On economics and charity

Published 9:01 am Thursday, November 6, 2014

The Johnson Center hosts a conference this week on “Philanthropy and the Economic Way of Thinking.” The conference will bring to Troy economists and graduate students from across the nation interested in the role of the philanthropic sector in America.

Why, you might wonder, would economists be interested in philanthropy? Such a reaction is to an impression that economics is concerned exclusively with business, profit, and efficiency. Yet economics is a social science, and its domain extends beyond business to the entire spectrum of life and society. James Buchanan and Gary Becker won Nobel Prizes for extending the breadth of economic analysis, Buchanan for applying economics to politics, and Becker for studying crime and the family.

The terms we use to describe a market economy – capitalism or the free enterprise system – also suggest that economics deals only with business or markets. America’s traditional system, however, I think is more accurately described as a voluntary society. In a voluntary society people own themselves and their property and are free to organize their lives and must deal with others entirely on a voluntary basis. Many of our voluntary dealings occur through business and markets, but ultimately businesses are just one form of voluntary association. Sometimes clubs, groups, or charities better serve our goals and purposes.

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People are both self-interested and desire to help others. Sound economics and public policy must keep in mind both parts of this proposition. Institutions which function well only if people ignore their self-interest will not serve society well. Nor will institutions which ignore people’s desire to help their fellow human beings when bad things happen serve us well.

Non-profit charities raise interesting questions for economists. For instance, why do we choose to organize some forms of collaboration as for-profit businesses and others on a non-profit basis? Profit harnesses people’s hard work, intelligence and creativity toward pursuit of a goal extremely well; so why do some groups not organize based on profit? Charities provide services to individuals unable to pay, but evaluating how well a charity is addressing societal problems without feedback from prices and profit is challenging?

Philanthropy has an important role in a voluntary society. Alexis de Tocqueville noted in the 1830s Americans’ penchant for forming groups to address needs and problems in their communities. A strong civil society can remedy many of societal problems we might otherwise ask government to solve. Philanthropy and mutual aid, for instance, led the response to and recovery from 19th Century disasters like the Chicago fire and the Johnstown flood. Prior to the rise of the welfare state, fraternal organizations assisted members in the event of job loss, death, or medical emergencies.

Yet the philanthropic sector seems less capable today acting without recourse to government. Dr. Lenore Ealy, director of The Philanthropic Enterprise and organizer of this week’s conference, argues that philanthropy today faces an intellectual crisis. Much of the philanthropic establishment in America today serves as an extension of the administrative state, working in concert with government.

To some extent this has been beneficial; non-profit organizations certainly improve the delivery of some government services. Nevertheless, too close of entangling alliance with government risks its valuable independent role and threatens to turn our charitable sector into a mere servant of government administration. Dr. Ealy warns that organized philanthropy too often accepts a world-view in which only top-down (meaning typically government-led) efforts can solve societal problems. This is a very different vision from a world in which a variety of voluntary associations spring up to address local problems as needed.

Any substantial rollback of the size and scope government will require convincing Americans that the voluntary sector can better perform tasks currently assigned to government. Sometimes the business sector can substitute, as in the privatization of traditional government services like trash disposal. Acts of beneficence currently entangled with government’s welfare state will require a revitalized philanthropic sector. America’s history of philanthropy offers a path forward, and explains the concern of economists who will gather in Troy this week.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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