Wednesday, June 17, 2009

The Economics of Friendship

It's blog post titles like this that make people not want to be friends with economists.

(I kid, of course. Everyone wants to be friends with an economist. At least they do today, now that their portfolios have taken a 25% haircut in the past three quarters and their old financial advisor has fled the city to work on an oil rig in Fort McMurray. Now everyone wants some pro bono investment advice from their friendly neighborhood economist. But I digress.)

Today's post will focus on a rigorous, quasi-serious analysis of the economics of friendship.

First, read the inspiration behind this post. Bryan Caplan is one of my favourite economists living today. He is smart, honest, perceptive, and full of integrity. He also strikes me as a fundamentally decent and nice person. Hopefully, in light of all this (very sincere) praise, he will forgive me for pointing out that in his younger years, he was a bit of a nerd. As such, his definition of a successful social strategy sets the bar pretty low.

As I pointed out in the comments to that post, I disagree with his recommendations. To explain why, I'll need to break down a working model of friendship.

Friendships exist because life is full of potential positive-sum interactions between groups of people. Most of these look a lot like unconventional forms of insurance.

- Your friend moves, you help him
- His car breaks down, you drive him around until it's fixed
- He loses his job, you pick up bar tabs until he's back on his feet
- He's single, you introduce him to your girlfriend's hot friends


As I said: Insurance. Except better, because the cost of helping is much less than the benefit received. What does it matter to you if you give up a Saturday to move furniture? You didn't have much to do anyway. But you saved your friend $500 of movers fees. A group of people who are all willing to do altruistic things for one another will always be better off than lone wolves. The closer the friendship, the higher the ratio of (cost to you)/(benefit to them) you are willing to tolerate before the favour becomes "unreasonable." Assuming the number is always less than one, it's pretty easy to see that closer friendships are welfare-enhancing.

So there you have it. The conclusions derived in today's economic analysis: Cherish your friends, offer your help unhesitatingly, and expect them to do the same for you.

The Dismal Science, indeed.