By Russell Roberts
Let me introduce you to an acquaintance of mine: Homo economicus, or economic man. He is an interesting character. Economic man (it is never economic woman) is a rational, self-interested fellow always looking out for himself. He does not give to charity. Why waste money on someone other than yourself? He never leaves a tip in a restaurant unless he expects to eat there again. He never votes because his single vote is almost certain to be worthless in determining the outcome of an election, even a close one. Give blood for a blood drive? Are you crazy?
There is another name for this type of person: straw man. Why? Because economists understood long ago that altruism, fellow feeling, and caring for others are a huge part of the human enterprise. Such motives explain why we have children, do volunteer work, vote, write checks to charities, and take jobs that do not pay a lot but that are rewarding in other, nonmonetary ways.
There are many situations in which altruism is more or less irrelevant. When someone buys a house or browses the produce section at the grocery or chooses a retirement plan, narrow financial motives tend to take over. A lot of powerful predictions come from noting that people tend to act in their own narrowly defined self-interest.
But economics also has quite a bit to say about behavior that is altruistic. While the economics of altruism may seem like an oxymoron, economics is about the choices we make when we cannot have everything we want and the implications of those choices in market and nonmarket settings. As long as people do not have infinite amounts of time and money, economics will have something to say about how they behave in settings involving love and compassion, duty and honor. The essence of economics is remembering that few virtues are absolute—when they get more expensive, harder to do, or less pleasant, people will do less of them.
This richer perspective on human behavior, which allows for more complex motives than the narrowest self-interest, goes back to Adam Smith, whose underappreciated masterpiece, The Theory of Moral Sentiments, explores the richness of human nature. Smith understood how the power of self-interest, harnessed by competition, could make the world a better place. But he also understood that narrow self-interest in the pursuit of material well-being is only one of many human motivations.
That is not to say that economists do not recognize that some charitable giving is motivated by pecuniary self-interest. People may donate to enhance their reputation with others or for the opportunity to make social or business connections. But most of us donate to charity for the same reason that we give our money to the ice cream vendor or the car dealer—the satisfaction and pleasure we get in return make the monetary sacrifice worthwhile. That is, much of our giving stems from what might be called self-interested altruism, the joy of seeing others helped.
In 2002, individuals and corporations in America gave roughly $240 billion to charity. Is that a big number or a small one? American giving as a percentage of GDP dwarfs that of every European country, even when spending on religion is excluded. A recent study by the Johns Hopkins Comparative Nonprofit Sector Project (Salamon 2004) found that giving by American individuals and businesses, as a proportion of GDP, is eleven times that of Italy, three times that of France, seven times that of Germany, and twice that of Sweden. American giving is seven times that of Japan. Of the thirty-six developed and developing nations studied, only Israel is more generous.
Recent data suggest (Salamon 2004) that the value of time devoted to volunteering is more valuable than direct contributions of money and that some Europeans are more generous in this regard than Americans. But these data include coaching Little League and volunteering with European amateur sports clubs. And some European data include helping relatives, a category excluded from the American data. So, while volunteering is an important contribution to the fabric of life, in what follows I focus on monetary donations.
Even excluding the value of donated time, Americans donate billions more than the federal government spends on cash, food, and housing for the poor. The bulk of the money, typically about 85–90 percent, comes from individuals or bequests. What do we spend our charitable dollars on? When we think of charity, we think of helping the poor. But very little charitable giving goes to the poor. In most years, about half of all charitable giving goes to religious institutions. Most of the rest goes to education, health, the arts, and the environment. Very little of the $240 billion is what would have been called charity in, say, the nineteenth century. Almost none of it goes to feed the hungry or shelter the homeless.
The biggest recipients of United Way funds, for example, are typically the Red Cross, the YMCA, the Jewish Community Center, and the Boy Scouts. And while these groups do help the poor with some of their programs, most of their money is spent elsewhere.
Perhaps Americans are less generous than they appear to be. But economics suggests a different explanation. Charitable giving by Americans one hundred years ago was a very different picture. Back then, numerous private charities helped the destitute, the insane, the single mother, and the elderly. Some catered to the poor of specific nationalities or religions. Some provided coal in the winter or work or food or clothes. What has changed?
