Wednesday, December 31, 2008

The Economics of Charity Exhaustion

As faithful readers of this blog might note, there have been more posts lately than usual. I've been going through all of the unfinished posts, some of which had a few paragraphs written, some with a sentence or two, and some nearly finished. This one only had a title, based on some thought that I had about a year ago.

The basic economic case for charity is hard to make. Economics presumes that people are rational, and make rational choices. When we give something away to someone, we don't usually do so with the expectation of getting a return on it; charity is not an investment. The reward for our behavior must then be something else - social or psychological causes are the first refuge of economics in these cases. The easier answer would be that people are not wholly rational, and sometimes do things just because, but that is not a very useful assumption on which to base a science.

The psychological reason for charity is that it makes people feel good. The social reason is that it makes people feel less bad, and can be used as leverage (bragging rights). In this model, charity is a service. Giving food, money, coats, or time is a way of paying a person or organization in order to alter your mood. Of course, many people involved in charity don't see this as a good comparison, because that means that charity is no better (on a personal level) than spending money on personal things, like videogames, movies, beer, etc. The only real difference is that there's social pressure which can only be relieved by giving.

In a small scale economy, charity can in fact act as a form of investment. If we lived in a village of 150 people, my act of charity might enable another person to become a more productive member of our village, which in turn improves the lives of everyone. It could also improve the giver's life more than the amount it cost him to give. This is why I'm usually more than ready to help out my friends - the return on investment within a social circle is pretty good. The thing is, in a large scale economy, where you're unlikely to see a stranger more than once, the personal material reward for charity is pretty much nothing.

From the point of view of the society, charitable giving is usually pretty worthwhile, because the collective needs to be maintained. The need for collective giving is so strong, in fact, that it's not even voluntary anymore - it's why we have taxes. From this, a cynical person might respond to any request for charity with, "Isn't that what we pay taxes for?" but it should be understood that this makes that cynical person look like an asshole. This was one of the big problems with Katrina - a lot of the charitable giving had people wondering "Isn't this what FEMA is supposed to be doing?"

So charity goes above and beyond the "mandatory charity" which is provided by our taxes. The reason for giving beyond that amount is either psychological or social. But as a consequence of this, the distribution of charity does not have a real basis in rationality. When we give (if we give), we only do so until the point where a subsequent dollar spent doesn't give us a psychological or social benefit equal to a dollar. Because social or psychological pressure mounts over time, this is why people are more likely to give several small donations instead of one large one. This is also the reason for donations to be spread among a number of charities instead of just going to a single one. On top of that, this means that there is a limited amount of charity in the world per year, which can only be increased by the application of social or psychological pressure.

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