man-96587_640You have $100. You want to move people out of poverty. What are your options?

You could put the $100 towards the purchase of a pair of Tom’s Shoes, a “Red” product, or some handicraft from Ten Thousand Villages. You could also buy brand-name products from manufacturers who have a reputation for using “sweat shops”. While not the most palatable way to move people out of poverty, they do provide employment opportunities for the poor. You could invest the $100 with MicroPlace or a hedge fund committed to Socially Responsible Investments. Or, you could give the $100 directly to someone in poverty.

Since we live in a world of scarcity, you have to make a choice. And, as you would expect, when you choose to do one thing you give up the opportunity to do one of the other two. Indeed, by choosing to dedicate your $100 to moving people out of poverty, you will not save the ta-tas, Sarah McLachlan will continue singing that horribly sad song, and your local kick-ass independent radio station will not get supported.

Consume it. Invest it. Give it away. Which one?

Let’s go with give it away. All right then, you have three steps to take and lots of questions to answer:

Step One: Go find a poor person

Do you focus your efforts on domestic poverty or global poverty? If you focus on global poverty, do you choose to give your $100 to someone living under $1.25 a day, $2.50 a day or $5 a day? If you choose $2.50 per day, do you give it to someone who promises to send his or her child to school, buy a mosquito net, or take another action or no action at all?

Step Two: Settle upon a terms of trade

What do you expect in return? Just a handshake, something else, or nothing at all? What is the total price of your benevolence? What do you walk away with? What do they have to give up? Is there an imbalance between what you give and what they get?

Step Three: Enforce the terms of trade

You give away $100 immediately. In return, you get a promise that particular poverty alleviating steps will be taken…in the future. How do you know that they will follow through? What steps will you take to make sure that they do? Is it even your place to decide when and how your $100 is used?

Congratulations! You have just created a market. It is a small market with only one supplier (you) and one buyer (the poor person). Nevertheless, it only takes one exchange to make a market.

What should we call this market? How about a market for…um…Good? I know. I am assuming a lot. I know. It is a loaded term. But, I think we can get some mileage out of thinking about doing good in terms of markets.

Markets are meant to allocate scarce resources to where they can do the most of what a society wants. If a society wants more pillow pets, then markets are tasked with the responsibility of redirecting scarce resources away from other sectors of the economy (it could be child care, public safety, who knows) towards the production, distribution and consumption of pillow pets.

We can think of the market for Good as being tasked with redirecting the time, effort, enthusiasm, passion and income of those who can afford to do good to those in need of some good. Once again, I know. I could barely restrain myself from backspacing the last bit of that sentence. But, let’see how far we can stretch this mental construct.

The thing about markets, though, is that they don’t always do their job. Markets can breakdown for various reasons. One of those reasons include transaction costs. Transaction costs are simply the costs of making an exchange happen. They include the time, effort and resources you dedicate to searching for an exchange partner, negotiating a terms of trade and enforcing an agreement. They are the cost of doing our three steps above. Indeed, in the market for Good, the costs of searching for a poor person are so significant that you may decide to employ the match-making services of a non-profit organization like Kiva or Global Giving instead of giving $100 directly to the poor. This is what most of us do most of the time.

In general, doing good is hard. Doing good is complicated. Doing good is messy.

Over a series of post, I want to use the economic way of thinking to analyze the market for Good. The tools, concepts and analytical framework of economics can assist us in understanding our motivations for participating in this market. Are we really in it to move as many people out of poverty as possible? Or, are we in it for the “warm and fuzzies”? We could be in it for both. If so, then we need to know that our “warm and fuzzies” are  not free. Our desire for “warm and fuzzies” keep our $100 from being directed in a way that moves the maximum number of people out of poverty.

Post #1: Do-Goodernomics
Post #3: Making the Poor Pay
Post #4: Poor Paternalism

4 Responses to “Do-Goodernomics

  • I have been thinking about this Question for long. I call it #1 “arm-chair do gooder” and #2 “get ready to sweat to reach the do-good mine”.
    I used to be a hard believer in #2 but over the years with volunteering and other observations i have come to the conclusion that both #1 and #2 are equally important.

    for ex:- 1) go give $100 to the poor is not sustainable .. poor needs a system to get him/her our of poverty not a bandaid of funds whenever somebody feel like it

    2) the System is better provided by organised #2 because they have resources, experience and are dedicated because they want to be in this profession (not in all cases .. but generally speaking i think these people can get higher paying job elsewhere too)

    3) that said i don;t deny “arm chair do gooders” who are making employment for themselves…but as long as they have credibility, are answerable and ultimately are making an impact of the Poor ( my ultimate target group) i am fine

    my impact might bemore to the 1 Poor i guve $100
    But i would prefer if the impact is more sustainable and if it reach upto masses $10 to 10 poor .in a sustainable way .. i don;t mind at all

    • shumphre
      8 years ago

      Thanks for the comment. I want to highlight the tension that exists between the two options you propose: give $100 to 1 person or give $10 to ten people. If you give one person one significant lump sum of money, then he or she could make a significant investment in a piece of machinery, education or health care expenditure. It not only benefits the one individual it may benefit the whole community. However, this may contribute to pre-existing inequalities in a community. Your choice of the one person to give the $100 to may be influenced by your belief in his or her willingness and ability to use the lump sum in the most effective manner. Which, in turn, may be determined by his or her pre-existing mental, physical and/or entrepreneurial advantages over others in his or her community. Your choice may reinforce these disparities.

  • I guess my point was .. as a person its easier for me to find i person who can use my donation rather than 10 deserving people so if #2 options are not there. People would be going with that model ( which used to be the case before these organizations sprawled up)..Now we do understand that different problems need different solutions ( like to make poor enterprenuers yes investment would be high, but for say a micro-lending project for seed conservation project) impact is more if the effort is crowd sourced by distrubuting $10 to 10 people are encouraging participation , giving some seed money but not all .. to keep them engaged to raise the rest of it,and in turn looking for a wider impact sustainable solution. ..but ofcourse ..this solution does nto fit all problems and there will be cases which will need $100 for 1 person .. but its the intervention of these “do good and earn a living” organisations i think that we are able to manage the $10 to 10 people type of solutions..earlier all those organisations were charities ..there was no business model ..hence they were in perpetual shortage of resources and now this is changing since someone came up with a revenue model for them and make them less dependent ..which is Big..

  • to add to that .. giving money not the only way to do-good. Often its capacity building, raising awareness, vocation trainings ..all these goals are served better if there are “revenue generating” organizations backing the work

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