Four Ways to Spend Money
Also known as: Friedman's Four Ways, Money Allocation Principle
Formulated by
Milton Friedman
(1962)
menu_book
From
Capitalism and Freedom
Definition
Milton Friedman's framework describing four ways money can be spent, each with different incentives for economy and care about results: (1) Spending your own money on yourself—most economical and careful; (2) Spending your own money on others (gifts, donations)—economical but less careful about results; (3) Spending someone else's money on yourself (business expenses)—not economical but careful about results; (4) Spending someone else's money on others (government programs, subsidies)—neither economical nor careful about results. This principle illustrates how ownership and beneficiary alignment affect resource allocation efficiency.
The Four Ways to Spend Money
| On Yourself | On Others | |
|---|---|---|
| Your Own Money | Spending your own money on yourself | Spending your own money on others |
| Economical / Attentive to results | Examples: Gifts, dinner invitations Economical / Slightly less attentive to results |
|
| Someone Else's Money | Spending someone else's money on yourself | Spending someone else's money on others |
| Examples: Legislator setting own salary, employer's money Not economical / Attentive to results |
Examples: Government programs, subsidies, welfare distribution Not economical / Not attentive to results |
Quotes
View full quote"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your..."