Saturday, October 15, 2011

Diary of a Reformed Cheapaholic

In my student days, I used to joke that 10% of my brain was dedicated to knowing the exact prices of esoteric cooking ingredients in all the markets around town and optimizing my hoarding strategies to match sales.  Given my intense frugality, food was the only thing I could rationalize spending money on regularly, but I sure made the most of it.  For a certain breed of middle-class striver, few thrills can match the joy of getting a great deal.  

Now that I'm making big bucks as a finance professor, I'm starting to develop some perverse spending habits.  One of the funny things about being rich is that you get more stuff for free (faculty spending accounts, promotional textbooks).  But now I hate freebies more than ever, and shy away from luxury.  I don't like buying things, but I go out of my way to spend money, especially on things I can get for free.  

What I've realized is that there are two ways to be cheap.  The first is to want less.  The second way is to try to get something for nothing.  A recent example of the latter is a story I heard on Planet Money.  Frequent flyer fanatics purchased thousands of dollar coins from the US mint in order to get miles.  They then got free vacations and returned all the coins back to the Fed unopened, abusing both airlines and the government to get something for nothing.  This is what I call cheapaholism.

Wanting less is still an attitude I embrace.  Most of economics assumes that our preferences are fixed – we only get a certain amount of satisfaction from a given amount of goods.  Wanting less turns this idea on its head and asks – what if we could get more satisfaction from the same amount of consumption?  Could it be that we've been missing out on a crucial psychological technology, that simply changing our attitudes could do more to improve human well-being than cell phones, the internet, or air travel?  We can employ this technology by being grateful, appreciating what we have, and being clever by doing more with less.  Changing our attitudes isn't easy and requires effort, but it can be a great investment in the future.  In today's uncertain market, the highest-return retirement plan I can think of is making sure I don't increase my standard of living.

Deal hunting is selfish frugality, one side of a zero sum game.  While the consumer gets more for less, the merchant, the supplier, and the worker get less for their efforts.  Played out repeatedly, the deal-hunting dynamic can cause big vendors like Wal-Mart squeeze their workers (see Nickel and Dimed, by Barbara Ehrenreich), big companies to squeeze profits from unpriced externalities (see climate change), and financial firms to charge byzantine fees that squeeze the poor (see free checking / overdraft fees).  Played out at a global scale, the frugality of consumers in China and Germany mixed with the selfish drive for returns played a major role in the financial crisis of 2008.  Thinking about the crisis really forced me to confront how personal fiscal responsibility can actually contribute to societywide calamity.

In a complex economy where just buying a cup of coffee starts a chain-reaction of consequences rippling around the globe, our actions have a greater and greater effect on the people and world around us.  But our moral and intellectual machinery aren't equipped to handle such far-reaching effects, so our default option is just to do what makes sense for ourselves.  That's exactly what we pillory Wall Street traders for doing, and that's what we do when we use Groupon or Priceline to get something for nothing.

Personally, I'll never be able enjoy the cheap thrill of bargain hunting again.  Not being able to compute whether my consumption choices might do harm down the line, my default is just not to buy things.  One example is fish – I find the governance of the seafood trade so abyssmal and untrustworthy, that I avoid all seafood even when for species purportedly harvested using responsible methods.  When there is something I use and enjoy such as music, newspapers, or exotic chocolate, I'm happy to overpay.   And I go out of my way to pay for things on the internet, to support content creators and promote free access for those who can less afford to pay.

Prices in a free market may be efficient, but that doesn't make them fair.  To me, this inherent tension between fairness and efficiency is at the heart of the growing conflict between the amoral market and the values of normal folk.  Furthermore, if we can be deceived by advertising and incomprehensible financial contracts, or if we refuse to pay for things we value such as media content, then prices may not be efficient at all.  Reconciling our market behavior with our basic values of justice, fairness, and human rights is the great challenge that American capitalism faces now, and we have to begin with ourselves.


Ed said...

Don't you think priceline and groupon are really just marketplace phenomena? No one is getting anything for free, the former is just kind of capacity pricing and in the latter vendors are doing the same thing plus paying for exposure.
Wall street on the other hand is more of huge drain at a high order level on practically everything. Kind of a tax without real benefit.

no6ody said...

It is the privilege of the gods to want nothing, and of godlike men to want little. Diogenes

James said...

Considering that consumer spending 70%-75% of America's GDP, we're obviously not thrifty in aggregate purchases, yet I agree that in a better word, we'd all be injecting more preference into purchases (or going Zen and doing w/o, but that seems unlikely). We've elevated shopping to a sport (but can you really give up all deal hunting? that sounds hard), predicated on price. On a positive note, conscious shoppers are gaining in ranks. I only eat humanely raised and killed animals, and while I was still considered a total freak during my travels in Asia recently, I'm semi-normal in my circles here. That wouldn't have been the case 20 years ago. Anyway, interesting post.

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