Usher Political Economy (Blackwell, 2003)

because there is no publicly available gauge of quality. Is the teacher’s performance satisfactory? Typically, there is no objective standard to which the teacher and the school board may appeal. Even when there is a standard – such as the percentage of students passing a certain exam – one party may claim that the standard is inappropriate in his case because, for example, the teacher’s students are atypical. It may be a matter of judgment whether or not the teacher is doing his job well. In other kinds of work, it may be impossible to say with certainty how much time is required to complete the job, whether a poor crop is due to bad weather or to a want of diligence by the tenant farmer, or the extent to which the profitability of the firm is attributable to the ability and diligence of management. Ordinarily, the more skilful the worker and the greater the responsibility of the worker, the harder it becomes to tell if the worker is doing his job well.

In the absence of an objective standard of performance and where remuneration must be set per hour, or per year, rather than per unit of goods produced, there arises a principal–agent problem. The principal hires the agent. Principal and agent may be the owner of a firm and his workers, or the school board and the teachers, or the stockholders and the chief executive officer. The principal–agent problem is that the agent works less diligently, and for less pay, than would be in the interest of principal and agent together if they could agree on a standard of performance that could be observed and enforced. In the absence of an objective standard, the agent lacks the incentive to be as diligent as he would otherwise be. Anticipating the correspondingly lower output per worker, the principal knows that he must offer a lower wage to maintain any given level of profit, and the market-clearing wage would be correspondingly reduced. The less observable the performance of the worker, the more serious does the principal–agent problem become. Adam Smith alluded to the problem in the matter at the outset of this chapter, arguing in effect that the principal–agent problem is more acute when the principal is a publicly owned or endowed school than when education is purchased privately by parents for their children, and schools are likely to go bankrupt unless incompetent teachers are dismissed. The corresponding case for public schools rests upon externalities similar in some respects to the smoke and smoking problem discussed in chapter 5. Public provision of schooling may inculcate civic virtues because children from every stratum of society are educated together. The principal–agent problem is especially acute in socialist societies where prices need not reflect scarcities, where firms need not be profitable, and where the principal–agent problem between workers and management is compounded by a principal–agent problem between managers and the government. In the words of the Russian joke, “You pretend to pay us, and we pretend to work.”

There is another closely connected problem. Non-observability of the quality of the labor supplied leads inexorably to some involuntary unemployment of labor. If the output of the worker could be observed perfectly, the labor contract would dissolve into a sale of goods. All work would become piece-work, there would be established a market-clearing rate of pay per unit of work done and it would be a matter of indifference to the employer how little or how much any given worker chooses to do. Otherwise, when payment is per hour rather than according to the amount of work accomplished, there is an incentive to shirk. Dismissal for shoddy workmanship may be the principal’s only weapon to enforce diligence. But dismissal is no threat when

there is a uniform market-clearing wage because a person dismissed from one firm can expect the same wage from another. Somehow, if the threat of dismissal is to be a goad to diligence, the worker must become worse off when he is dismissed. A blacklist among employers may be sufficient. Otherwise, since all firms are in the same boat, the wage of employed workers must be high enough that a dismissed worker must wait longer for re-employment than he would prefer.

Where want of diligence by the worker is especially costly to the firm, and where diligence is difficult to observe, a profit-maximizing employer may wish to provide some workers with “trust wages”: wages high enough that dismissal constitutes a substantial penalty to the malfeasant worker. If, as an employee, I have a 50 percent chance of getting caught and being dismissed for malfeasance – anything from laziness to outright theft – and if my gain from undetected malfeasance is $1,000, then my employer acquires an incentive to pay me a wage high enough that I am at least $500 worse off seeking a new job than I am working for him. The greater the cost of my malfeasance to my employer, the greater his incentive to deter malfeasance by whatever means he can. Trust wages may be an effective option. Workers in the diamond trade might earn trust wages. Salaries of judges may depend as much on the harm a corrupt or inattentive judge may do than on the skill that he brings to his office, though the prospect of loss of honour may go a long way in keeping judges in line. Huge salaries for chief executive officers of large corporations – which can be thousands of times greater than the average wage in the population as a whole – may be due in part to their special skills, but may also reflect the cost to their corporations of negligence at the top of the industrial hierarchy or their opportunities for personal profit in dealings with other firms. Occupants of such positions are fortunate because they are paid more than their skills would fetch in less sensitive jobs.

