Tuesday, 29 May 2018

It's hard not to do good

There was an idiotic movie in the 80’s (“Brewster’s Millions”) where Richard Pryor had to burn through $30 million in 30 days in order to inherit $300 million.  There were some conditions:  “. . . after 30 days, he may not own any assets that are not already his, and he must get value for the services of anyone he hires. He may donate only 5% to charity and lose 5% by gambling, and he may not waste the money by purchasing and destroying valuable items. Finally, he is not allowed to tell anyone. . . .” [Wikipedia].

Anyhow, I was thinking of a similar movie one could make.  Awful, but perhaps instructive to students of economics.

Similar premise, similar challenge.  But my twist is that the stipulation now is that he can do whatever he wants with the $30 million, on the condition that he NOT HELP ANYBODY with the money.

I don’t believe this is possible.  Consider:

If he were to simply keep in in the bank and not touch it, the supply of loanable funds would shift to the right, lowering the cost of borrowing money, thereby helping others to improve their lives in various ways.

If he were to spend the money, he would create gains from trade, a positive-sum game.  People would consider themselves better off for having sold him a good or service . . . or they wouldn’t have.  Plus multipliers.

If he gave the money away, the recipient would doubtless consider himself better off, at least initially.

If he burned the money, he would be, albeit in a small way, helping the nation’s economy as a whole, since that $30 million represents a claim on the nation’s goods and services that now will never be called in.

I guess what I’m getting at here is that I don’t believe there’s any way a rich person can avoid helping others with his money.
First up, Brewster's Millions was brilliant. I loved how he decided to waste his money with a run for office.

But the substantive question's a tough one. It's easy to come up with examples that have negative externalities and so impose some harm on others. And it's not impossible to come up with ones where the negative externalities might result in net harms. But ones where nobody is made better off?

And it's related to an older problem in preference-revelation mechanisms.

Recall that in the old Tideman-Tullock demand-revealing process, in which a Clarke tax could induce truthful preference revelation, you could only be sure that you had truthful revelation so long as the participants were neutral about the use of the collected taxes. If you gave the money to charity, people might overreveal their preferences since the collected funds would go to a cause they supported anyway. But if other people hated that particular charity, they might underreveal their preferences. Given the very flat payoff curve, these kinds of considerations might matter.

Tideman and Tullock's solution was that the collected taxes had to be spent on real resources produced in perfectly competitive markets so that no rents were conferred by having bought the resources, and then the resources had to be destroyed. That still doesn't work, though, because a lot of people have strong preferences against waste per se.

But it does hint at a solution to the question: if you want to spend money while helping nobody, buy something that is produced in a perfectly competitive industry that uses only inputs that come from perfectly competitive industries too.

I love this thought experiment. It is hard to come up with examples where trade does not benefit the people you're trading with. And yet political rhetoric often comes from the opposite starting point.

The more plausible examples in the comments over at MR have to resort to illegal activities to make them work: buy hand grenades and use them to blow up the manufacturer/vendor of the hand grenades.

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