Economics is about how social phenomena can lead to unintended consequences, asking which means might be most appropriate for the attainment of a given end. Charity is about trying to help people, or to promote projects. So the role of economic theory with regard to charity, is to ascertain whether our heads agree with our hearts: will the things that make us feel good, actually work?
Whilst in Cluj, we ate at several pleasant restaurants. I often encountered high quality service amidst a delightful atmosphere and wanted to tip heavily. Surely the waitress would appreciate a 30% tip, and to me that amounts to a tiny fraction of what a similar standard of meal would cost in the US or UK. But who else might be affected by this incident? This practice might well lead to a rise in the price of restaurant meals, forcing local people to switch from the nicer places to ones more affordable. Perhaps a divide will emerge between lavish visitors in the town centre, and residents moving toward the outskirts. My intention was not to displace those who for which this was home.
Also a large tip will increase the incentives for people to work in the hospitality industry. At one level, this might just lead to an increase in jobs, as previously unemployed people find work in expanding restaurants. However a more problematic outcome might be that previously employed locals switch jobs in response to the change in relative wages, and we see a diversion of labour from industries such as teaching or nursing toward bar staff. That might sound a little hypothetical, but I know that it happens.
I didn’t want to raise prices for local diners, and I certainly didn’t want to make it harder for schools and hospitals to attract staff.
With the best possible intentions, bad outcomes can emerge.
In the wake of the Tsunami last year, many people lauded the generosity of private donations to charities directly involved in the relief efforts. I expressed reservations (here and here) about those charitable donations, on the grounds that micro-management tends to be a bad thing. My local grocer is good, because he filters out inefficient and wasteful suppliers to offer me a restricted, yet high quality menu of choices. He concentrates on reducing my transaction costs of search, and this specialization underpins prosperity.
When it comes to charity, it is a sign of an underdeveloped, and inefficient market if private citizens channel donations to small-scale projects.
Surely we’d be best making a sustained subscription to reputable agencies like Medicin Sans Frontier, or Amnesty International, or the Red Cross (or I dare say just sit back content that our taxes fund the UN…) and allow those experts to divide up the funds. The worst thing would be to let media sensationalism divert scarce funds from where it’d better be spent.
But how able are those agencies at allocating donations? They all appear to be “not for profit”, and that worries my instincts. I recently spoke to a Romanian chap involved in the privatisation of their old industry, and he put it quite well. He said that you shouldn’t put jobs before profit, else you’ll go bankrupt. Profit before jobs, is the only way of providing either.
And my reservations about the organisations that channel charity have some genuine grounding – there are tales that Tsunami money is yet to be spent, and many aid agencies can struggle when their resources exceed their planning.
To wrap things up, then, I’ve expressed concerns about the efficacy of the donor deciding just how their donation will be spent, and I’ve also raised doubts about the ability of larger charities to cope and prosper as financial institutions. Does that mean I’ve merely justified abstention? Am I saying that our efforts are futile?
No. Charity should be promoted, championed and encouraged where possible. It should be monitored by the donor to ensure efficient use of funds, and that’s best done when the donor pays directly – with their private money, and voluntarily. And to whom should we donate? In a free market system we can be confident that the largest firm is providing a pretty good service. In a more regulated state, the visible firms might merely be those most acquitted at circumventing regulations. In the charity market - where firms profess a desire to be as least market driven as possible – it’s all the tougher. For a more concrete recommendation/suggestion of who to support, stay tuned….