Economics isn’t just about GDP and unemployment. Sadly those types of economists get all the attention, but they also take most of the fun out of the “dismal science”. I’ve often found the most fascinating lessons of economics come from applying abstract ideas to what we observe every day.
Recently, I found myself on a sketchy side of town looking for my nearest bank branch. In front of me in line was someone who reeked of alcohol. This was about lunch time on a week day and since I was at a bank and not a NASCAR event I was left to assume this guy is an alcoholic. As we stood there in line I started thinking about what his financial situation might look like which lead me to generalizing alcoholics for the sake of an entertaining post on the blog. Here are just a few things I picked up on as I explored the economics of an alcoholic.
Addiction: Alcoholism is an addiction issue. All addicts initially find their source of addiction to provide some kind of pleasurable effect. Most of us know the effect alcohol has on us, and alcoholics are drawn back to the feeling. Unfortunately, you eventually build up a tolerance to the effects of alcohol which means you need to consume more. Aside from being quite expensive, this tolerance also makes each individual drink less effective. This is the law of diminishing marginal utility. The lesson then for an alcoholic is to optimize their alcohol use, or also find substitute products to “kill the pain” like pot or pain pills. This other choices have their own risks too so each alcoholic should make their choices wisely.
Saving: John Maynard Keynes is famous for having the cojones to tell people it’s bad to save. What he meant was that since person consumption is so important to the economy, an increase in personal savings can be bad for the economy. We modern critics often characterize this as Keynes not wanting anyone to save. Well have you ever met an alcoholic with a 401(k)? Maybe a functional alcoholic might, but in my eyes that is no alcoholic. Depression and a lack of usefulness drive an alcoholic, if you can’t see beyond your next drink you aren’t thinking much about the future. Since the alcoholic spends all his money on booze and doesn’t save, he’s the ideal citizen for Keynesistan.
Incentives: Every time you take a swig, shoot up, or hit the pipe, you’re trying to fill a void or forget a bad memory or simply become a brainless zombie for a while. You manage your life by stealing from family, sitting on the sidewalk with a cup, or barely managing to hold a day job. These aren’t productive uses of your time and ultimately you drag down the economy. The problem is we don’t offer alcoholics an incentive to be more productive. We might kill two birds with one stone if a social program were launched to incent alcoholics to work hard for more access to booze. Stone one is increased productivity. Stone two is they eventually get so plastered they either kill themselves or end up in rehab. Either way you kill the habit. Perhaps allow an alcoholic to be registered as such and be able to deduct an allowance tax free like a 401(k) for booze. There would have to be some kind of control but this mostly just made me grin simply thinking about it.
Alcoholism is a serious problem that can not only hurt the individual (which I’m okay with) but also those around the alcoholic. However I think that by analyzing them from an economic standpoint we might learn a little bit more than the Dr. Phils of the world have already uncovered. My post is mostly for entertainment, but counselors, therapists, and policy makers might uncover some new treatments by applying the dismal science to a depression with no shortage of liquidity.
Photo: a4gpa
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I titled an entire section of my web site “Stock Drunk” because I think the failure of economists to consider the implications of alcoholism in the investing field is the biggest cause of our investing and economic troubles of today.
The dominant model for understanding stock investing is the “Passive Investing” model. The model is rooted in the Efficient Market Theory, the idea that investors are as a whole acting in their self-interest. If only it were so!
Do alcoholics act in their self-interest? They lose their spouses, their families, their jobs, their homes, their money, their health, and their self-respect. And they often end up not enjoying the drink that much. Many alcoholics are plenty smart. They are just not capable of acting in their self-interest.
So it is with stock investors. The historical data has been warning us that investing passively (not changing your stock allocation in response to price changes) always ends in financial ruin. But do we act in in our self-interest and avoid Passive Investing? By no stretch. We pay “experts” million-dollar salaries to encourage us to invest passively!
We want to destroy ourselves. That’s the bottom-line reality. I believe that we can be trained to overcome our temptation to become stock drunks. But we cannot do it without agreeing to explore these questions in depth. Alcoholism is a counter-intuitive phenomenon and so is the urge to invest passively.
Rob