Understanding the True Meaning of Charity

The Misesian (TM): The economics behind gift giving and charity have long been a neglected topic among researchers and economists. What prompted you to launch your own investigation into the topic?

Jörg Guido Hülsmann (JGH): The economic literature on gifts is actually quite massive, but it’s true that these writings don’t make it into standard micro- and macroeconomics. My initial interest was sparked by Benedict XVI’s 2009 encyclical letter Caritas in veritate. The pope wondered how the scope of gratuitous goods could be increased in the human economy, and he called on all people of good will to deal with this issue in thought and action. I put a doctoral student to work on this subject in 2011 and she successfully defended her French-language dissertation four years later. Still I sensed that much more work was needed and that the economics of gratuitous goods promised to shed new light on the very foundations of economics.

In 2018, during a sabbatical semester, I therefore set out to study three specific areas in more detail: (1) How do gifts fit into the general theory of economic goods? Is the act of giving a distinct praxeological category on its own? (2) Which are the major types of positive externalities, or side-effect goods, that spring from profit seeking and other human actions that do not have the express purpose of providing gratuitous benefits to others? Which are the causes that promote and hamper the development of such side-effect goods? (3) In which ways and to what extent do government interventions influence these processes?

At first, I thought this could be done fairly quickly, but I overrated my speed and underestimated the difficulty of the subject. All told it took me four years to produce a complete draft of the book.

TM: The idea of Homo economicus has long plagued economics, and many people conclude the idea tells us that people engage in economic activity only for monetary profit. Does the Homo economicus model have value or is it an impediment to understanding the full economy?

JGH: With a few exceptions, economists have always understood that the Homo economicus fiction is precisely that, a fiction. Its proper use is to serve as a pedagogical tool. Sums of money can be directly compared. It is clear that nine units of money are more than eight units of money. It is also straightforward to argue that everybody prefers more money to less money. But outside of this narrow pedagogical use, the fiction becomes problematic. It is clearly not the case that all goods can be given a monetary expression. Nor is it the case that people only care about money. Human action designed to acquire and hold money must be balanced against all alternative actions. People do not desire to own as much money as possible but the proper amount of money, along with the proper amounts of all other goods that they also wish to own. Last but not least, it is not the case that all human actions have the purpose of providing the agent with monetary revenue or other advantages. Genuine donations of time and material goods are also possible.

TM: Why is the Austrian School uniquely suited to analyze gifts and charity?

JGH: The starting point of Austrian reasoning is real human action, not any fictitious stipulations. Carl Menger strongly emphasized that acting man pursues different objectives that cannot be summarized by a single one. In other words, human action does not aim at maximizing a single variable, such as monetary profit or utility. It aims at establishing a proper balance between different goods that cannot be reduced to a common denominator. It follows that, from a Mengerian perspective, it is not difficult to concede the possibility that gifts are meant to serve others, and that the satisfaction of the needs of others has to be brought into a proper balance with the satisfaction of our own needs.

By contrast, the Homo economicus of present-day mainstream economics maximizes a single variable; namely, utility. But this implies from the very outset that only one person counts; namely, the agent whose utility is being maximized. Whatever he may do for others he ultimately does for himself. Mainstream economists are therefore willy-nilly led to the conclusion that genuine gifts are impossible. They hold that donors always and everywhere give in order to benefit from “warm glow” feelings and for other selfish objectives. But such contentions have nothing to do with any science or empirical research. They are implied in the stipulated premise of Homo economicus. They are grounded in a fiction, not in a fact.

Let me also highlight that Austrians are uniquely well positioned to understand the nature and scope of positive externalities. The reason is that, contrary to the mainstream, they do not subscribe to Aristotle’s equivalence postulate.

Aristotle contended that a just exchange is an exchange of equal values. Unless each person provides the equivalent of what he receives, one partner to the exchange wins at the expense of the other, and the exchange is therefore unjust. This fundamental postulate has survived all evolutions and revolutions in economic thought. Present-day general equilibrium economics à la Debreu and Arrow postulates that each good provided to others is, or at least should be, adequately remunerated, unless it is provided as a deliberate gift. This is called the postulate of complete markets or, more pompously, the first fundamental theorem of welfare economics. But it is really just another example of a purely fictitious assumption gone wild.

On a free market, positive externalities abound. Each single externality might be marginal but, in the aggregate, they provide significant gratuitous abundance. An Austrian economist may therefore conclude that positive externalities are praiseworthy benefits that spring from the workings of an unhampered economy. But then come the mainstream economists with their postulate of complete markets. When they see these benefits, they infer they must be terrible market failures that cry out for state intervention. They start to tax some people and subsidize others. Thus, they paralyze the taxpayers, encourage the subsidy recipients to frivolous behavior, and eliminate or at least diminish the side-effect benefits for all others.

TM: A potential problem with all research is that the researchers may only study the things that can be quantitatively measured. Is that a problem here, since it is difficult to quantify the value of gift giving and charity?

JGH: You highlight an important issue. Indeed, the value of any good is a matter of personal judgment within a personal context. A poor woman may consecrate a day to care for her mother. That comes with a huge opportunity cost for her. The personal value of this service is therefore immense, and will be greatly appreciated by her mother and any objective bystander. But from a statistical point of view it is nil, it does not exist at all.

