Economic Efficiency Paradox

Which is more economically efficient, philanthropic efforts focused on non-government related causes or philanthropic efforts focused on government programs? In a New York Times article, entitled “Policy-Making Billionaires”, the topic of philanthropic economic efficiency is discussed. The article claims that philanthropic dollars which are used outside of the government system can produce results faster and better than dollars spent in government programs. Yet the article also states that philanthropic efforts which are not channeled through government programs cannot make an impact on a large enough scale to truly achieve social change.

Our book states that an allocation of resources is economically efficient if no other reallocation of resources can make one person better off without making another person worse off. So the question remains as to which philanthropy option is the most economically efficient. The use of philanthropic dollars in non-government projects is more cost effective and produces results quicker. However, directing the funds through government channels helps more people and can create change on a broader scale. I have always been taught that governments are run inefficiently, but if a larger scale change can take place through that channel maybe it is more economically efficient and I should support it.


Dr. Tufte said...

Oooh. This is a good one.

The analogy to keep in mind here is driving uphill: it's possible to gain more altitude on a hill that isn't very steep if it is longer than some steeper hill.

The analog to steepness is efficiency. Government philanthropic efforts may be inefficient (flatter), but ultimately have more effect because they are on a bigger scale (longer).

In part, this is why we spend so much time focusing on whether government is doing the right thing. We want to make sure that inefficient doesn't turn into incapable (flatter to flat), or worse from inefficient to incorrect (flatter but still upward-sloping to downward sloping).

Aaron said...
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Aaron said...

Really good post and great answer from Dr. Tufte. I needed this information last week when I was discussing this same topic with a relative.

In light of the current recession, where people want results sooner rather than later, couldn't one argue in favor of large, non-government-regulated companies with ideas to help get Americans back to work? It would be nice to see government back away from large companies that are putting people to work now and then support/partner with them moving forward to focus on more long-term (flatter) initiatives in the future.

Dr. Tufte said...

Thanks. I try :)


What do you have in mind for a "large, non-government-regulated companies"? Microsoft?

And what do you mean by "with ideas to help get Americans back to work"? Investment ideas for the firms' benefit, or something that doesn't benefit the firm (that a good manager shouldn't be pursuing)?

Mitchell Stone said...

I think it is more beneficial to get better and faster results. Channeling funds through government programs might reach more individuals but how lasting are the effects? It seems to me that government programs are almost like band-aids and do not suffice for the long-term. In addition, the government has become so addicted to regulation that large companies are in no position to pursue philanthropic causes. My vote is that the government cut back on regulation of business so that they are more capable of keeping employees, raising wages, and contributing to the free economy.

Windwalker said...

At least now we know what gets Dr. Tufte excited. This reminds me of what my dad used to tell me in regards to pulling a grade driving truck. He would tell me that the he would prefer a steep, short grade every day over the long, gradual climb. He could work his way through that shorter and easier (relatively speaking) climb with much less wear on the truck, on him, and on the clock than that long, much more gradual climb.

The point again is that the "easier" course of action is not always the best course. We often see that steep climb, or those instant payoffs, and get worried or excited, rather than focusing on the long-term payoffs.

Dr. Tufte said...

Mitchell and Windwalker: thanks for the opinions, but I don't see much ManEc in either one.

Windwalker: did I give the impression this got me excited?? Hardly. Not my area of interest at all. But I am glad that the analogy hit home for you!