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Money isn't real. When you donate money to a charity, how does it actually help?

by Dagon1 min read2nd Feb 202028 comments

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EconomicsAltruism
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Money is a shared illusion. Neither paper, gold, nor electron patterns can stop a mosquito or feed a hungry person directly. Transfer of money is a temporary, low friction way to motivate unidentified strangers to preform an action.

So what's the mechanism by which monetary charity works? Are we "just" exploiting a comparative advantage in dollar-gathering in order to force the people on the ground to behave the way we prefer? Do we have any evidence that it can create channels of behavior that are self-sustaining?

On small (and not-so-small, but not universal) margins, money is a fine way to change some behaviors. I'm wondering if there are ways to shift the equilibria at the core rather than the margin.

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Calling money an illusion and describing at as a way of temporarily motivating strangers seems like a misunderstanding of what money is. It's true that money itself is just a piece of paper that we agree to treat a specific way, but the way we treat it is as a representation of real work done and real favors owed.

When I give you a dollar, I'm saying that you've done something worth (at least) a dollar for me and that I now owe you a favor worth (at least) a dollar. This works without money ("IOU's", or just keeping track of favors). The innovation of money itself is that we can get favors repaid by complete strangers without having to figure out the chain of favors every time (and in some cases, being able to get a favor repaid before it's owed).

Which is all a long way of saying that if you do something to make someone owe you a favor, you can transfer that favor to a charity instead of calling it in yourself. The piece of paper won't feed a hungry person but the favor attached to it can.

To paraphrase Sean Carroll, money is as real as baseball.

Does baseball exist? It's nowhere to be found in the Standard Model of particle physics. But any definition of "exist" that can't find room for baseball seems overly narrow to me. It's true that we could take any particular example of a baseball game and choose to describe it by listing the exact quantum state of each elementary particle contained in the players and the bat and ball and the field etc. But why in the world would anyone think that is a good idea? The concept of baseball is emergent rather than fundamental, but it's no less real for all of that.

In the modern human society money is no less real than guns or food. This may change if the society will collapse or change forms, but as things are now, there is nothing illusionary about money. When you donate money to charity, they gain the power to get food, or mosquito nets, or workers on the ground, or anything else that is hard to provide in a direct way.

Consider a charity providing malaria nets. Somebody has to make the nets. Somebody has to distribute them. These people need to eat, and would prefer to have shelter, goods, services and the like. That means that you need to convince people to give food, shelter, etc. to the net makers. If you give them money, they can simply buy their food.

This of course raises the question of why you can't simply ask other people to support the charity directly. But consider someone providing a service to the charity workers: even if they care passionately about fighting malaria, they do not want to run out of resources themselves! If you make food, and give it all to the netweavers, how can you get your own needs met? What happens when you need medical care, and the doctor in turn would love to treat a supporter of the anti-malaria fight, but wants to make sure he can get his car fixed?

In a nutshell, people want to make sure there will be resources available to us when we need them. Money allows us to keep track of those resources: if everyone treats money as valuable, we can be confident of having access to as many resources as our savings will buy at market rates. If we decide instead to have everyone be "generous" and give in the hopes that others will give to them in turn, it becomes impossible to keep track of who needs to do how much work or who can take how many resources without creating a shortage. You can't even solve that problem by having everyone decide to work hard and consume little; doing too much can be as harmful as doing too little, as resources get foregone. And of course, that's with everyone cooperating. If someone decides to defect in such a system, they can take and take while providing nothing in return. Thus, it is much easier to mange resources with money, despite it being "not real", even in the chase of charity. Giving money to a charity is a commitment to consume less (or to give up the right to consume as much as you possibly could, whether or not your actual current spending changes), freeing up resources that are then directed to the charity.

I don't like the term "money is a shared illusion" (as it misguides the real concept), money is the materialization of credit. The history of money is pretty long to this comment, but to summarize: money is the idea that someone owns you some amount of resources (work/material/etc), and as the society agreed with this common denominator (money), so the society also owns you some amounts of resources.

Price formation (or price system) consider a lot of things, geographical resources, comparative advantages, technology and many more, all this knowledge we call market information.

So the "unidentified strangers" will want (or not) this credit with society so they can exchange in something that the society could provide to them, the amount requested by this stranger is based on how he evaluates the information it haves, with his own perspective and when it decides the X amount, this will also add to the information above and update the weights in this high-dimensional network of values.

When you pass this credit to someone else, this person could use his subjective value to offer X amount of his credit to satisfies his interests as he knows that society will also have personal interests and want the credit too. This could be pretty obvious but I introduce now what problem the "money" solves and no economist could figure out another solution to this: https://en.wikipedia.org/wiki/Economic_calculation_problem

So money and market is a super distributed computer of calculation and allocation of resources, considering subjective value, socioeconomic factors and many more things that is by now impossible to account in any other known way.

A video of intuitive explanation: https://www.youtube.com/watch?v=zkPGfTEZ_r4

It's fine, people are only 1 layer of unreality removed from money, so they can interact via gravity, which "leaks" into the 4th dimension (explaining why it's so much weaker than the electromagnetic force).

I am not sure the standard economic logic has a really good fit with the market for charity. That is not to say there are not insights to be gained or aspects that can be examined/analyzed well but only that they are incomplete.

I agree with the other two answers but only up to a point.

Markets for charity have the problem of being more complicated than the standard producer-consumer or seller-buyer structure. It's really a case where the consumer is not buying anything. The side that does all the buying is actually part of the production side. In this regard, I think it might be more relevant to focus on the rationing aspect of money in monetary market settings (basically every setting in the modern world outside direct personal interactions).

So we might consider the donations and the activities around getting those donations as something along the lines of relaxing a production constraint. I do think it might be worth considering when and where that is the binding constraint though. Just consider the recent complaints from those in Wuhan about the local Red Cross poor ability to get resources it has distributed to where they are needed or to even spend the donations they have received (though it's not clear that not spending is a clear sign they are failing in their job).

A secondary thought here would be just how one might implement any type of real market would be a good parallel to normal monetary markets (retail, wholesale, financial, specific products...) to would allow the standard prices as information approach to work. But I'm not entirely sure we need to do that either.