The Behavioral Economics of Welfare
Crossposted from Tumblr.
Epistemic Status: I offer some speculation, don’t really understand what is going on, would be glad to receive more insight.
You sometime hear libertarians say that welfare is unnecessary since private charity can replace it. IMO, it looks like the evidence doesn’t support this: only few people donate sizable amounts to charity, and historically, charity didn’t substantially ameliorate poverty during the early Industrial revolution (to the best of my knowledge). In fact, welfare developed precisely because the systems of poverty relief that existed in small rural communities became obsolete with mass industrialization and urbanization.
This seems somewhat paradoxical. All Western-style democracies have welfare systems, which means that presumably the majority is interested in having a welfare system, despite that it is a financial net negative for most people (that is, most people pay more money in taxes for welfare than receive welfare, I think?) So, apparently most people care about the poor. In this case, why can’t charity replace the welfare system?
Let’s consider several theories. These theories are not mutually exclusive, and the real explanation might be a combination of several (or something else altogether.)
Theory 1: People don’t trust charity funds. Normally, when you buy a commodity or a service, you can test its quality directly, and if it is found wanting you will not return to the same supplier. On the other hand, it is difficult to observe the effects of charity if you are not acquainted with the recipients. Therefore, verifying the trustworthiness of a charity fund is much more costly than verifying the trustworthiness of other suppliers, and most people aren’t sufficient altruistic to pay this cost.
This theory is somewhat supported by many explanations I heard people give for why they don’t donate to charity, although many times it sounds a bit like an excuse.
Theory 2: People indeed care about the poor, but only about the poor in their neighborhood or town. Therefore, acting against poverty requires either very local charities or coordination. Coordination is difficult (tragedy of the commons) and very local charities would face even greater trust issues (This theory is an extension of Theory 1.)
I liked this theory initially, but upon deliberation I find it difficult to believe. Most people who speak out in favor of helping the poor don’t seem to exhibit any geographic focus besides a focus on their own nation. Such a focus probably existed in societies that preceded the Industrial Revolution and the associated atomization (destruction of local communities). Today, to the extent local communities exist at all, they seem to be clustered by socioeconomic status, so those most able to help the poor are the most remote from them anyway.
Theory 3: People hardly care about the poor at all. The main reason they speak and vote in favor of welfare is because each person knows eir individual influence is very weak so this support costs them little. In other words, welfare exists because destroying welfare is a coordination problem: each individual would prefer not to pay it, but given that welfare exists, it is better to signal virtue by speaking and voting in favor of welfare (one may argue that the secret ballot would have removed this incentive, but actually people often deceive themselves in order to deceive others, not to mention that voting is constrained by positions on other policies as well.)
Theory 3 seems supported by Hanson’s philosophy of “X is not about X,” to the extent we believe this philosophy. It is the most cynical and also very ironic: here, Moloch turns out to be the good guy. I would rather live in a universe where this theory is false, but, [insert Litany of Tarsky here.]
I think it is very important to understand the real mechanism. Among other reasons, if we want to improve the world by charitable giving, we need to understand the incentives at work. Indeed, different explanations seem to suggest quite different strategies to improving the situation.
A standard consequentialist model for welfare is that 1) each person cares about every person’s well-being at least a little, but cares about themself much more and 2) a dollar goes farther at purchasing increased well-being in the hands of a poor person than in the hands of a well-off person.
For example, say that each person values themself 100x as much as they value another person and a dollar goes 10x farther in the hands of a poor person than in the hands of a well-off person. From the point of view of a typical well-off person, me getting a dollar is worth 100 utils (let’s say, to set the scale), some other well-off person getting a dollar is worth 1 util (since I value them 1⁄100 as much), and some poor person getting a dollar is worth 10 utils (since I value them 1⁄100 as much and they get 10x as much well-being per dollar).
So one well-off person giving a dollar to a poor person is net negative according to the giver’s preferences: −100 utils from losing a dollar plus 10 utils from a poor person getting a dollar (-100 + 10 = −90). But if 100 well-off people coordinate to each give a dollar to a different poor person then that is net positive or according to the preferences of one of those well-off people: −100 from losing a dollar, minus 99 from 99 other well-off people each losing a dollar, plus 1000 from 100 poor people each getting a dollar (-100 − 99 + 1000 = +801).
In this model, giving welfare is a coordination problem. From the point of view of one well-off person, it would be best to give nothing while all the other well-off people gave alms to the poor and worst to give to the poor while all the other well-off people gave nothing, and of the two coordinated solutions the one where everyone gives is better than the one where nobody gives. People used to try to solve this coordination problem by reputation, norms, etc. (judging almsgivers as virtuous and non-givers as vicious), but it gets harder to make that sort of solution work as society gets larger and more diffuse, with more interactions happening through impersonal markets and rule-based governments rather than within tightly-knit communities. Now people try to solve the coordination problem by getting the government to force everyone to participate.
That’s a great explanation. But it still leaves the mystery of why everyone must participate. In your example, coordinating charity with 100 other givers is already a good deal for all involved. Since such deals aren’t happening spontaneously as much as they could, it seems like something else is going on. For some reason society-wide coordination is needed.
