Monday, November 26, 2012

The Economics of Friendship

Ok...I'm not an economist...but I play one on the Internet. I've been trying to sort out some of the philosophical puzzles that contribute to economic disagreements. Here's one puzzle that often eludes both economists and philosophers. I call it the "Economics of Friendship." First some basics...

Classical economic theory is about the distribution of resources. Most often it focuses on buying and selling of products and services between strangers. Today, most economic activity is, indeed, between strangers. I don't know who manufactured the various components of this computer, who assembled it, who delivered it to the retailer. etc. I don't know the salesman that sold it. Classical economics says that when buyers and sellers reason about transactions with strangers, they at least try to maximize their own self-interest. Buyers prefer transactions (products and services) that maximize quality and minimize costs. When multiple sellers compete buyers tend to get a better deal and when multiple buyers compete, sellers tend to get a better deal. That's the beauty of a "free market." It allows strangers to benefit from exchange. But what can we say about transactions between friends and families?

When I buy musical equipment I always check, first, with my friend Gordon at Western Hills Music. I buy all my strings from him, even though I pay about a buck more per pack...which would be irrational if I didn't know him. Of course, if I didn't know Gordon, I might decide to get those strings from him, anyway, because I'd spend more than $1 in gas to drive all the way to Guitar Center. Why waste the time, energy, and resources driving all that way to save $1? But that's not how I reason about it economically. On the other hand, if I were buying an expensive guitar, say a Gretch, I'd talk to Gordon first and see if he could get one for me and how much he'd have to charge me. He would figure it out and if I could get the same guitar at Guitar Center for $200 less, he'd say: "Ron, get it at Guitar Center (Or better Yet, get it online at Musician's Friend, and save taxes!) That would be irrational econiomic behavior on his part, at least from the standpoint of traditional economics. Although I'd probably buy that guitar online, I'd bring it to Gordon to set it up for me. I'd never ask him, beforehand, how much it will cost, and I'd never, get a second price from Guitar Center. If it doesn't need a setup, Gordon would say: "Ron, the setup is perfect! I just removed the original .010 roundwound strings for you, and put a new set of #.011 Flatwound strings for you." Guitar Center, however, would probably do some minor adjustment, charge me for a full setup, and (might) call  me and ask what kind of strings I'd like.

What does all this mean? Well, Peter Singer and many other philosophers have argued that "ethics" consists in treating strangers as if they were friends. Therefore, a good person is "impartial." On the other hand, I'd argue that it makes much more sense to treat strangers impartially and friends partially. No one in their right mind would criticize me for giving one of my sons a guitar (as a gift) and NOT doing the same for a stranger. I would probably sell one of my guitars to a friend, for a lot less than I would a stranger. There's nothing wrong with that either. In fact, there's nothing wrong at all with either nepostism or cronyism in the world of one-on-one transactions. Problems arise when government and large corporations conspire to undermine those personal economic relationships by passing laws (taxes, regulations etc.) that make it more difficult for small businesses to enjoy the competitive advantages (and disadvantages) associated friendship. I don't know about you, but I prefer an economy where I can deal with both strangers and friends. So let's NOT let the big corporations and government surreptitiously destroy small businesses.           

      

1 comment:

rj jones said...

While the abolition of the state would bring an effective end to corporatism (rent-seeking) and sustainable monopolies, small(er) businesses would still be subject to the market forces responsible for what Schumpeter called creative destruction. If an entrepreneur isn't careful, friendship itself -- or, more generally, playing favorites with one's family members and friends -- can morph into such a destructive force.