Monday, 27 December 2010

Public Finance and Private Finance

How can these principles of public finance help us with personal finance? Personal finance is similar to public finance in that often an individual wants to save money for the future but is tempted to go on spending binges to fulfill needs like food as well as wants like intimate relationships, family, holidays, and luxury cars. According to behavioral economics, the dual-self model is used to explain how often an individual will behave as if he has two selves. One self is the sensible, long-term thinking self (the long-term self) who wants to exercise, wants to save up money, and so forth. The other self is the impulsive and short-term thinking self (the short-term self) that wants to spend money via impulse shopping, watching television, eating junk food, and so forth.

All accounting is for the sake of fulfilling the need for a principle to be able to monitor and control the actions of an agent. In other words, accounting is a necessity in principle-agent relationships. In managerial accounting, financial statements are used by managers and executives to allow them to monitor their workers. In public finance, financial statements are also used by politicians (who work on behalf of the general public) to monitor the public sector or the bureaucracy. In personal finance, because of the economic insights of the dual-self model of human behavior, financial statements can be used by individuals to allow the long-term self to monitor the short-term self. In other words, the relationship within an individual person between the long-term self and the short-term self can be modeled as a principle-agent relationship, and the insights we can get from other forms of accounting (e.g. managerial accounting and public finance) can be used to improve personal finance.

In public finance, citizens pay taxes that go to government who then spend the money for the betterment of citizens. In personal finance, the long-term self makes the short-term self work hard to earn money to save so that there is more money in the future to benefit the long-term self. In terms of accountability, in public finance the government is accountable to the people. In personal finance, the short-term self is accountable to the long-term self.

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