TM: You note that there are many things in the world that are gratuitous, such as culture. What are some other examples, and how can we measure the benefits of such things?

JGH: Language, money, and law are prime examples of cultural commons. They are network goods that emerge from the interaction of countless individuals, each of whom pursues his own goals and does not, as a rule, intend to bring about or preserve the network good. Carl Menger famously described the process of their spontaneous emergence, emphasizing that network goods are not instituted by the deliberate choice of any individual or group. They owe their origin to a social process, not to any political authority. It is impossible to measure their monetary value, and no attempt has ever been made to do so, to my knowledge.

There are other side-effect benefits the monetary value of which could conceivably be estimated in various ways, yet with great margins of error. A shopkeeper may benefit from the security personnel of a business right next door. He could know the costs of hiring his own security staff, but how could he assess the contribution that the extra security provided by his neighbor makes to his bottom line? He would have to make various assumptions about what would have happened if the neighbor’s security had been absent. In other words, he would have to engage in intellectual gymnastics of the sort that is undergirding present-day macroeconomic modeling. The quality of his results would probably be of the same sort: wild guesses. Most likely, he would quickly come to conclude that such guesswork is a waste of time and money.

Difficulties of this sort have an important practical ramification. Precisely because the money value of side-effect benefits is so difficult if not impossible to assess, it is out of the question to eliminate these benefits by a sleight of hand. Positive externalities are therefore especially robust gratuitous goods.

TM: Do pure gifts really exist? That is, do people ever give gifts without wanting something in return?

JGH: Pure gifts can exist, and I know they do exist. However, it is impossible to publicly demonstrate their actual existence because this would require the ability to look into the minds and hearts of others.

TM: There is a lot of history about economic theory in this book. When did economists first go wrong on the charity problem?

JGH: I cannot pinpoint a concrete date or period. The medieval theologians had considered it to be a matter of course that pure gifts do exist and play a hugely important role. I suppose a change came with the modern philosophy of utilitarianism, especially with Jeremy Bentham’s utilitarianism, which rushed into the reductionism that is so characteristic of modern economics. In Bentham’s conception, all human choices are reduced to a calculus of pleasure and pain. And, of course, these pleasures and pains are the ones of the acting person, so that it is from the outset clear that only this one person counts.

On the other hand, as far as side-effect goods are concerned, things turned sour when the academic economists of the nineteenth century decided to neglect the work of Frédéric Bastiat. The latter had developed a very powerful analysis of the role of gratuitous goods in human welfare. Most notably, he had argued that increased savings allowed people to create ever more tools and harvest the gratuitous forces of nature. He had also shown that technological progress eventually conveys gratuitous benefits to the ultimate consumers, whereas the innovators benefit only temporarily (although it is true that Bastiat’s work was marred to some extent by the shortcomings of his value theory and by his inattention to the role of side-effects of human action, which he had neglected, as did all of his contemporaries). Tragically, he came to be almost completely forgotten when the fictitious theory of complete markets rose to its triumph in the twentieth century.

TM: How is bad economics in this field a problem for ordinary people? That is, has a failure to understand the economics of gratuitous goods led to justifications for interventionist economic policy?

JGH: There are here two issues of paramount practical importance. Both spring from bad economics and have led to disastrous policies.

The first one is the theory of externalities. In Human Action, Mises pointed out that negative and positive externalities do not have symmetrical effects but fundamentally different ones and that they required fundamentally different responses. When negative externalities like factory smoke and noise affect the property rights of neighbors, these conflicts can be settled in courts of justice. By contrast, positive externalities do not require any action at all. There is simply nothing wrong with them. It is superfluous and, in fact, disastrous to interpret positive externalities as market failures and have the government step in to redress them, for example, by funding the courts, the army, or roads with taxpayer money. The gratuitous abundance that characterizes the workings of a free economy is then curtailed with rising taxation and rising consumer-good prices.

This brings me to the second issue. In the mainstream conception, the development of the market economy inevitably goes hand in hand with a decline of generosity and altruism. Indifference and coldheartedness rear their ugly heads. Rugged individualism reigns supreme when the state is small or inactive. By contrast, a large and active state is bound to provide the population with the numerous and substantial gratuitous benefits of the welfare state. And, of course, such a large and active state is also likely to promote economic growth through expansionary fiscal and monetary policy. In my book, I show that this conception is the exact opposite of the truth. It is a fairy tale of statist propaganda. The truth is that generosity and abundance flourish in a free economy. When such an economy grows, there is actually a powerful tendency for generosity to increase more than aggregate output. But government interventions, most notably expansionary monetary policies, annihilate and invert these tendencies. They create very strong incentives for people to become stingy, selfish, and indifferent. And for analogous reasons, the services provided by the welfare state in the long run never solve any of the problems they were supposed to mend. They always end up reinforcing and perpetuating homelessness, illiteracy, sickness, unemployment, violence, dependence, indifference, and despair. In other words, state-provided gratuitousness is not only sterile but positively harmful, the exact opposite of the gratuitous goods provided by free and responsible citizens.