Question

Economists are often blamed as cruel and calculating. This section makes it feel as though economists consider consumers to be human calculators in order to maximize their welfare. How would you explain the following paradox? Economic theory assumes that consumers always want more, and they are constrained by their resources. (If they had $1 more they would find a way to spend it and increase their happiness). It that's the case, how would you explain charity? Aren't consumer just simply throwing away an opportunity to increase their own utility?

Answer 1

At the outset, let me tell one important thing that, Economics as a social science which deals with human beings is very difficult to give 100% exact conclusions and exact answers as we give in other sciences like Mathematics, Physics or Chemistry. Every subject/discipline which deals with humans is very complex to arrive at exact conclusions. So from these kind of subjects, we need to understand that if there is a theory, which states something about humans, it is applicable to the majority of the human beings and not to all the human beings. Economic theories assume that the consumer always acts as a rational being, and he always tries to maximize his utility with the given resource/budget constraints. Here Economics tries to generalize the behavior of the humans, that majority of the humans try to maximize their utility with given resources.

Economists analyze things in general perspective, thinking that particular theory would be applicable to majority of the people/citizens. Economists assume that humans take decisions by doing the cost benefit analysis for a particular decision and they try to maximize their utility. Here if we go by economists’ perspective in narrow sense, we may end up understanding all the humans are selfish and greedy. Because every agent/person is trying to maximize his own utility, without thinking about others. That’s why economists are misunderstood that they encourage selfishness and they are blamed as cruel and calculating. In reality, humans do not do the cost-benefit analysis before taking every decision. For example, if someone falls on road, we immediately go there and help him, without thinking about the benefit from that act. However, people do cost-benefit analysis before taking any major decisions, especially if it is related to money. This is where the role of behavioral economics come in.

In case of charity, many people think that the economic theory doesn’t work, because here the agent/person is sacrificing his utility, without trying to maximize his own utility with the available money. In my opinion, the person who does charity is also maximizing the utility, although it cannot be quantified. However, the benefits of charity will definitely outweigh the costs associated with it. The benefits might not be in monetary terms or it cannot be quantifiable, but in terms of satisfaction one gets after doing charity is immeasurable. The utility which one gets after doing charity cannot be measured in numbers. It does not mean that he does not derive any utility out of that. I do not agree with the statement that the humans always want more and more in monetary terms or in quantifiable terms. It might be applicable to majority of the people, but many others are there in the society, who do not bother maximizing their own utility, but they are more concerned about maximizing others’ utility. Charity is the best example for that. If one does charity in monetary terms, he assumes that that money will be utilized for productive purposes by the people who are in need of money. However, in Economics as well as in general, the satisfaction derived by the donor from charity is not considered as utility. Because it cannot be measured. Many people think that it is simply losing a person’s opportunity for maximizing his own utility.

If we think in narrow sense, we may end up concluding that consumer is throwing away an opportunity to increase his own utility. However, in broader sense, we can say that, he is deriving much more satisfaction/utility by donating the money. Because the utility of the money which is donated will be very high because, in most of the cases it is spent on very productive purposes and through this charity many more people are deriving utility. If we compare the collective utility of all the needy people who get benefit from the donations with the individual utility of the donor, which he would have derived by utilizing that money for his own utility maximization. I feel, the collective utility of the people who get benefit from the donations would be much higher compared to the individual utility of the donor.