Making Good Economic Decisions Doesn't Always Mean Being Cheap

I used to be a road warrior and I had an incredibly durable suit back from L.L. Bean (this was a couple of decades ago, so I do not know if they make them the same way). I eventually had to throw it out because if I carried it using the shoulder strap, my tan raincoat would pick up the dirt the bag had acquired from airline check baggage, city taxis, etc. Almost as if I had rubbed the raincoat with newsprint.

The story would make another nice anecdote in your book Making Great Decisions in Business and in Life.

This reminds me of a lengthy quotation I encountered when skimming University Economics (someday I’ll have to read that massive text). I’ll post it here because I think it’s a brilliant passage (it can be found in chapter 7’s questions and answers section; the answer I’m quoting is found on pages 813-814). The question being answered is ‘“In the capitalistic system, only money or market values count in allocating productive resources.” Evaluate.’

The belief that money or market-exchange value is the sole criterion of allocation is so widespread, deeply ingrained, and incorrect that it is worth spending some time in examining it. Money is not the only criterion; that much has already been established with our analysis. (That it ought to be or ought not to be is not the issue.) When I dine in a restaurant, I select my dinner according not only to prices but also according to what the item is. I never tell the waitress to bring me the cheapest items only. The taste, nutrition, and looks of the item are considered. Similarly, when buying a suit, I take into account the style, feel, looks, and fit, as well as the price. For national security, we don’t buy the cheapest weapon regardless of what it will do, nor the most modern, expensive weapon simply because it is the most expensive or modern—but not as effective as three units of a cheaper weapon (for example, one B-70 as compared to three missiles).

Only if the options are equivalent in all other respects do money costs become the sole criterion, simply because cost is the only one that, in this case, makes any difference. On the other hand, if money costs were equal, the n only the other attributes would be relevant.

Suppose that I own some land next door to where I live. Of two people who apply to buy the land, one—an ordinary man who offers $1,000; the other, a beautiful woman who offers at most only $995—I will sell to the woman. Her presence as a neighbor is worth more than $5 to me. The man could overcome his handicap if he offered $100 more. Money (exchange value) does count, but it is not the sole nor even the dominant (whatever that means) criterion.

A related criticism of the capitalist system says it relies on market—revealed money demands rather than intrinsic or humanitarian needs. By now there is no “need” to discuss the nonsense of “needs.” But why do market demands count so much? The reason market demands are so effective is simply that exchange is a way to increase utility. Every person is free to reject the market demand and to exchange his wealth with “more deserving” people who offer less attractive market bids. But the market demand for exchange is heeded because people prefer to gain by exchange—not because they are perverted by capitalism or a desire for money.

If private-property rights did not exist, people would not be able to make such extensive market offers, because they would have nothing legally to buy or sell. In a university, the faculty does not have private-property rights in offices and classrooms; therefore, there is no marketplace where classrooms and offices are so easily exchanged. In a socialist system, market money demands are less effective simply because there is relatively less exchangeable property.

One simple caveat that I would humbly submit for this object lesson: When one weighs the cost-benefit of repairing vs. replacing goods, get-what-you-pay-for quality, etc., one must be careful to count all of the costs.

For example, it’s possible that other parts of the bag are not actually good as new, but rather simply haven’t failed yet, such that the $40 to extend the life of the bag may not actually be buying you time equivalent to the life of a new zipper. Replacing parts on machines with moving parts, e.g. appliances, puts this concern in even sharper relief. It’s very often not worth it to replace 1 broken part in a microwave, for example, and less and less worth it as both the age of the microwave and the cost of the repair increase. If your microwave is 5 years old, for instance, and the repair costs 1/2 that of an equivalent new microwave, the repair would buy you a microwave full of 5 years parts with 1 new part. It’s usually just better to just replace it.

Along these lines: One must account for risk of catastrophic loss when weighing get-what-you-pay-for quality. E.g. If I misplace a pair of sunglasses, or if my small child dumps maple syrup all over my computer bag (both completely hypothetical of course, insert emoji here), the more expensive higher quality make that reduces the wear-and-tear is suddenly worth nothing. Buying cheap helps you hedge against that kind of risk.

Lastly, you have to account for the expenditure of time too. Repairs take both work time to run the errand (on drop off and pick up, usually) and calendar time (which means lost utility) as you wait for the repair shop to finish their work (assuming it’s not immediate service). Also it may take time to get estimates on the repair work in the first place. Clicking ‘checkout’ on Amazon to replace something, however, takes very little work time, and can take very little calendar time too (especially if you have Prime with the 1-2 day shipping).

I suppose the inverse is true too, though: When you consider get-what-you-pay-for quality, you should also really consider all of the benefits. E.g. If the cost-benefit analysis doesn’t justify the higher quality good on a pure cost-per-utility basis, you may still want to buy the higher quality good for reasons other than simple utility. Maybe you just think it looks nice. Or you are sentimentally attached to your old thing. etc. That’s fine too. That’s worth something, and it’s good to recognize that value.

It’s just important to really be honest with oneself when considering these kinds of decisions – to really capture all of the costs and all of the benefits, so that you know what you’re paying for and why.