I think the missing piece is that, apart from diminishing marginal utility, the preferences of well-off people are partly positional. If you give 1% of your income to charity and Bob doesn’t, that gives Bob a small chance to get ahead of you, and that just won’t do. Even if 100 other well-off people do the same as you, that still lowers your position relative to most well-off people. But if all well-off people give 1% of their income to charity, the problem disappears.
Very reasonable, thank you!
The traditional forms of charity are church and family. The same goes for groups like unions but unions are usually not well regarded by the people who advocate for more charity.
Part of the idea of a secular nationstate is that the prime loyality of people isn’t to their church community or their family but to the nationstate. We consider different loyalities to be a sign of corruption. The politician or judge who puts the interest of his church community or his family before the interested of the nationstate is a huge problem.
Lack of loyality to the nationstate is a huge reason why many African countries don’t work. When government officials don’t act in the interests of the nation but their clan the government doesn’t work effectively.
Our secular nationstates do get loyality by engaging in actions like providing welfare for their citizens. Providing health care, both by regulating it and by organizing payment, is the same. In Hansian’s terms it shows that the nation cares for your wellbeing and it gets loyality as return.
There are similar reasons why an organisations like Hamas or the Muslim brotherhood does a lot of charity. It’s what you need to do for getting a certain kind of loyality.
That doesn’t explain why the laws that create welfare were passed in the first place and why laws get sometimes passed to increase welfare payments.
I need to think more about your suggestion about loyalty, but regarding the last point: it actually can explain it, in the same way. If each individual receives a social advantage from supporting the creation or enlargement of welfare then welfare will be created or enlarged, even if each individual would rather it wasn’t (because again, the political influence of each individual separately is very small).
I don’t think “Moloch” is a good word for “People vote according to what they think is a morally good instead of voting in their own self interest”. People not voting in their self interest is good.
Charity means that an individual person who donates more money won’t have a significant effect by funding a big charity but a high person cost. On the other hand, raising the tax rate has a much lower personal cost for the amount of good that gets created. Paying for collective welfare collectively makes a lot of sense you believe it should be funded but don’t want to fund a disproportionate part yourself.
Meta remark: I don’t understand the thing where I post something on my personal blog, explicitely write that it is speculation and I want other people’s insights, and get immediately downvoted. This is exactly the sort of thing I hated about the old LessWrong and that IMO contributed to its demise.
Mod team is having a discussion about this, but in the meantime, note that only front page posts affect your karma total.
Now it seems that other people upvoted it. Maybe I should just not look at the score until some time after posting. Btw, it might be a nice feature to hide it for some time automatically (that would also have the benefit of helping early readers to form an unbiased opinion.)
Votes aren’t supposed to be unbiased. When a post is negatively voted and I don’t think it should be negatively voted but I also don’t think it’s very great, having the information will get me to cast an upvote vote that I otherwise wouldn’t have and that’s good.
Strongly agree. This is really a discussion for meta so maybe bring it up there but might make sense to disable downvotes on stuff not on the front page.
Strongly disagree. I mean, I am okay with this specific article, but a ban on downvotes anywhere on LW is a bad idea. There needs to be a way to express “this stuff does not belong to LW”. Not even a personal blog on LW should be literally “anything goes”.
Theory 4: people only care about poor people in the in-group. People like welfare when it helps people similar to themselves, and hate it when it “enables” stupid lazy people in the out-group. This is often heavily racial—the countries with the most generous welfare systems are also the most racial homogeneous. So whether one votes in favor of welfare is determined by who they imagine being helped. This can often change rapidly, leaving public opinion on welfare to be a confusing mess.
The poor and the not-poor aren’t completely distinct and disconnected groups. Few people are rich enough to be able to to absorb all the impacts of becoming unable to work, and many working people have non working relatives. State welfare can be seen as a way of insuring against the former, and spreading the cost of the latter. So there are selfish motivations, up to a point.
And it’s typical of insurance schemes that most subsribers are nett losers—that is hardly a bug. And the shear scale of state welfare, seen as insurance, is a rather desirable feature that is likely to go missing in the alternatives.
This is a valid point, however one can then ask why we have welfare rather than private insurance.
In some cases we do, althouth it needs to be mandatory to get enough people in. But mandatory insurance is only half a victory for libertarians,
This theory is mostly true, but rather than being cynical about people caring about poor people, we should be cynical about the more general concept of people caring about stuff.
to the best of my knowledge
You need to improve on this. Also, consider the costs of welfare. And look into the history a bit more.
Many of the functions of welfare were provided by mutual societies, not by charities as we know them. You might find looking into who introduced welfare systems and why quite informative. It often had little to do with charitable notions and more to do with reducing crime.
“You need to improve on this” is not constructive.
I agree that there is another possible explanation of the form: people want welfare in order to reduce crime, this creates a coordination problem (since the welfare a single person pays doesn’t reduce crime only for em personally), which requires the government to solve.
The functions of state welfare were not fuliflled well by mutial aid socieities, because then the introduction of state welfare would have made no discernable difference.