All entries for October 2009

Why Do Ordinary People Make Political Donations?

The other night I dined with a colleague who is doing research on what makes people give money to good causes. The good cause in his research was cultural -- a European city opera house. It reminded me of a time when I had to ask the same question, but the good cause was a political one (so, a good cause only because it was one that I happened to believe in). The following story illustrates how different people gave money to the same cause for varying reasons. These differences were exposed when a technological innovation lowered the cost of giving money.

The year was 1977, as near as I can fix it looking back. I was treasurer for the city organization of a revolutionary left wing party. Then as now, communism and revolution were pretty unpopular, so there were few members and little cash. Still, we were not an absolutely negligible force, with a dozen branches across the city and a total membership in the low hundreds. Among those members were a number of esteemed and influential figures in the city's trade unions and other organizations, widely respected for their experience and dedication to the community.

Financially, we operated on a knife edge. The class struggle was expensive. It cost money that went on printing, postage, phone calls, train and bus fares, and the petty cash of meetings and demonstrations. The party itself required upkeep: more mailshots and meetings, the maintenance of a city centre building that was a legacy of more prosperous past times, and a substantial contribution to the party's headquarters in London.

We scraped the money together from various sources. There were membership dues, but these were only weakly enforced since we were always desperate to retain members whatever their circumstances. A considerable proportion of the members were low in income and advanced in years. Among them was vast shared experience, however, of raising money in labour intensive but convivial ways: social events, bring and buy sales, and selling newspapers and raffle tickets. There were others that we visited at home, spending hours chatting and chewing politics over a pot of tea, coming away with small donations and dues. 

Change was forced on us by new demands and new possibilities. The dream of our city party secretary was to be a professional revolutionary. Together we made his dream happen. But there was a price to be paid, and often enough he and his family were the ones that paid it. He spent much of his time raising his own wages. The wage rate was low, and not infrequently it was not paid in full. Meanwhile, the revolution was on hold.

A solution appeared in the form of the standing order. I don't recall whose idea it was; it wasn't mine. But it worked. It began when one or two of the wealthier comrades pledged money on a monthly basis. But they didn't just promise it, and then wait for us to come round and collect it; they signed up for the bank to pay it automatically, every month, direct from their accounts to the party's.

If they could do it, so could others. The idea spread. Soon we had a sheaf of standing orders, all bringing the money in as regular as clockwork. At the top of the range, we still had the original clutch of orders that each brought in £15 or £20 a month, plus a few new ones. Many more that we won over were made out for just £1 or £2 a month -- but because they were many, they counted just as much, or more. I don't remember the total, but this was a lot of money in those days.

The local party's financial situation was transformed. The city secretary's wages were paid, if not in full, then at least in part with greater reliability. He had more time for the revolution. For a while, things hummed.

Politically, the outcome was far from simple. To me, as an economist, what I saw in the standing orders was a pure efficiency gain: a dramatic reduction in the party's internal transaction costs. To raise money, you now had to pay just the fixed cost of one-time persuasion to get that signature on the form. After that, the money flowed without resistance. There was no longer a need for time-consuming social rituals and renewal of vows with our comrades and friends. Under the old system, that had to be done time after time; now, it had to be done just once, and then the standing order did the rest.

What the economist in me saw as a pure gain was felt by others as a direct loss. Why did we not come visiting any more? To these comrades, often retired or unemployed and perhaps at risk of social isolation, the hours that we formerly spent chatting at home with them over a pot of tea were not a cost but a pleasure. In fact, that was the main reason they parted with their pounds. If we didn't visit, they didn't pay. Likewise, they paid up their 50 pences to come to our sales and socials because it was their pleasure to do so, to come together, fraternize, and complain about the buses and the balance of forces in the world.

Others felt a different loss: our new income stream from the standing orders made the time and effort they previously put into those sales and socials, and the skills and experience they brought to bear on these activities, worth less than before. The party's increased financial efficiency literally devalued their contributions. Their enthusiasm wilted. They gave less money and less effort. Somehow, for them, it was all less fun.

