A Thought Experiment

by Russ Roberts on March 12, 2010

One difference between economists and others is that economists tend to be less impressed by motivation and more impressed by what people actually do. Economists are also less impressed by what people say than by what they do. So they are particularly unimpressed by people who profess to be motivated by the public good, for example. This is one reason some economists have little inherent sympathy for politicians–economists are not impressed by people who say they are working to serve the public.

So at one extreme you have non-economists who trust politicians because they say they are serving the public, but who distrust businesses because we know deep down that they really only care about profits. The economist answers that talk is cheap. Politicians are self-interested. So are people in business but because there is more competition in business relative to politics, businesses often do a better job of serving the public than politicians do.

So here is a thought experiment to help you (and me) think about motivation and competition and self-interest.

There is a charity that does wonderful work with terminally ill cancer patients making sure the end of their life has dignity. It helps family and friends of the dying cope with loss. It is a wonderful organization led by a fine woman who lost a child to cancer. This charity is her response to her loss. As the director of the charity, she is a passionate voice of the organization. She raises the money. She sets the tone and the direction of the charity. She thinks big. She hopes one day to open a hospital specializing in innovative treatments.

People find the director inspiring and unforgettable They are glad to give her money. Her board is a collection of wealthy philanthropists, some of whom, like her, have been touched by cancer, but others simply admire her deeply.

As much as people like the charity and its visionary leader, everyone agrees that they could do even better work if they had more money. They could reach more people. Help more people. Do more for them. The current budget of the organization is $10 million.

One of the members of the board is well-connected politically. He finds a way to make sure that the charity no longer has to rely on donations. Instead, it will receive an annual appropriation of $1 billion from the federal government. There is wild celebration at the charity. Their work will finally be unconstrained by the necessity of fund-raising. They will finally be able to do all that they’ve dreamed of doing, unconstrained by their meager budget of the past.

The annual funding by the government comes with one string attached. The leader of the organization will be no longer be chosen by the board but instead will be elected by a popular vote between two competing candidates each year. After all, the money is coming from the public. So the public should get to decide who leads the organization.

How would the performance of the organization change over time now that the budget is taken care of by the federal government? Would the scope and activities of the organization change? Who would succeed in leading the organization? Would the original director be elected?

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simon...

"The string" wouldn't make much of a difference, just accelerate the inevitable.
Randy

Perhaps on topics, perhaps not, but I find it extremely interesting.

Just did some rough calculations on the administrative costs of the Social Security program. While the administrative costs have not grown as a percentage of the value of the fund since 1957, the total administrative costs have grown at an average rate of 8 percent per year since 1957 (and exactly 8% in 2009). Now why would that be? Its not like the beneficiary population has increased at a rate anything close to 8 percent per year. Has the number of people required to run the program increased by 8 percent per year? If so, have they never heard of computers? No, I think its rather safe to conclude that the Administrative costs of running Social Security have increased by an average of 8 percent per year for the simple reason that the bastards have been allowed to get away with it.
kbibby

I think the question boils down to knowledge, currently the director and her staff need to constantly show they are doing real good and addressing the 'cause' to people that have a real and tangible interest. These stakeholders are purchasing a moral good, one that they feel represents the best value of the many mutually exclusive options for their money. Once the funding is provided from the public purse and so forced from the taxpayer they are free to pursue their own path without any accountability.

Here is were the election is key to the problem. It appears at first glance that this election would provide accountability in fact it is the foundation of representative democracy.

The problem is that the electorate is much less interested and knowledgeable than the original board and is in a poor position to judge the performance of the former charity (an organization funded by the coercive power of the state is by definition not a charity).

I recall in my undergraduate days our student government was a minor and trivial force on campus, they spent our fees but it was not a lot of money for per student and few people paid much attention. Elections and minor scandals came and went with little notice except one year were a small group of radical communists (their terms not mine) all showed up and elected themselves to power as our 'representatives' to much embarrassment of the electorate ..

My point is that representative democracy works only for issues that deeply matter to a large percentage of the electorate. It is therefore an extremely expensive decision making process that must be reserved for a few very special cases.

beware that "the passion for equality (does not make) vain the hope of freedom" - Lord Acton
kevinhodgkins

I think (and argue in my recently completed MPA thesis) that in this situation, you can expect less effective organizations for two primary reasons - ownership effects and monopsony effects. Wait, no-one owns nonprofits though, you say. I respond that I don't "own" my house either (thebank does)- but I treat it as though I do because I expect to live in it for a long time.

