If Everyone Caught FIRE, Would There Be a Recession?
Some Boring But Important Background Before the Controversy
The “Tragedy of the Commons” is an economic concept with origins in a 1968 academic article by an ecologist named Garrett Hardin published in Science. Without boring you too much with things like abstracts, charts, and in-text citations, the meat of the article is about over-grazing commonly owned land.
If I were you, at this point, I would be wondering what the relationship between grazing on common land and personal finance might be. My eyes might also be glazing over right now. I might even be thinking about donuts or turkeys since grazing and glazing were both mentioned in this paragraph.
Anyway, back to the story…
The tragedy of the commons itself references a broader economic theory. The “tragedy” is a situation where resources are finite and individual users of commonly available resources acting within their own self-interests behave in ways that are contrary to the common good.
The tragedy of the commons is that this behavior continues until all of the resources are depleted.
As someone who studied the natural sciences in college, professors discussed this theory often. The context in their examples was usually about fishing.
Imagine a pond filled with fish and with no restrictions on fishing. How long do you suppose it would take for the pond to become overfished?
That’s the tragedy of the commons.
The Tragedy of the Commons Applied to Money
Only recently did I start to think about how the tragedy of the commons can also apply to money. My wife, Mrs. Thrifty, and I were headed home from a rare evening out without our girls.
I can’t overemphasize enough that you should never leave young children unattended, or with bears, or even with responsible seeming raccoons. But if you have loving friends and family who you trust and who enjoy spending time with your little ones, I would encourage you to take them up on their offers to watch your kids for a few hours every now and then.
Anyway, Mrs. Thrifty and I were discussing how the downtown area we’d visited seemed to be flourishing. I told her the local economy had really picked up since I’d been there last.
Her response both surprised and challenged me.
My wife is pretty thrifty. Her name is Mrs. Thrifty, after all. And it’s not like we could make something like that up to write pseudonymously on the internet.
Even so, she’s not quite as enthusiastic about pursuing financial independence as I am. That’s why her comment caught me off guard.
She said, “You know, I think it’s great the economy here is doing well. But everybody couldn’t be living the way we’re living and that still be true.”
Just like virtually every other time, Mrs. Thrifty was right.
Could a Contagious FIRE Result in Recession?
Mrs. Thrifty’s comment really caused me to think about our spending habits and the broader implications for the economy.
Like many folks in the financial independence community, we try to save north of 50% of our gross income.
We invest in the stock market, so it’s not like all the money we have just sits in a bank account or is buried under a mattress or in jars in the backyard. Not all of it, at least (Note: copies of the map of the money buried in Mr. Thrifty’s backyard can be purchased for a nominal $500,000 fee. Just contact us for more details at the web address above!).
Note. Need a safe place beside your yard to stash some cash? check out: Unicorn of Savings Vehicles
But we’re not very active consumers.
It may be surprising to some, but consumer spending (aka the money you and I spend on important, non-negotiable staple items like gasoline, food, mandolins, and Yahtzee games) accounts for around 70% of the gross domestic product in the United States. Seventy percent.
If everyone were striving to save half their income or more, there eventually might not be anywhere near as much money circulating through the economy to continue to generate income to go around.
I’m not smart enough to explain exactly how it works, but consumer spending is a money multiplier.
If everyone were actively pursuing financial independence by not spending money, many of our incomes might eventually end up being much lower.
The tragedy of the commons, meet money.
Since those in the FIRE community are also pursuing early retirement, in addition to saving aggressively and curbing spending, the economy could also be impacted by the mass adoption of an early retirement movement.
If we were all pursuing early retirement, and we were all successful, eventually there would be no workforce.
How long could an economy thrive when no one is spending money and no one is working?
I’ll leave the conclusion drawing to you, but I can tell you Mr. Thrifty isn’t investing in that economy.