There was also a rebalancing of status among the city party's constituent organizations. The standing orders caught on quicker with the younger, more middle-class, single-no-kids, high-salary comrades at the university, where the branch was soon contributing far more than its share to party funds. The branches in the engineering factories and more traditionally working-class, family-minded neighbourhoods lagged behind, and still fell into arrears.

No doubt all this would have mattered less if the financial faultlines had not become entangled with social and political divisions. This is roughly what happened: with considerable variance, the keenest proponents of the financial revolution had a tendency to be more middle class and also more liberal, more attuned to new agendas of what today would be called "equality and diversity," less accepting of traditional, male-dominated, trade union militancy, and quite distinctly less sympathetic with the cause of the Soviet Union.

To the traditionalists, many (but not all) of whom were of the older generation, it must have seemed like we were buying up their party. We were liquidating their networks, their ways of doing things, and their values. And the bank was helping us to do it!

This is how I see it now. People that join political parties have mixed motivations. One motive is to achieve the party's political programme. Another is to mix with comrades who think the same and form solidaristic ties with them. No doubt the balance varies from one person to another, and perhaps also through each person's life course. 

It is easy to suppose, for example, that long term political goals might loom larger on average for younger people that are full of optimism and have many years in front of them, than for older people with less time and lower expectations. Of course, that's just a speculation. All the members were highly selected for being socially and politically deviant, so it must be a case of "Generalize with care!"

Think of party members as of two types. In one type, the political programme is the dominant motive. In the other type, it's the desire for comradeship. In my story, before standing orders came along, the two types of members coexisted in a mutual equilibrium. But standing orders, by dramatically lowering the cost of raising money, destroyed the equilibrium and put the two types of members at odds with each other.

The Type 1 party members saw the standing orders as a pure gain, making the party a more efficient instrument for achieving its programme. The Type 2 members were the party animals. They saw the standing orders as a detriment, because it made the party a less efficient provider of affective ties.

I like the way I've set out this story, but I'm not completely sure that I have it right. For one thing, I might have forgotten stuff. I have probably oversimplified. Specifically, I'm implying that I was one of the pure idealists -- someone who believed in a programme and wanted to work for it as effectively as possible. That might not be true. I also recall that I had a strong personal loyalty to our city secretary, so it might be that I too was motivated by comradeship, but towards a different set of comrades from the more traditionalist party members -- the ones I have called the party animals.

And, of course, I accept that the party animals did have political ideals -- often subtly different from mine, it has to be said. The memory that makes me think I'm onto something, though, is how clearly I recall the sense of loss that many of them expressed that we didn't have to give them hours and hours of time and conversation any more, just to get their 50 pences. If they wanted comradeship now, they had to get out and come looking for it, not have it brought to them on a plate of biscuits.

If I'd understood this then, would I have behaved differently? Maybe, but it would not have changed the outcome. The reason is that our cause was doomed, something I did not know at that time. Nothing was going to change that. But there's another story.

Mark Harrison : 28 Oct 2009 23:04 |  Tags: Altruism Politics |  Comments (0) |  Close comments |  Report a problem

The 2009 Economics Nobels versus Big Government

Writing about web page http://nobelprize.org/nobel_prizes/economics/laureates/2009/press.html

Elinor Ostrom and Oliver Williamson have just shared the 2009 Nobel prize for economics. Unsurprisingly, the first ever award to a woman is attracting much of the media interest. Many journalists are likely to find that an easier topic than the content of their contribution.

Anyway, we'll focus on what Paul Krugman would call the wonkish stuff. What do these two share? According to the prize committee, it is their contribution to "the economic organization of cooperation."

What does that mean? On the BBC news website BBC economics editor Stephanie Flanders is quoted as saying that the judges had rewarded work in areas of economics whose practitioners' "hands were clean" of involvement in the global financial crisis. This is true, sort of. As far as I can see, neither Ostrom nor Williamson have contributed anything to recent asset price bubbles, correlated risk taking by banks, or the psychology of "It's different this time."

But it's more interesting than this. In a year when big government is all the rage, the prize committee has chosen to honour two scholars whose work cautions against big government solutions to economic problems.

