“IF YOU WANT to see how the free market really works this is the place to come,” said Milton Friedman in “Free to Choose”, his 1980s TV series. He was sitting on a cross-harbour ferry in Hong Kong. The city, he said, was an “almost laboratory experiment in what happens when government…leaves people free to pursue their own objectives”.

Listen to this story

Enjoy more audio and podcasts on iOS or Android.

This week the same city began another experiment: not merely leaving people free to pursue their own objectives, but giving them free money to pursue their own purchases. On August 1st Hong Kongers received the first instalment of the government’s consumption voucher, an effort to revive the city’s hard-hit retail industry. The amounts are generous (HK$5,000 or $640) and the distribution is slick. The money is added to a person’s Octopus card (widely used in shops and on public transport) or paid into e-payment apps, such as Alipay. Shops are now vying for their customers’ unearned dollars. The Mira hotel, where Edward Snowden revealed America’s secrets to the world, is offering 75% off a romantic “staycay”. Unlike ordinary cash handouts, these e-vouchers must be spent within a few months. Otherwise they will “expire”.

So will Hong Kongers use it or lose it? Similar experiments have had mixed results. After South Korea provided perishable vouchers in May 2020, only 36% of households said they had raised their retail spending (and some of them cut spending of other kinds). After Taiwan distributed physical vouchers in 2009, most people spent them on things they would have bought anyway, according to Kamhon Kan of Academia Sinica in Taipei and his co-authors. Only about a quarter used them for unplanned purchases, making them no more effective than America’s more conventional tax rebates in 2008.

These shortcomings would not surprise proponents of the “permanent-income hypothesis”, who argue that households will try to smooth their consumption over time, spending a fraction of their estimated lifetime wealth. In these models, windfall gains are largely squirrelled away. Hong Kongers cannot set aside their voucher money without losing it. But the windfall nonetheless lets them save more of their ordinary money because they do not have to spend it on the stuff they are buying with their vouchers.

The originator of the permanent-income hypothesis was none other than Milton Friedman. If Hong Kong’s new experiment is to work as well as the government hopes, one of his most cherished cities will have to overcome one of his most celebrated theories.

For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.

This article appeared in the Finance & economics section of the print edition under the headline “Temporary income hypothesis”