Even if he is talking in third and second person…
Don’t Hit the Panic Button Just Yet
Unless you just like the way pressing buttons feels, and you have an actual panic button within reach, you can play it cool and stay in your chair for now. Or keep standing, if that’s what you’re into.
If you’re driving or splitting wood with an axe right now, though, please put the screen down for a minute. Don’t get me wrong; I would like to hang out with you sometime if you’re using an axe effectively. You seem like my kind of person.
Anyway, the reality is we’re not all trying to become financially independent, and we’re definitely not all trying to retire early.
That’s certainly true within the broader generational population, and it’s even true within the personal finance community.
One of the best things about the tragedy of the commons is that it provides unique opportunities for those who are willing and able to go against the flow.
Go Against the Flow
Because of the reality of the tragedy of the commons, not everyone can do something that would be beneficial for one person or for some people. What’s good for the goose really may not be good for the gander.
Not everyone could continually benefit from a finite amount of any good thing.
But anyone can.
Not everyone could choose to live below their means. Some people just aren’t interested in it, and even if they were, we’ve established that it might be bad for the economy if everyone did.
But anyone can. And because you can, you can probably find ways to reach your goals because of it.
What My Realtor and Michael Dinich Have in Common
There’s a guy in my town who sells real estate. There are actually quite a few folks in my town who sell real estate. But this story is about the guy.
This guy sells more real estate than anyone else in town. And he owns more rental properties.
Anyone could do what he does, but not everyone can. There are only so many houses out there to sell and to find buyers for, and there are lots of realtors in the market. It’s the tragedy of the commons.
To be honest with you, I’m not even sure exactly what he does different, other than that he seems to have an undeterred sense of perseverance about him, kind of like Michael Dinich. He does not, however, have an awesome beard like Michael Dinich.
I do know the realtor in my town has figured out a way to do things that no one else here has. He’s not that old, and I imagine he could walk away from what he does today without having to work another day in his life.
The tragedy of the commons isn’t something to lament. It’s something to understand and leverage to your benefit.
Find Ways to Differentiate Yourself
The tragedy of the commons allows you, allows anyone (but not everyone), to differentiate yourself.
How could you benefit from the tragedy of the commons?
Find something (ethical) no one else is doing, can do, or is willing to do. Or find something you can do better than anyone else.
Whatever your niche may be, that’s where you can find an opportunity others may not see. I’m not sure whether or not everyone could achieve financial independence. But anyone can.
Don’t let the tragedy of the commons and what other people are doing limit you. Maybe you could fish in another pond that wasn’t so crowded or sells fishing poles instead of fishing. In the Gold Rush of 1849, far more outfitters found economic prosperity than prospectors did.
Look For Opportunities
The tragedy of the commons provides opportunities if you can see them. For example, if the stock market were to drop 10% next week, how would you respond? I would see an opportunity, at least to the extent that I didn’t immediately need the money I already had invested in the market.
Unless stocks were grossly overvalued, which they sometimes are, stocks are now on sale at 10% off in this scenario. That could be a good time to buy more. Anyone can, but not everyone could…the tragedy of the commons.
If you can see the same set of circumstances differently than most others, you will find ways to accelerate your journey on whichever of life’s paths you might be pursuing. What’s something you can do better than anyone else?
What’s something (ethical) no one else is willing to do? How can you leverage the tragedy of the commons to your benefit?
Let me know your thoughts on the tough questions above. Do you think a recession would occur if everyone was on FIRE?
Mr. Thrifty publishes Thrifty Enough, a blog that provides an uncommonly common sense approach to thrifty living. You can also find him on Twitter at @thriftyenough. He lives in a small Midwestern town with his wife and a growing contingent of young children. They are on the path toward financial independence, but they enjoy stopping to smell a few roses along the way.
It’s been rumored that Mr. Thrifty once won and lost a million dollars and two possums during the course of the same card game. What’s known is that faith, family, friendship, and low-cost, diversified index funds are some of his favorite investments.