When the government money comes in, research shows that nonprofits will tend to cow-tow more to the government line. They will be more conservative in their interpretation of regulations. Government becomes the monopsony consumer of the nonprofit producer.

The ownership issue is more important. I believe the monopsony effects are only important in nonprofits with independant boards. In many instances, and I would bet in a nonprofit like that described in this scenario, the founder of the nonprofit retains significant control over the board and procedures. Although the Executive/founder may not "own" the assets of the nonprofit corporation, she affects ownership like control over its assets except for the right of final asset disposition. As long as she only wants to dispose of those assets in ways that are in line with nonprofit restrictions she has de facto ownership control. Bring in someone else who has not had the emotional connection and they may do as well or better than the founder in managing the firms assets, but the incentives shift and significant agency issues are introduced.
Ike Pigott

How would the performance of the organization change over time now that the budget is taken care of by the federal government?

I can't say that the "performance" would change, because the activities certainly would.

Would the scope and activities of the organization change?

Yes -- with an abandoning of long-term vision for the sake of whatever can be allegedly accomplished within an election cycle.

Who would succeed in leading the organization?

The one who promises the most, and who pledges to kick business back to those who support.

Would the original director be elected?

Only the first time.
paulroscelli

Accepting the dubious proposition that more money = more discoveries, eventually it wouldn't be "good enough" that the organizations found scientific advances. After all, is it good enough that Walmart produces products at low costs? Is it good enough that banks make loans to credit worthy individuals? No, in both cases the government has poked, prodded and often force these businesses to take up ancillary objectives such as "green production" or loans to differing ethnic groups irrespective of creditworthiness or burdensome employment practices that oft times raise costs and deny access. When someone else pays the bill one cannot accept the change (dollars) without also making change (in policy).
martinbrock

The original director might be elected, but she wouldn't be the original director anymore.
rallpeggen

Where is the evidence that the government can be an efficient user of dollars? The president thinks that government will win any competition with the doctors in Medicare and will therefore save money in health care with the new legislation. Of course, with the US treasury picking up the bill with tax funding there is no competition.
MnM

I had a feeling this one was going to feed the trolls.
muirgeo

You're an intellectual pansy! You can't come you with a reasoned rebuttal so you fetch your favorite reply about MY supposed lack of substance. Look in the mirror. You're far more a troll then I am. And a boring one at that with nothing of interest or of originality to contribute. Just a stupid Yes man.
carlsoane

You're right that people have not rebutted your post in which you cite the scientific breakthroughs funded by government grants. I would guess that one reason is that you are making a slightly different point than Professor Roberts. Professor Roberts is questioning whether an elected official would run as focused and effective a charity as the private person who founded that charity. My strong suspicion, after having volunteered for years in a charity that is similar to the hypothetical one that Russ refers to, is that the answer is no.

That said, I cannot dispute your point that government funded research is responsible for many scientific and medical breakthroughs. And, I am glad, of course, for the breakthroughs you cited.

In fact, one aspect of economics I have recently become curious about, but have not had much time to read on, is analyses of what would happen to fundamental scientific research if it were left strictly to the free market. Bell, Edison, etc. were private sector research organizations that did fundamental research. The Pasteur Institute has, I believe, always been a private organization. Would more such organizations spring up if the government retreated or would there be areas of research that simply were not covered if the government did? I don't know.
MnM

You haven't posted anything to rebut. Your posts are rife with off-topic, non-sequitur ridiculousness. And when someone calls you on posting red herrings you insult them.
LowcountryJoe

>>And when someone calls you on posting red herrings you insult them.<<

That's only if he's not embarrassed enough to completely duck out of the discussion. Only if he were embarrassed more often...I'm allowed to dream, aren't I?
JohnK

Whatever would you do without orders from your beloved Olberführer on MSNBC?
How many days since mission accomplished?
muirgeo

"One difference between economists and others is that economists tend to be less impressed by motivation and more impressed by what people actually do. Economists are also less impressed by what people say than by what they do. So they are particularly unimpressed by people who profess to be motivated by the public good, for example. This is one reason some economists have little inherent sympathy for politicians–economists are not impressed by people who say they are working to serve the public."

