False economy

In economics, a false economy is an action that saves money at the beginning but which, over a longer period of time, results in more money being spent or wasted than being saved. For example, it may be false economy if a city government decided to purchase the least expensive automobiles for use by city workers, as cheap automobiles have a record of needing more frequent repairs in the long term and the additional repair costs would eradicate any initial savings.

Motivating factors on the part of the party engaging in false economies may be linked to the long-term involvement of this party. For example, a real estate developer who builds a condominium may turn the finished structure over to the ensuing condominium corporation which is run by its members once the last unit is sold and the building has passed a final inspection. Longevity of the components of the structure beyond the final turnover of the facility may not be a major motivating factor for the developer, meaning that the result of the application of false economies may be more detrimental to the end user, as opposed to the developer.

Individuals may also practise false economy in their personal lives. A notable practitioner of false economy was King Frederick William I of Prussia, who was said by Thomas Macaulay to have saved five or six reichsthalers a year feeding his family unwholesome cabbages even though the poor diet sickened his children and the resulting medical care cost him many times what he saved.[1]

The concept is related to planned obsolescence, whereby the lower initial cost of a false economy attracts buyers mostly on the basis of low cost, who may later be at a disadvantage.

Some examples of individuals partaking in false economies include: Purchasing cheaper products that don't last as long or may require more maintenance than the more expensive alternatives (buying cheap shoes, cheap paint, cheap automobiles), Paying just the minimum amount on a credit card bill each month, purchasing counterfeit or knock-off goods, Choosing to not have your vehicle serviced on time, Doing home projects yourself rather than employing a trained professional for the job. All these examples save the consumer some amount of money in the short-run, however could end up costing the consumer greatly further down the road.


Poor people are often forced into false economies when they can't afford the better long term option in the short term.[2][3]


See also

Total cost of ownership

References

  1. ↑ MacAulay, Thomas Babington. Critical and Historical Essays. Volume 2.
  2. ↑ KillerGibsons. "Why I Make Terrible Decisions, or, poverty thoughts".
  3. ↑ Tirado, Linda (21 September 2014). "'Poor people don't plan long-term. We'll just get our hearts broken'" – via The Guardian.


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