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A Thought Experiment

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?