade-offs. Which kid do you keep, and which do you send to the orphanage? Which kid works and which goes to school? Do you choose to buy medicine or food? These terrible circumstances are not absent in market economies, but they are less prevalent. They are so uncommon that we don’t have them in mind when we refer to ‘only money’.

Hayek’s pertinent argument in The Road to Serfdom is that introducing state control or another drastic planned reorganization of the economy is not the same thing as an income shock. When the state makes decisions for the individual regarding consumption and production, the rational utility optimization model goes out the window. The individual consumes what they’re allotted, works the job they’re assigned, and labors the hours that they’re commanded. Their utility changes more than on the margins of the lowest valued units. Their consumption is directed in the pursuit of the planner’s disparate goal and there is no optimization calculation that has the individual’s happiness as its objective. In such a circumstance, the individual and all that they value is at the mercy of the planner’s discretion. Money, and the resources it can direct, becomes the difference between life and death and ceases to imply a mere consumption adjustment among trifles.