What a dreary view of humanity. I guess the Hedge Fund manager who profits wildly secondary to his use of complex financial derivatives is more impressive (in his honesty) to an economist then the Peace Corp volunteer working in Haiti. There's an argument to be made that rote economic thinking is the closest thing to sociopathic thinking of any profession.
A.J. Lenze

It depends on what the hedge fund manager says. If he says he's trying to make as much money for himself as possible, I believe him. If he says he's trying to make as much money for his clients as possible, I start to have doubts but still mostly believe him as his own interests are mostly aligned with his clients. But if, like Goldman Sachs chairman Lloyd Blankfein, he says that he's "a guardian [...] for the purposes of society" and that he's "doing God's work", I would call him a liar.

To some extent, a politician's interests coincide with the voters they represent. But, to borrow from Animal Farm, some constituents are more equal than others. These "more equal" constituests include family members, friends, those who work for them, and those who donate to their campaign.
LowcountryJoe

I'm with you muigeo, this is dreary at best. Imagine these heartless libertarian clowns on this blog who cannot seem to grasp the notion that words speak louder than actions.
brotio

I read in an interview once, that the actor who played 'Warren' in the movie There's Something About Mary was, as a child, a patient of Yasafi's. He claimed Yasafi was his inspiration for developing the 'Warren' character.
LowcountryJoe

Warren?! For me, that was an obscure reference so I had to check it out. Found an interesting quote regarding Warren on the actor's IMDb page. Then, taking you seriously, I began to investigate if the actor and YASAFI really ever could have been in the same place. My trail grew could -- the closest that they ever were is in Missouri at the same time.

But then I started looking into George and found a strange blurb in a Sierra Club article that prompts people to share why they became environmentalists; George shared his. Then I discovered that he has a FaceBook page which he pretty much leaves wide open. And while he doesn't share much on his FB page, I did take note those things that he has shared. They're the darnedest things in the form of audio/video...in fact, I cannot tell the difference between the political stuff he shares and, I kid you not, the LooneyTunes soundbite he shared on December 12th.
brotio

I'm sorry I sent you on a wild goose chase, Joe.

All I can say is, "Have you seen my baseball?"!
LowcountryJoe

"Yeah, that girl over there has it. But she calls it something else."
muirgeo

LCJ,

They're not heartless... they are soulless. You can put a price on a heart but not a soul. Are you really only motivated by self interest and greed? Is it really impossible to be motivated by public good? The cancer researcher, the bank robber and the Wall Street Quant are really all seeking and motivated by the same thing?

Actions by the libertarian measure seem to be directly proportional to wealth... thus wealthy people are the most valuable regardless of how they became wealthy. It's tautological gibberish and it's the root of the quip about economist knowing the price of everything and the value of NOTHING!
Randy

"Are you really only motivated by self interest and greed? Is it really impossible to be motivated by public good?"

They don't ask, they take, and so their motives are irrelevant. They don't ask, they take, and so your opinion of my reaction is irrelevant.
Sam Grove

Better to sink the boat, eh?

Economics can't know value, per se, because only individuals can determine value in their transactions...of all kinds.

You are not in a position to to evaluate the moral stature of other posters here as your economic comprehension still is lacking in depth.

If helping others is the measure of individuals, it is only because they CHOOSE freely to help.

Advocating state action to help those in need nullifies the value because it enslaves some for the benefit of others. To exemplify yourself in such an equation requires that you ignore the negatives by referring to enslavement as "social obligation".
LowcountryJoe

Look at what you quoted above muirgeo and look at the way you deride it. What Russ was getting at was that there are people who will talk the talk and tell you how much they care without taking any action on it. And then there are people who make not talk but do face the real burdens of funding the actions - either voluntarily or through the tax codes - that do help people.

So, knowing this, you would rather sidle up to the people who just talk and feel the pain of others (the caring folks who supposedly look out for the downtrodden) yet do not take the actions or produce anything a value in which to make real contributions with.

Does that about sum it up for you? Seriously, this is how you just came across; do you realize this? And you come here to lecture to us about soullessness and public good?! Doctor, you need to heal thyself of thine mental illness.
SheetWise

muirgeo --

Certainly you understood that LCJ was being facetious when he said "clowns on this blog who cannot seem to grasp the notion that words speak louder than actions."

That was truly an LOL post. You responded as if he was serious, which I find even more entertaining.

I certainly hope that sharing these observations with you won't influence any decisions you have to make on sharing your comedic insights.