The simple answer is the role of the federal government in the welfare system. It is commonly believed that before the great depression, the poor, the elderly, and the vagrant had to rely on private alms. That turns out not to be true. The government has been involved in helping the poor in America since colonial times.
But the Great Depression is a key watershed. Before the Great Depression, public aid to the poor typically took place in almshouses or poorhouses, facilities run by the city or county where destitute people could get work and receive food and shelter in return. By all accounts, these were distinctly unpleasant places, perhaps deliberately so, as stigma was believed to be an important deterrent to dependency.
Private charities typically offered “outdoor” relief—aid “outside” the poorhouse or almshouse. It could be cash or food or coal and was doled out on a case-by-case basis.
When economic conditions worsened, private charity typically surged to deal with the increased hardship. In the severe depression of 1894, for example, the New York Association for Improving the Condition of the Poor provided $100,000 in aid to the poor of New York City. Other organizations, such as the New York World Bread Fund, the Herald Free Clothing Fund, and the East Side Relief-Work Committee, spent similar amounts. A single individual donor, Nathan Straus, was said to have contributed $100,000 by subsidizing low-cost sales of coal, food, and lodging (Closson 1894; Rezneck 1968).
But with the dramatic increase in public aid during the Great Depression, which began in late 1929, private charities were “crowded out.” They could no longer successfully compete for donations with a federal government that could compel “donations” via the tax system. Table 1 shows how private charity during the Great Depression grew initially, then faded as government spending surged dramatically.
As public aid continued to grow and then remained in place, many private charities that helped the poor simply folded, presumably because they could no longer generate contributions.1 Why give when your tax dollars already go toward the same goal? Table 2 shows how the New York Association for Improving the Condition of the Poor found its donations drying up as federal aid surged. Note the shift away from material relief—the direct transfer of money and resources—as federal aid started to grow in the early 1930s. Finally, in 1939, the association merged with another organization and focused exclusively on social services not provided by the government rather than on direct aid to the poor (see Roberts 1984 for more details).
The same phenomenon remains true today. Few private charities work with the poor, and those that do tend to work with extreme situations in which the people they are trying to help are either ineligible for public aid or uninterested in working through the public system for social or psychological reasons.
What would happen if the government were to leave charity in aid of the poor to the private sector once again? Private charity would certainly increase. But it would be unlikely to equal the amount of money that the government spends. Many people who are coerced into helping the poor through their taxes would be content to let others do the giving; they would give little or nothing, assuming that others would shoulder the burden. The total level of giving would thus likely be lower under a purely private system.
|*. Excludes expenditures under the Civil Works Administration.|
|†. Excludes expenditures under the Works Program.|
|Public Funds||Private Funds|
|Source: Geddes 1937.|
|*. Excludes legacies. It is difficult to track legacies during the period.|
|Material Relief||Total Expenditure||Donations*|
|Source: Annual Reports of the association, 1928–1938.|
But the total amount of money spent on the poor is not the only measure of a social policy’s success. The government system has the advantage of being able to compel people to pay their taxes. But it has the disadvantage of being inflexible and relatively stagnant. A private system of charity is likely to be smaller and more innovative.
While government welfare programs are reformed now and then, there is little political support for a radical reordering of responsibility away from the public sector and toward a more voluntary solution. As long as the government remains the dominant provider of aid to the poor, charity dollars in the United States will not go to the poor but will continue to provide significant support to other causes, helping the arts, museums, universities, medical research, and religion.
Foreign Aid, from the Concise Encyclopedia of Economics.
Palotta on Charity and the Culture of the Non-Profit Sector. EconTalk, June 2013.
William MacAskill on Effective Altruism and Doing Good Better. EconTalk, September 2015.
Munger on Love, Money, Profits, and Non-profits. EconTalk, April 2010.
Our collection of EconTalk episodes on Altruism and Charity.
Amy Willis, Discovering Positive Deviants. EconTalk Extras, May 2019.
Susan Mayer on What Money Can’t Buy. EconTalk, November 2019.