27 May 2016

The Curious Case of the $300 Frying Pan

On a visit to the US, I encountered a $300 frying pan. Coming from India, that’s outrageous, but there are apparently people in developed countries that pay for it and have more money [1] than judgement :)

If I was paid a developed-country-level salary, I wouldn’t waste it on a $300 frying pan. I would save it so that I can retire early, or work fewer hours, or take a career break, or have the time and money to start and self-fund a startup. Any of these are a better use of money than a $300 frying pan.

But what if everyone did this? Let’s say all exorbitant consumption goes away — $300 pans, $400 handbags, $60K cars, and so on. Let’s say all this wasteful consumption disappears. For that matter, let’s say everyone sticks with their existing stuff, if it works fine, rather than buy a new pan or TV or car. What will happen? My first guess is that some demand will evaporate from the economy, and some jobs with it. And since those people spend money, it will have a second-level effect. That is, fire the guy who works in a factory making TVs, and maybe the waiter who brings him his food is out of a job as well. This will probably lead to a recession. But, on second thoughts, maybe the economy is a partly a Ponzi scheme, so it’s best to do away with that part of it, in the long run. Let’s find a new normal, sustainable for consumers and for the environment. Don’t work long hours to buy overpriced, unnecessary stuff, and wreck the environment in the process.

And don’t confuse GDP with well-being. People who own a $80 frying pan are just as happy as those who own a $300 one. If you don’t have a pan to cook food in, that’s a problem, but if you have one, beyond a point, GDP disconnects from well-being.

But there’s another side to this. If people don’t blow up their money on frills, they will invest it instead, and the additional investment will help the economy. If nothing else, it will reduce the cost of capital for companies, producing more economic activity. This will hopefully cancel out the economic contraction caused by reducing demand.

One socially important form of investment is in poor but smart and promising kids, who exist in every country. Maybe fund their education loans. Or give them money outright. Let no one be turned away from realising their full potential because their dad isn’t rich. If I felt like donating lacs to someone, Louis Vuitton wouldn’t be on my list of worthy aspirants.

Another use of excess money is to fund causes that you think are good for the world but not priced into the decision. For example, we think fossil fuels are cheaper than renewable energy only because we ignore the cost of the former. If we take it into account, renewable energy will be cheaper. If you’re thinking, “That’s all fine, but what do I do about it?”, one answer is to invest in renewable energy. You can install solar panels on your roof, or you can buy debentures of a renewable energy company. These could be additional investments, or you could redirect some of the investments you make anyway into such companies.

The point is that there are so many worthwhile things you can do with $300 than waste it on a frying pan. If everyone spent money in a useful way, the world will be better off.

[1] To be clear, having too much money is a great problem to have.

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