-- SheetWise
Randy

"economic thinking is the closest thing to sociopathic thinking of any profession"

You are correct that the argument is frequently made, but it is made by the political class. That is, by those who, while claiming to speak for society, are in fact exploiting the population under their control. The argument is propaganda. It is also ironic - to have the exploiters accusing the producers of being "sociopaths".

Just to be clear, politics, the art of exploiting human beings, is sociopathic by definition.
muirgeo

I guess I'm not sure that any logical conclusion can be drawn based on the set up of the thought experiment. My guess would be, as with most major medical breakthroughs, increased funding would be more likely to result in a positive results. Certainly we HAVE seen great advances in Hospice care and care of the terminally ill. Many of the advances have come from research funded by the government.

Here are the most recent ones... most with much government funding;

1. New Mammography Guidelines
2. AIDS Vaccine
3. Funding Ban Lifted on Stem-Cell Research
4. H1N1 Vaccine
5. Stem-Cell-Created Mice
6. Prostate-Cancer Screening
7. New Research on Autism
8. New Drug for Osteoporosis
9. New Alzheimer's Genes
10. Brown Fat in Adults
Randy

How would the performance of the organization change over time now that the budget is taken care of by the federal government? In much the same way as any organization changes as it grows beyond the entreprenuerial stage. It will be able to do things it couldn't do before, but it will also have many more stakeholders to satisfy on each decision. More organized. Less dynamic.

Would the scope and activities of the organization change? Entire new departments would be created to deal with new stakeholders.

Who would succeed in leading the organization? Someone with a Phd in Public Works. That is, someone certified by the political class.

Would the original director be elected? For a few years maybe. As long as it remained politically expedient. But the power structure within the organization would change quickly, to the point that the original director becomes only a figurehead.
LowcountryJoe

That one string that's going to be attached becomes many strings over time...to the point where what this charity used to do morphs into the whims of the majority who now control the charity's behavior like a marionette. Why?

1) What end-of-life dignity meant to the organization before becoming publicly funded would be sure to change by those that believe that no one should be able to decide, by themselves, when it is time to let go with dignity

2) government funding would ensure that the organization could never discriminate against (i.e. make decisions regarding) who recieves of end-of-life care. On the surface this apears to be a good thing but in practice it leads to people getting benefits from the organization who are not philsophically aligned with it. This builds resentment and removes the feature of voluntary association: and with that the true nature of altruism and giving from 'the heart'.

3) and just like where ever Mary went the lamb was sure to go, it is absolutely undeniable that bureaucracy would follow politicians and taxpayer funding. This would leave significantly less pennies on-the-dollar 'raised' for the 'charity' [if you can call it that any longer] to operate with.
Paul Brinkley

Mr. Roberts, I dispute that economists are less impressed by motivation. I'd wager they put a great deal of stock in the motivation of greed, after all.
danielkuehn

Well put it this way - they are definitely concerned with motivation and incentive, but if there are no revealed preferences - if there is no acting on that motivation or incentive - then the motivation/incentive probably wasn't that impressive or important to begin with.
SheetWise

I appreciate your humor -- thank you. It's hard to communicate sometimes. ;)
Marcus

"...but because there is more competition in business relative to politics, businesses often do a better job of serving the public than politicians do."

I think the principle reason businesses do a better job than politicians/government is that all the participants of a business participate voluntarily. From investors to employees to consumers, everyone can walk away when ever they want.

Perhaps that is just an aspect of competition. Businesses have to compete for investors, they have to compete for employees and they have to compete for customers. But I think the voluntary nature of it is the important distinction to make.
Seth

Marcus - I agree that the voluntary aspect is a reason. Businesses aren't always better than government, but the voluntary nature of the interactions in business also gives rise to failure for the businesses that don't do a good job. The failure feedback isn't as strong and sometimes it's reversed (i.e. failure to meet objectives attracts more funding to "fix" the problems) in government.
Gary Arndt

As you outline the scenario, I think the founder would get elected, at least at the start.

She would have the power of incumbency. Someone running against her would have a very difficult time trying to claim the moral high ground on the founder of the organization. The founder would probably have more name recognition.