To a greater or lesser extent depending on the specifics of the law and peculiarities of the labor market, the labor contract entails a humiliating subordination of the worker to his boss. Ideally, there would be no such subordination. If the market for labor were like the market for cheese, then a worker dismissed from one job could instantaneously find another commensurate with his skill and experience, placing boss and worker on equal footing. The worker’s threat to quit would be no less potent than the boss’s threat to fire him, and there would be no sense in which either party could be said to exert power over the other. In reality, losing a job is costly and unpleasant. At a minimum, one is deprived of his wage until another job is found, a cost that is reduced but not eliminated altogether by severance pay and unemployment insurance. If the new job is in another town, one must sell one’s house and buy another. The new job may be at a lower wage. Searching for work is intrinsically unpleasant, especially if one is not quite sure that one will ever get a new job at all. By contrast, the stress on the boss who fires you is more bearable, especially if there is a large pool of the unemployed from which replacements can be drawn. A boss or supervisor may even take pleasure in acquiring a reputation for being hard-nosed, in concentrating on the bottom line or in exercising authority over the lives of other people. The asymmetry between boss and worker is likely to be greater in a company town than in a large city, in a factory than in a university, and in a non-unionized firm than in a firm where there is a union, though, as will be discussed presently, unions present problems of their own.

VOLUNTARY ASSOCIATIONS

Voluntary associations are like elaborate contracts, among their members in the first instances, but also between their members and the rest of society. Marriages, condominium associations, corporations, unions, charities, and political parties are voluntary associations established to achieve objectives collectively that cannot be achieved individually through the price mechanism. Such associations are established in accordance with patterns or templates recognized by the law as manifested in thousands of court decisions resolving points of dispute about who owes what to whom. Such associations may convey privileges and obligations not just among the members of the association, but to society as a whole. The public interest in private associations may be no more than to facilitate the common purposes of a group of citizens, but some associations confer benefits upon the community at large.

It is of little importance to the rest of society whether a group of people occupying apartments in the same building do so as tenants or as members of a condominium association. As it is of importance to the occupants themselves, the state provides a framework of law for the enforcement of their promises to one another and for the resolution of disputes. Typically, an explicit condominium agreement would specify the broad purposes of the condominium and the general terms of the agreement. The agreement would implicate the state as the ultimate enforcer in the event that one party violates the terms of the agreement and as the final interpreter of the contract in the event of disputes as to its meaning. No agreement, no written document, can provide for every contingency and for every dispute that may arise. The full meaning of the words of the agreement can only be understood against a background of law. Ultimately, the terms of the agreement are whatever the courts are prepared to enforce.

A marriage is like a condominium association in that the terms of both agreements must be enforced and interpreted by the courts. A marriage differs from a condominium association by the presence in a marriage of a distinct public interest going well beyond the interests of the parties to the contract and manifest in the privileges and obligations that marriage conveys. The state’s principal interest is in next generation. Marriage laws are to a large extent about the raising of children to become good citizens. On marrying, a couple may write a marriage contract, but most marriages are without explicit contracts because a contract is implicit in the law of marriage and in the traditions of the courts as revealed in the entire history of the courts’ resolution of marital disputes about the obligation of spouses to one another, the dissolution of marriage, the custody of children, the responsibilities of parents to children and the responsibilities of children to parents.

THE CORPORATION

The corporation combines a unity of organization with a diversity of ownership. The unity of organization is required to cope with economies of scale and with the multitude of small decisions that must be coordinated if modern industry is to work at all. An industrial hierarchy is required to direct the research, locate the factories, hire workers

with the appropriate mix of skills, prepare the accounts, arrange advertising, sue one’s competitors over patents and other matters, buy raw material and parts, and organize the assembly line to direct the flow of cars, radios, aeroplanes, computers, food, clothing or whatever the firm produces. Assets worth billions and billions of dollars must be brought under one authority and used to promote the profit of the whole.

