The Economics of Philanthropy
Strategy in philanthropy can seem like a large open field: one can choose to take any path and make any choices along the way. However, when viewing philanthropy through the lens of an economist, one would see the strategy as very formulaic, taking into account many factors that could either direct towards or deflect from the ultimate objective. The literal definition of economy is careful management of scarce goods, and we, as program officers, need to make sure we get the most out of our goods, grant money.
There are many things to take from economics in order to get a better understanding of how to reach an objective, but I will share just a few cornerstones of economics and how they apply to the Jewish Teen Foundation.
The value of a good is subjective.
This is pretty simple. Anyone can value anything at a certain price. However, looking at it with philanthropy, this basically means that context is important. For example, it might not be so great to donate 100 iphones to impoverished children in Chicago because they have other major needs to be met like water and food security. There is never a universal value of a good because situations are dynamic and different people have different needs.
Individuals are self-interested and always make choices with purpose.
In other words, people will do things for a reason, whether it’s “I don’t feel like it” or “I don’t see sustainability in this organization.” We can make a step further, though, by predicting how they will choose by looking at possible reasons for choices. This leads into the next tenet.
Incentives matter—changes in incentives influence human choices in a predictable way.
Knowing that individuals respond to incentives, we can use this in our fundraising aspect of our organization. For example, a fundraiser consisting of a raffle may be more successful than one that provides little economic incentive other than “it’s for a good cause.”
The use of scarce resources is costly, so decision-makers must make tradeoffs.
This idea could fall in line with the concept of opportunity cost, the highest valued alternative to a choice or course of action. In giving a grant to an organization, our foundation would need to assess which organization has the biggest impact to our mission of securing basic needs for at-risk youth. There will be many great organizations we will have to forgo granting to in order to find the ones that fit best, but we must understand that there will always be tradeoffs. One organization may have a large impact in the area of at-risk foster youth. One organization may have a large impact in the area of homeless youth. However, it’s possible that we may not find a way to give them both a grant and would have to forgo giving a grant to one in order to give a grant to another. Furthermore, if we were to give to both we would have to forgo making a greater impact by just giving to one organization
Beware of the secondary effects: economic actions often generate indirect as well as direct effects.
This pertains very much to an article from the New York Times, When Making Donations, Know an Agency’s Needs. Let’s say a local synagogue runs a food drive for the victims of the Nepal earthquake. The members get together a large bundle of foods and ship it off to Nepal, feeling good about their impact. Do they know how their contribution was used? Do they know if a food drive was the most effective way to contribute? Maybe Nepal was overstocked in food and understocked in clothes. Maybe an agency that has expert knowledge on Nepal’s situation already had a controlled supply of food to sustain the Nepali people. Maybe even the food that was donated put out of business many impoverished farmers. The point is not that food drives are a terrible idea but that in choosing how we make an impact, it is important to understand the possible negative secondary effects of our choices. Maybe donating $3,000 to an on-the-ground agency could be more effective because we would be giving people with knowledge about the situation the ability to make a broader impact, whether it be through human outreach, food, water or clothes.
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Although making the most effective impact can seem like finding a needle in a haystack, it can be made easier through these guideposts. Our choices will be most effective when we understand the incentives of people, foresee possible secondary effects and make decisions where we will get the highest benefit for our cost. We use the word invest in our mission statement not because we are trying to make money, of course. Our organization’s currency, like any other not-for-profit’s main currency, is impact, and we aim to invest in sustainable organizations that make the most impact in the issue of at-risk youth.