After a time, perhaps after the founder dies or retires, I'd expect things to morph like we've seen at the Ford Foundation. A small group could take over, mission creep could set in, and the money would be corrupting. Much of that could take place under the original founder.
artemis

It's a bit of a rigged question. Forget about the entire government side. Your question can be boiled down to "Take a system where everything appears to be working. Introduce a change X. Do you expect change X to improve the situation." The answer is always going to be "probably not", because if something is working pretty good, odds are that any given change will not make it better.
SheetWise

"Your question can be boiled down to 'Take a system where everything appears to be working. Introduce a change X. Do you expect change X to improve the situation.'"

I hate to be obtuse, but can you support that "boiling down" theory with an example?

"The answer is always going to be 'probably not', because if something is working pretty good, odds are that any given change will not make it better."

I believe Russ would call that a good approximation --but I'm not sure I see your point.
Dan Rosenberry

director should change. One of the current director's competitive edges versus other charities is being inspirational to the wealthy and generally being good at fund raising. Now that those abilities are devalued in the organization the director should be replaced. If she is or not is a different matter
RL

It seems to me much of the harm is a consequence of the funding change. I'm not sure why you felt the need to add the fillip about voting for the person in charge.
danphillips

I don't know, Russ. You tell me: who's the Baptist and who's the Bootlegger?
I.B. Cynical

As long as a real estate syndicate could be formed to buy a lot of land and donate some of it to the charity for their new building campaign and as long as the congressman and his pals can get into that syndicate and as long as the construction of that building and the development of all the property around it could be done in a tasteful manner with nothing but the best then I'm sure the original director would be elected without any trouble...and then the tooth fairy flies back to her home far away.
rallpeggen

Well said!!
vidyohs

We can assume, can we not, that your opening paragraph condemns Krugman as a non-economist? I agree.

As to what would happen one only has to look at the public school system when it was taken over by the federal government in much the same way. During the early FDR administration, if I have my facts even close to correct, the financially hurting states were offered federal money to help out, with those self same style strings attached. Along with the money comes the string. In the case of the public education system actual real control passed to the federal government and we all began to learn FDR and socialism worship. No need to expound on how that effected the quality of education as we have seen the degeneration deepen over the years.

And the quality of education has effected every other arena of American vitality, business, markets, manufacturing, production, and trade. With the launching platform of the industrial revolution here in the USA we should own the moon, have made it into an exotic shopping mall to visit on the weekends, using shuttles that make the trip in hours or matter transfers that do it instantly. But no, we are bogged down making a cheap auto that will get more than 40 MPG.
LAD

Over time, the goals and performance of the organization would be determined by the highest bidder. Since they would have the money, organization and motivation, I'd guess that the employees of the organization would unionize and control dominate the election process. The goal of the organization would shift from serving cancer patients to maximizing the salary, benefits and number of employees. In addition, a large number of resources would also be dedicated to increasing the organization's budget. In short, the organization would become the public school system.
rallpeggen

The replies show the skepticism that the government can run anything for the benefit of the public. Nobama is intent upon change as his motto, notwithstanding campaigh rhetoric, and is on course to make the US a socialist economy. He thus fulfills the goal of Rev Wright of God damn the United States. His attitude towards Israel appears to show his early education.
Methinks1776

"Is it really true that political self interest is somehow nobler than economic self interest" - Milton Friedman
JohnK

Those who rob Peter to pay Paul...
vikingvista

...or rob Peter to pay Peter.
vidyohs

Depends to a great deal on whether you are a politician or some one who is interested and willing to actually earn a living.
SheetWise

With one billion free dollars, it's hard to believe that there are many pimps who wouldn't want to run that stable.

The performance (goals) of the organization would shift from finding a cure to public relations work. Interests and goals would immediately be diversified to protect the organization in the event their primary objectives were reached, and the goalposts would be moved out as far on the horizon as possible (more ambitious goals). The organization would be lead by the person who best connected with the electorate -- unlikely to be the original director, who doesn't sound like a pimp at all.

Do I sound cynical?
Methinks1776

No. You sound wise, Sheetwise.

Your post reminds me of an old Soviet joke from the 70's:

Q: It is constantly being said that the communism is on the horizon. What is this communism?

A: Communism is a society free from exploitation, our happy future where nobody lives in want.

Q: But what is a horizon?

A: A horizon is an imaginary line that keeps moving further away as we get closer.
SheetWise

As we approach St. Patrick's Day -- I hope you will enjoy imaginary figures well as I will.

Best to you all -- I love this forum -- Gregg