You have $100. You want to move people out of poverty. What are your options?
Consume it. Invest it. Give it away. Which one?
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.
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.
This post originally appeared on shawnhumphrey.com