January 9, 2006
WRTA
 Brown
Shoes Diary
The Perfect Act of Charity
Charity has been a recent topic on-air and on-line at WRTA so I thought
I'd do a little bit of economic analysis on the issue. What I
discovered is perhaps the perfect act of charity.
Suppose Jones has the urge and can afford to donate $100 cash to
charity. Which of the following is the perfect donation for Jones?
A) give the $100 to the American Cancer Society.
B) give the $100 to AIDS research.
C) give the $100 to the Salvation Army.
D) give the $100 to an assortment of charities through the United Way.
E) give the $100 to me.
F) burn the $100.
E, of course, is the preferred answer, but if you answered F, then move to
the front of the economics class.
Why might burning money be the perfect act of charity? I'm glad I
asked. The answer involves just three steps of reasoning.
Step one is to understand how burning cash impacts an economy. Take the
case of a very simple two-person (Smith and Jones) economy where each person
has a total of $100 cash and the entire economy consists of 200 apples.
Initially then, each apple costs $1. Smith can buy 100 apples and Jones can
buy 100 apples. Suppose, in an act of charity, Jones gives his $100 to
Smith. Now Smith, thanks to the charity of Jones, can buy 200 apples
because he now has $200. But suppose that instead of Jones donating his
money to Smith, he burns it. Now there are still 200 apples, but since
this economy only has $100, the price of each apple will drop to 50 cents
each. So Smith is still the beneficiary of Jones' action and the
benefits are exactly the same--Smith can buy an additional 100 apples.
The economics here is simple. Having money gives a person claims to
goods and services in an economy. Relinquishing and transferring one's
claims is the definition of charity. You can do that either by giving
your money away or by burning it.
Step two is to notice there is one subtle difference in the charitable means
that Jones selects (giving versus burning). This difference is of no
consequence in a two-person economy, but is relevant in any economy with more
than two people, which is to say it's always relevant. When Jones gives
the $100 away, he is stating his preference for who gets the benefit of his
charity. When he burns the money, the beneficiaries of lower prices are
everybody else in society since they are all wealthier. (The cash they
hold now has higher purchasing power.) Charities will thus receive what
everybody else in society decides to give with their increased wealth.
In other words, in giving money away, Jones is being a bit selfish because
he's using his preferences to see who gets the money. By burning his
money, he is being entirely selfless, letting everybody else in society
decide how to distribute the benefits he has given up.
Now, for the third and final step of establishing money burning as the
perfect act of charity. Unlimited charity is not a good thing for
society. If we all quit our jobs to serve the less fortunate or we all
gave everything we earned to the less fortunate, pretty soon we would all be
steeped in poverty. In charity, as in all economic decisions, there are
trade-offs and one can always overdo a good thing. (The one possible
exception to this principle is unlimited contributions to my bank account,
but that experiment hasn't been tried yet.) Anyway, there is such a
thing as an optimal level of giving by society. Each of us could impact
that level through our own contributions, but the more prudent thing for a
truly selfless person to do is to leave that decision up to everyone
else. If you burn all the money you can afford to burn, it will lower
prices making everyone else wealthier and everyone else can best decide how
much to give to charity. You are not only giving to charity by burning
money, you are empowering others to do so too. Can it get any better
than that?
The next time you're asked for a charitable donation, don't say, "I gave
at the office." Say instead, "I gave at the bonfire."
Contact John D McGinnis
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