I've never read anything by Ostrom; in fact, I'd never heard of her before yesterday. I feel bad about that, but I would feel worse if much more knowledgeable people like Paul Krugman (last year's Nobel laureate) and Steven Levitt (of Freakonomics fame) did not also admit to never having read her work. In order to say anything about it, I am relying partly on the Nobel citation, partly on a short interview she gave to BBC Radio 4 News last night.

Anyway, this is what I have picked up. Ostrom works on the management of common property such as land, water, and fish stocks. Economics 101 tells us that private exploitation will destroy the commons in the absence of government regulation. Ostrom's research is reported to show that there are alternatives in between private exploitation and government regulation. User communities often come up with cooperative management solutions that are less costly or more efficient than either, on their own initiative. It sounds like I should find out more.

In contrast to Ostrom's, I know of Williamson's work. I use it in my research papers, and also in my teaching. In fact, I'll be telling my final year undergraduate students about it next Monday in a lecture on the topic of "Government Failure." (The course is called The Making of Economic Policy, and I give two introductory lectures, one on how markets fail and one on how governments fail.) Williamson comes into the lecture because of his work on what he calls "the impossibility of selective intervention."

The starting point is to imagine the best of all possible worlds. We live in a market economy, and sometimes markets fail. Williamson's work shows, for example, that the very existence of firms is a response to markets not doing everything well. For some purposes it's cheaper to organize exchange within an integrated organization than through markets. Firms are these integrated organizations.

Can an integrated organization fix everything that markets can't fix? The key here is that government intervention is conceptually similar to just having bigger and bigger firms. In fact, twentieth century socialists often thought of the socialist economy as "one big firm." When markets fail, I suppose we'd all like to think the government could step in selectively, just when required and only then, and fix the failure. Then, we could always have the best of everything: market allocation, unless it fails; if the market fails, intervene to correct or replace it. That's selective intervention. Over the last century social democrats and democratic socialists have put forward many different ideas about what exactly needs fixing, but all would have agreed, I think, that selective intervention is the key. Williamson's work suggests, however, that this best of all worlds is out of reach.

Of course, Williamson is a scholar, not an ideologue, so he doesn't reach this conclusion directly. In The Economic Institutions of Capitalism (1985), for example, he asks a related question: what are the true limits on firm size? (Or, why don't we run the economy like one big firm?) He argues that replacing the market with an integrated organization always has unanticipated costs. The market, for example, provides high-powered rewards for success and penalties for failure. Intervention always impairs these incentives. We can define the benefits of intervention in advance, but not the costs. If politicians are allowed to intervention selectively, some interventions will inevitably make things worse.

Why? There are several reasons. One is the cost of good intentions: "Decision makers," Williamson writes, "project a capacity to manage complexity that is repeatedly refuted by events." Another reason is the propensity to micro-manage: Intervention always involves the exercise of power, including the power to divert resources to private goals. A third reason is the effect of "forgiveness" on effort: If a firm is losing out to market competition, there is no appeal against the verdict of customers. Managers and workers know this, so they make inordinate efforts to avoid losses. In a politicized environment, in contrast, sharing and horse-trading are much more important, so loss makers can buy political insurance against failure, or forgiveness. As a result, efforts to avoid failure are less. Finally, loss making activities are more likely to go on making losses. That's because politicization creates scope for lasting alliances based on reciprocity; loss making activities can win subsidies from profits made elsewhere and are not closed down. So, losses persist. 

In short, Ostrom and Williamson point in the same direction. Ostrom is saying that big government may be less necessary than we think. Williamson is saying that, even when necessary, the results of big government will always disappoint.

This is not the same as to say that politicians should never act. If there are always unanticipated costs, there may still be benefits, and the benefits may still outweigh the total costs -- both expected and unexpected. An example is the big-government bail-outs that saved the world economy over the past year. We will be paying the bill for a long time, and the bill will be bigger than anyone thought. The fact is, it had to be done and was worth doing.

The message of the 2009 economics Nobels is not to make a virtue out of what was done from necessity. The return of big government is not a cause for celebration.

Mark Harrison : 13 Oct 2009 09:55 |  Tags: Economics Nobel-Prize Politics |  Comments (1) |  Close comments |  Report a problem