The Water Bottle and the Fountain

You cannot escape economics. The word 'economics' is best understood by considering its close cousin 'economize,' a concept that most of us have to face daily. When you decide between watching a film or renting a video, you make a decision in economics, in economizing your time and money. Aggregate all such decisions you make, and you get your personal economic situation. Aggregate all such decisions made by everybody in some country, and you get that country's economy.

Most of us instinctively understand how to manage our own economics. But the economics of a country usually overwhelm us with their magnitude and complexity. It's hard to extrapolate our personal economics to that extent. But in this case, the sum of the parts is exactly equal to the whole. If some economics issue or concept facing the country appears too hard to comprehend, think of it as a smaller issue faced by each of a million persons. Then consider how you'd handle that smaller issue in your own life.

For example, here's a simple issue that I faced regularly. During the summer of 2001, I flew from Boston to Austin, Texas, every week for three months. I quickly got into the habit of carrying some water with me on the flights, as otherwise the low humidity on the planes dehydrated me. Before each flight, I bought a bottle of water at the airport shops, typically for about $1.50. But then I started carrying such a bottle with me and re-filling it at the water fountains that are invariably found in the airports. Okay, maybe I'm cheap, but why waste any money, even if it's only $1.50 per flight?

Then the U.S. economy headed for a downturn. We were all exhorted to "get out and spend" to jump-start the economy. By then, I had finished my stint in Austin, but if I had still been flying regularly, should I have recanted my spend-thrift ways and started buying a bottle of water for $1.50 on each flight? Would this have been the way to rescue a faltering economy?

The arguments by the idea's proponents for spending money in this fashion appear solid. The $1.50 I spent per bottle, magnified by all such decisions made by millions of people, goes to support a whole industry of water bottlers. This money, in turn, is spent by the bottlers, and round and round the money goes, saving us from a downturn. If I re-fill my bottle at a water fountain instead, thousands of water-bottlers are thrown out of their jobs, the industry collapses, and the economy sinks into a gloomy recession. It all seems to make sense. And yet ... and yet, how can it make any sense, economically or otherwise, for me to pay more money than necessary to assuage my thirst?

Let's consider the two situations. In one, I have my $1.50 and my water bottle filled at a fountain. In the other, I'm $1.50 poorer, but have supported the water-bottlers by that amount. How can we decide which situation has greater value to all parties concerned? It does not seem possible to decide unambiguously.

The way out of this conundrum is to interpose an intermediate situation, in which I still fill my water bottle at a fountain, but give $1.50 to the shop-keeper, to be passed along to the water-bottlers.

Situation 1 2 3
Description Buy bottle for $1.50 Fill bottle at fountain, give $1.50 to bottlers Fill bottle at fountain, keep $1.50
Me $1.50 poorer $1.50 poorer Have $1.50
Water-bottlers Do work, get paid Do no work, get paid Do no work, don't get paid

Compare Situations 1 and 2. My predicament does not change, but the water bottlers are better off in Situation 2, as they do not have to do any work. So Situation 2 is better overall than Situation 1.

Then compare Situations 2 and 3. The difference between the two is solely in who has the $1.50. Are all parties better off if I simply give $1.50 to the water-bottlers, even if I get nothing in return? I might as well have given the money to the shoe-shiner, or to the flight attendant. Can giving money away like that really benefit the economy? That's charity, not economics! To benefit the economy, I should keep the $1.50 until I get some service worth paying for. Hence Situation 3 is better overall than Situation 2.

Let's summarize: we started by attempting to compare situations 1 and 3. Those two alone are difficult to compare. But by interposing situation 2, we are able to compare them:

Situation 2 is better than Situation 1; Situation 3 is better than Situation 2.
Hence Situation 3 is better than Situation 1.

This establishes that the collective situation, as an aggregate of the individuals' situations, is better in Situation 3 than in Situation 1. The overall economy benefits when I allocate my scarce resources ($1.50) as parsimoniously as possible. Profligately spending my money on items that I can get more cheaply by other means doesn't benefit me, nor does it benefit the country's economy. In other words, this confirms that the country's interests and my interests are allied in this case.

The intermediate Situation 2 is not something that people would adopt in practice. Can such a non-real situation be used to help determine the relative worths of two real situations? The answer lies in why people would reject Situation 2: because Situation 3 is obviously better.

How about spending money to obtain items that I otherwise would not have obtained? Suppose I had not been planning to take a vacation this year; should I, as a means of stimulating the economy, take a vacation after all? That's a somewhat different situation, but I believe (as I will discuss elsewhere) that the answer is still that what makes sense for the country must make sense for me.

The interposition of an intermediate situation is a useful means of comparing two situations that are not directly comparable. For example, consider a factory that employs a hundred people who manufacture kettles that are sold for $50 each. The factory owner is considering whether to introduce labour-saving machinery. To take an extreme case, suppose that the machinery will replace the hundred people's labour, and the owner plans to continue annually selling the same number of kettles for $50 each, pocketing the increased profits due to the decreased labour costs. (To keep things simple, let's ignore the capital costs of the machinery, as it complicates the situation without changing the conclusion.)

Which situation is more advantageous to all parties concerned? Under the new situation, the owner increases his profits, but a hundred people no longer get paid. At first glance, it's hard to determine which situation is better overall. But, as before, the interposition of an intermediate situation clarifies the matter:

Situation 1 2 3
Description Employ kettle-makers Install machinery, continue paying kettle-makers Install machinery, fire kettle-makers
Owner Get profits Get same profits Increase profits
Kettle-makers Do work, get paid Do no work, get paid Do no work, don't get paid

In Situation 2, the owner is no better off, but the kettle-makers are better off than in Situation 1, because they don't have to work. The difference between Situations 2 and 3 is solely in who gets the money that was paid as wages. Either the owner can keep the money, or he can pay the ex-kettle-makers. He may choose to do so for compassionate reasons. But any economic argument for doing so would be equally applicable if he gave the money to any other people of his choosing. But, surely, the best way to benefit the economy is for him to keep the money to pay for goods & services from productive workers. Continuing to support the ex-kettle-makers is an act of charity, and not an economic decision.

Caveats: The above arguments ignored various factors in the interests of simplicity and expository clarity. In practice, there are complicating factors, such as:

This appears to reduce the difference in total worth between Situations 1 and 2. However, it is exactly offset by the additional fountain-makers and machinists that are employed in Situation 2. So this factor does not affect the argument or its conclusion.

Rujith de Silva
Created 2002-01-30; modified 2009-10-14.