Few people are wealthy enough to acquire sole ownership of a large corporation. Instead, the corporation issues shares held in relatively small amounts by many people, most of whom would prefer not to risk their entire fortunes in a single enterprise. Shareholders are at once the claimants to the earnings of the corporation and bearers of the risk in the event that the earnings are not forthcoming. Like the condominium, the corporation may in the first instance be established by a single entrepreneur who sells shares to raise capital or to divest himself of the entire firm as profitably as possible. Initially, the entrepreneur may have a good deal of discretion in establishing the rights of shareholders. He might prefer, for example, to issue non-voting shares, but may desist from doing so because prospective buyers would be unwilling to pay much for shares in a corporation where the original owner can, by one means or another, deflect the profit of the corporation from the non-voting shareholders to himself. Occasionally, the original owner is trustworthy or can be bound by the constitution of the corporation to treat non-voting shareholders well. Usually not. Non-voting shares are legal in some countries but not in others.

The corporation is at once a network of contracts and a set of legally established privileges and obligations that a person or group of people may choose to assume. Shareholders contract with one another over the governance of the firm, with bondholders to return their initial payments with interest, with workers to accept the authority of the management of the firm (within certain limits) in return for their wages, with suppliers of parts and raw materials, with customers to supply goods of a certain quality. There is sometimes alleged to be an implicit contract between the stockholders of a firm and its stakeholders: bondholders, workers, suppliers, and even the general public. The implicit contract would require management to take account of all these interests – and not just the shareholders’ interest in profitability – in the running of the business. Though this is often said, it is unclear how the different interests are to be balanced, one against another, and the entire distinction between stockholders and stakeholders may be little more than propaganda to justify managerial incompetence or to the keep the regulators away.

The greatest privilege of the corporation is limited liability. No matter how unprofitable the corporation, the stockholder is never liable for its debts. If I invest $100 in the stock of a corporation and if the corporation goes bankrupt, I can lose my entire investment but can never be obliged to pay an extra $50, for example, if the uncovered financial obligation of the bankrupt corporation is $50 per share. Losses of the bankrupt corporation may be borne by its suppliers, by bondholders and by workers whose wages remain unpaid, but the worst that can happen to me, as a stockholder, is that my shares become worthless. The stockholder’s other assets are not in jeopardy. Corporations are different in this respect from partnerships; partners are fully liable for all debts of the partnership. Partners may not even want limited liability because of the greater assurance that unlimited liability provides to their associates that the debts of the partnership will be paid. The public interest in limited liability is to allow

small investors to participate in the ownership of large aggregations of capital without at the same time risking their homes and their retirement incomes on the chance that, through miscalculation or chicanery by the executives of the corporation, the corporation acquires large debts that it cannot pay.

The corporation is bound by an elaborate framework of law. It must establish a board of directors to whom the officers of the firm are ultimately responsible. If its shares are traded on the stock market, it must produce an annual report with financial information certified by a chartered accountant. There are rules restricting “insider trading,” the purchase or sale of stock by officials of the corporation to profit from information unavailable to the general public. There are rules about the government of the corporation, mandating, for example, that there must be an annual meeting of the stockholders, that decisions at the annual meeting are binding on the firm and that such decisions are to be based on majority rule voting, one share one vote. There are rules about fairness among stockholders, such as the rule that all shareholders receive the same dividend per share.

There are rules protecting the rights of minority shareholders in a takeover of a corporation. Corporation law must specify whether, for example, an offer to buy shares at a certain price can be limited to just enough stocks to secure control of the firm for the buyer and whether all current stockholders must be treated alike. There are rules about transactions with other businesses. Corporation law must specify whether and in what circumstances a party with a controlling interest in a corporation may buy up some or all of its assets. An unlimited right to do so would provide a majority shareholder with a way to expropriate the minority shareholders. An unrestricted prohibition would block mutually advantageous transactions. A balance has to be drawn, but no balance can be entirely satisfactory in all circumstances.

