Everyday Economics

Phony Generosity

Economics Nobelist Vernon Smith’s alarming discovery about human nature.

Let me tell you about two people I’ll call A and B. No, on second thought, let me tell you nothing about them at all, beyond the fact that they are strangers to you and to each other, and that none of you will ever meet or learn any more about each other than you know right now.

I have three questions: Would you like to give some money to A? Would you like me to force B to give some money to A? And would you be willing to pay me to force B to give some money to A?

I’d like to think the answers are no, no, and no. Giving money to A seems at first blush like a nice thing to do, but why give money to a total stranger, who might already be very rich or very lucky, or for that matter very nasty, when you could give it to your favorite charity?

As for forcing B to give money to A—what would be the point? After all, if you knew anything at all about these people, you’d be just as likely to think that A should give money to B. And as for paying me to move money from B’s pocket into A’s—would you also pay me to move money from A’s pocket into B’s? And then pay me again to move it back to where it came from? Can I make a career out of this?

Which brings me to this week’s Nobel Memorial Prize in Economic Sciences. One of the winners, Vernon Smith of George Mason University, was honored for his pioneering work in experimental economics. In one series of experiments conducted by Smith and his former colleague James Cox, the subjects effectively answer my original three questions not with the expected “no, no, no” but instead with a “no, yes, yes.” No, I do not want to give money to A. (Understandable.) Yes, I want B to be forced to give money to A. (Weird.) Yes, I am willing to pay someone to force B to give money to A. (Very weird.)

Smith, for the record, does not agree with my interpretation of his experiments (as I learned after I first wrote about this topic in Reason magazine), so let me tell you what the experiments show and you can decide for yourself.

In one experiment, you (assuming you’re the subject) are placed in a room and given 10 dollars. You’re invited to put some of those dollars in an envelope that is passed to the stranger in the next room. Whatever doesn’t go in the envelope is yours to keep.

The result? About two-thirds of the subjects keep all the money for themselves. In other words, people don’t like giving money to total strangers. That’s the part I understand.

In the next experiment, you’re placed in a room and given 10 dollars. Once again, you’re invited to put some of those dollars in an envelope that is passed to the stranger in the next room. But this time, your gift is automatically tripled: If you put two dollars in the envelope, the experimenter adds another four to make it six. All the extra cash goes to the stranger, and once again whatever doesn’t go in the envelope is yours to keep.

In other words, the experimenter is offering, for a fee (i.e., whatever you put in the envelope) to take money from B (the taxpayer who’s funding this experiment) and give it to A (the stranger in the next room). You have no reason to think that A is any poorer or richer than B, no reason to think that A is any more or less deserving than B, and no reason that I can think of to care more about A than about B. Nevertheless, now a lot of money goes into the envelopes—the average envelope contains $3.63, so that A gets $10.89 of B’s money. And you, the subject, have paid $3.63 to make it happen.

Now I wonder what would happen if the experimenter offered to reverse the flow of funds—inviting you to pass dollars to B (the taxpayer), all of which would be tripled out of the pocket of the hapless subject A, the stranger next door. (Of course, this experiment would be difficult to conduct in practice since A would probably call the police. But let’s consider the hypothetical.) Since A and B are interchangeable to you, this seems like exactly as desirable a proposition as the original experiment. Would you spend your life passing money back and forth between strangers, coughing up your own funds at each step along the way?

You might object that subjects are unaware—or at least potentially unaware—that these experiments are funded by tax dollars. Fine, but I don’t think that changes anything. Surely the subjects must be aware that these experiments are funded by someone, and that every dollar comes out of someone’s pocket. Even if you think the experimenter is determined to keep going till he’s spent, say $1,000, it’s still true that every dollar you give to A is a dollar that won’t be available to some future experimental subject. And why should you care more about A than about his future counterpart?

There are only three explanations I can see for all this. One is that people just really enjoy moving other people’s money around, independent of who those people are. Another is that people simply forget that there are no free lunches, and you can’t give something away without making someone pay for it. Yet another is that people somehow care less about anonymous faceless taxpayers than about other anonymous faceless strangers. I’m not sure which of these explanations is right, but none of them does much to improve my faith in democracy.