What If Everyone Did It?
"You wanna make an omelet, you gotta break some eggs."
-"Tyler Durden" in Fight Club
I'm walking through the bitter cold wind to get to my economics class. I'm in college in Moorhead, Minnesota and it's very cold in the winter. I have been learning about supply and demand, opportunity costs, trade-offs, and short-run vs. long run. On this particular day I learn of a quote that says, "In the long run we're all dead."
Economics classes have always made sense to me, but I can't wrap my head around this one. Does it mean we should ignore the long run and focus only on instant gratification? That doesn't make sense to me. Does it mean in the long run each individual is going to be dead? What about future generations or the economy as a whole?
This is the first time I've disagreed with something I learned in economics class.
Personal Finance Is Hard
The basics of personal finance are quite simple. Spend less than you make, save for the future, manage your risks, and don't do anything dumb. Ideally we would all use our money to support living a life that fulfills us and is aligned with our values.
The thing is, many people struggle to achieve a healthy relationship with money for one reason or another. Besides the internal struggles we all face, there are external pressures working against us. I'm sure you've heard "economic reports" telling you that consumer spending is up (down) and that's good (bad) for the economy. During recessions we're told we need to spend our money to keep the economy afloat. We do it, because we tend to look for any permission to spend our money.
What if we didn't? What if we held strong to core personal finance principles?
What If a Miracle Happened?
We're taught of the "paradox of thrift" (often attributed to John Maynard Keynes) where being vigilant with our money is good, but if everyone did it, it would be bad. If everyone was thrifty, the saying goes, then the economy would be in trouble and we would see a recession; maybe a depression. And, it's your fault! You should have spent your money! That's why you got a tax cut!
It's nonsense. This is a classic "scare us with short run thinking and ignore the long run" technique. If we woke up tomorrow and every single person followed accepted personal finance guidelines, the economy would not collapse. It's true, some companies and even industries would die off as people started using their money in a way that supported their own values instead of their neighbor's, friend's, or society's values. We wouldn't want their stuff anymore. However, new companies and industries would spring up to fill new demand for new products and services.
You can bet that those industries that sell stuff we don't value anymore would use their marketing skills to urge us into buying their stuff. We would see sales, advertisements about how far behind we're going to be if we don't use products, and so on. Temptation would be high.
More Difficult to Stay Disciplined
It's already difficult to stay disciplined, and if everyone started doing the right things tomorrow, we would see the pressure from media companies rise...fast. Here's why: you can tune into "financial news" (actually financial entertainment) networks and watch for free. Media outlets aren't charitable organizations, though, so they have to make money somehow. They do that by selling our attention ("We have X viewers," "We regularly see Y clicks") to companies that buy advertising from them. The companies that purchase ads want us to do buy something from them; otherwise they wouldn't buy the ads.
If we stopped buying stuff from them, they would stop buying ads, and the media companies would push the lever all the way down and sensationalize the news even more than they already do. They need those advertising dollars!
Equilibrium
In economics there is a concept called equilibrium. Equilibrium is the point at which markets have calmed down, where supply, demand, prices, and quantities are in sync (this is not the technical definition). Something happens to distort equilibrium. For example, an unexpected frost in Florida might impact the supply of oranges. This is called a shock.
Shocks happen in the short run.
Over time, the market for oranges will return to equilibrium as prices rise in the short run to reflect the lower supply - the higher prices will induce more people grow and sell more oranges - the frost in Florida will subside - and equilibrium will be restored (note that this doesn't mean the prices will be the same or the same producers will be in business).
Equilibrium happen in the long run.
There's another nonsensical phrase thrown around in economics that goes like this, "In the long run, we're all dead," which is also attributed to Keynes. The idea is that we should spend our time focusing on the short run because the long run doesn't matter; we're dead in the long run. The problem with this idea is that, while I will die, future generations will still exist - the economy won't die. It's an incredibly egocentric view.
Omelettes are good. Part of the cost of having an omelette is the loss of some eggs. The broken eggs are the shock; the omelette is equilibrium.
Someone else's company not being able to sell products is none of your business. What happens with the economy is outside of your control. Focus on, and contribute to your own personal economy. Live intentionally.
Read More:
References:
Brad Klontz, Ted Klontz: Mind Over Money
Mr. Money Mustache: What if Everyone Became Frugal?
The Simple Dollar: The Paradox of Thrift
Richard Wagner: Financial Planning 3.0
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