Whose money is it anyway?

Milton Friedman used to elegantly distinguish between four ways of spending money. First, when you spend your own money on yourself, you are very careful to get the most benefit for your buck. After all, it is your money and you know what you want for yourself. Second, when you spend your own money on someone else. Here too you carefully economize to meet your objective but since you don’t know the other person’s needs as well as you do your own needs, your spending may not be as optimal for the other person. Third, you spend other people’s money on yourself. In this case, your incentive to economize is certainly blunted. You are much more concerned with getting the best and less with what it will cost.

Finally, when you spend other people’s money on someone else. That is, you transfer resources from one group to another group. In such cases, economizing goes out the window, and what is worse, you promote your own ends rather than the ends of those whose money you are spending or those who are the ostensible beneficiaries of the transfer. The most ubiquitous example of this is what he calls the “distributor of welfare funds” — taxpayers money being spent by government officials for welfare. Here’s Friedman in his own words:
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