All Commentary
Monday, June 1, 1998

“In Defense of Misers”

Markets and Misers Provide More Benefits Than They Are Credited With

To the Editor:

Since I work for an organization that studies philanthropy, I find Candace Allen and Dwight R. Lee’s article (“In Defense of Markets and Misers,” April 1998) interesting. I agree with their argument that Mr. M (the miser) provides a total benefit of $10 billion to others by hoarding his money, thus reducing the money supply and making goods more affordable. But I don’t think they have shown that Mr. P (the big spender and philanthropist) “actually does less good than the unheralded contribution of Mr. M,” that “Mr. M is actually providing more benefits to others,” and that “misers provide benefits to others more effectively than do philanthropists.”

I think that depends on whether Mr. P’s philanthropy is wise or ill considered. To take two current examples, billionaire Ted Turner has pledged to give a billion dollars to the United Nations over the next ten years. Unfortunately, I think most of this money will have little effect and perhaps some negative effects (e.g., promoting dependency rather than economic growth in third-world countries by merely providing material assistance). But Bill Gates’s pledge of $200 million to provide computers and Internet access to public libraries in low-income communities might have significant positive effects.

To take a hypothetical example: suppose a student becomes interested in biomedical research as a result of using these computers and the Internet. Suppose this interest might never have been sparked without these com puters (the student becomes an accountant instead). The student goes on to study medicine in college and later discovers a relatively inexpensive cure for a major disease. In just the first few years after the cure is found, over $200 million is saved in health-care costs. While this example is probably not very likely, it is at leastpossible. Certainly other positive economic benefits of lesser magnitude are possible. Together, they may add up to well over $200 million—an amount that Bill Gates could just as easily put in a vault under his house.

In response to the authors’ question, “which one of the two did more to benefit others?” I would say we don’t know because we don’t know what kind of philanthropist Mr. P is. In most cases, there is probably no way to measure the economic benefits that good philanthropists provide. But surely the spillover effects of philanthropy at least sometimes provide more in benefits than an equivalent amount of money kept in a vault.

Some of the authors’ other remarks seem overgeneralized:

“Without the feedback of profit and loss, [nonprofits] don’t know if they could be producing more value by using their resources in other ways.” But certainly some nonprofits try allocating their resources to different programs and have the results of this measured by evaluation studies. These studies probably aren’t as meaningful as profit-and-loss statements, but they do provide some useful information for making program improvements.

“Charities lack the incentive to direct resources to their most productive employment.” Granted, it is better to rely on the profit motive to allocate resources than the goodwill of nonprofit executives, boards, and staff. But surely there are many people of goodwill in the nonprofit sector who seek to allocate resources efficiently and to avoid extravagant costs.

“Much of it [charitable contributions] goes into appeals for more contributions.” I don’t know if anyone has done a scientific survey, but fund-raising costs can vary from almost nothing to almost the entire budget of a nonprofit.

Daniel T. Oliver

Research Associate

Capital Research Center

Washington, D.C.

Candace Allen and Dwight R. Lee respond:

All authors hope that their work will motivate thoughtful comments by thoughtful people, and so we were delighted to see the response to our article by Dan Oliver.

The main point of our paper is that markets and misers provide far more benefits than they are commonly credited with, because those benefits are widely dispersed and difficult to trace back to their origins. And indeed, we believe, and argued, that markets and misers accomplish more good than politics and philanthropists even though the benefits of the latter two are more appreciated because their benefits are concentrated and easily visible and traceable to their source. Thus, more good is accomplished indirectly through the market process than directly by either politicians or philanthropists, although of the two, we prefer the philanthropists.

Oliver’s first concern with our paper is that we undervalue the potential benefits of philanthropists; the gifts of some philanthropists can have spillover effects that are greater than the “equivalent amount of money kept in a vault.” There are no doubt cases in which this is true, as suggested by Oliver’s hypothetical student who discovers the cure for a major disease because of a philanthropic girl. But our point was that the money kept in the vault lowers the price level a bit, which presents opportunities for people that can also have desirable spillover effects. These opportunities are easy to ignore because of the diffused nature of benefits created (exactly our point), but easy to appreciate once we consider the importance of marginal impacts. For example, there are millions of young people deciding whether to go to college, or take an additional course at the expense of less part-time work. Some of them will be on the margin of choice, and so the small per-capita increase in well-being provided by a miser can make a difference in how much education they get. Just as in the case of Oliver’s student, some of “our” students can also go on to create enormous benefits because of the marginal impact of the miser.

Oliver agrees with us that the incentives of the marketplace do the best job directing resources into their most valuable uses, and we agree with him that “there are many people of goodwill in the nonprofit sector who seek to allocate resources efficiently and to avoid extravagant costs.” But in terms of getting the job done, we feel that marketplace incentives trump the “goodwill in the nonprofit sector.” We also agree with Oliver on the lack of “a scientific survey” backing up our claim that charitable organizations spend more on fund-raising activities than private firms spend on advertising. We have seen examples of extraordinarily large amounts of charitable revenues going back into fund-raising, and, for reasons discussed in our article, feel our claim is justified. But we recognize that this is ultimately an empirical issue.

We appreciate Oliver’s comments. And we want to emphasize that our paper is in no way an argument against philanthropic activity. People should be free to do what they want with their money, including giving it to the United Nations. And, as opposed to Turner’s gift, we are confident that much philanthropic activity is socially beneficial. But it’s misers, not philanthropists, who need defense. By defending misers we aimed at making a broader point on the advantages we all realize from the dispersed and indirect benefits of the marketplace.

Candace Allen is a member of the affiliate economics faculty at the University of Southern Colorado. Dwight Lee, a contributing editor of The Freeman, is Ramsey Professor of Economics and Private Enterprise at the University of Georgia.

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