Control of the corporation is especially problematic. A controlling hand is required to direct resources coherently. This presents no difficulty for a small firm with a single owner whose income depends on how efficiently he manages his resources. With ownership shared among thousands of stockholders, the corporation must be governed by voting, with one vote per share rather than per person as in voting for Members of Parliament. The law requires two stages of control: shareholders vote for the board of directors at an annual meeting, and the board of directors takes ultimate responsibility for the running of the firm including the appointment of the chief executive officer and other executives down the line. A majority stockholder can control the firm by electing his nominees to the board of directors. A large shareholder with less than a majority of the shares may do so too if other shareholders are passive, as many shareholders tend to be. Control of a corporation may be desirable for its own sake, for the authority it conveys over other people and for the access it conveys to politicians and to the civil service. Whoever controls the corporation is empowered to appoint its executives, set the wages of employees, choose the recipients of trust wages, provide jobs for relatives or friends, or arrange large compensation for himself. Control may also supply opportunities to manipulate, expand, or reorganize the corporation to one’s advantage.

There is on the other hand a “free-rider problem” in the participation of minority shareholders. Suppose all stockholders know that their corporation is badly managed. Suppose that there are 1,000 shares outstanding, that an expenditure of $10,000

would be sufficient to mount a takeover of the corporation to displace the old management and that the efficiencies of the new management would raise the present value of the corporation by $20,000. An expenditure of $10 per share would lead to a rise of $20 in the stock price. Whether the return to the would-be raider exceeds the cost of the raid depends on how many shares, and at what price, the raider acquires. If he can acquire 70 percent of the shares at the original price before the take-over is anticipated, then the take-over is profitable, yielding him $14,000 ($20 per share for each of 700 shares) at a cost of only $10,000. But if the raider can acquire no more that 40 percent of the shares at the original price, then the take-over becomes unprofitable, for the gain in the value of his shares is only $8,000 ($20 per share for each of the 400 shares he acquires) which does not cover the cost of reorganization. Worse still, if a successful raid were anticipated by the market, the cost of the shares to the raider would include the value of his anticipated reorganization, rendering the take-over unprofitable no matter how many or how few shares the raider acquires. The nub of the free-rider problem is that the raider bears the full cost of the raid even though a successful raid raises the value of everybody’s shares by $20.

Control is an elusive concept. It is obvious enough what it means when one stockholder owns more than 50 percent of the shares, but the perquisites of control can frequently be obtained with very much less. Control can be maintained with 25 percent of the shares if 50 percent of the shareholders are unwilling to monitor the conduct of the corporation or to vote in proxy contests. Control can be maintained by leveraging. A corporation with assets of $1 million can be controlled with as little as $100,000 of one’s own capital by issuing, say, $800,000 of bonds and then selling just under half of the stock of the corporation. Control can be maintained by pyramiding. A corporation worth $1 million can be controlled absolutely with assets of as little as $250,000 by setting up an intermediary corporation which holds just over 50 percent of the stock in the primary corporation. To play this game, one must, of course, persuade others to hold just under 50 percent of the shares of both corporations, but that can be effected gradually by buying control of existing firms and moulding them to one’s purposes. Ten stages of pyramiding, which would be bizarre but is not actually illegal in some countries, could secure control of a corporation worth $1 million by means of an investment of less than $1,000. Better still, one can control a corporation with no assets of one’s own at all by establishing two corporations, A and B, each of which owns over 50 percent of the shares of the other. Both corporations have the same directors who meet twice every year, once on January 1 in their capacity as the board of directors of corporation A and again on June 1 in their capacity as the board of directors of corporation B. As representatives of corporation A, they re-elect themselves as directors of corporation B. As representatives of corporation B, they re-elect themselves as directors of corporation A. It does not matter which corporation actually controls the productive assets and generates the revenue for the two corporations together. The scheme is foolproof, or would be if it were not illegal. I understand that such a scheme was once maintained with the connivance of the government of South Africa to preserve the diamond cartel.

In practice, control may lie with the management of the firm, with banks, with pension funds or with wealthy individuals, depending in no small measure on the legal framework of corporate finance. Fearing the emergence of monopoly and of the

domination of industry by large banks, the United States and Canada established a complex network of rules – about the composition of the assets of banks, the holding of equity by the banks, the placing of representatives of banks on the board of directors of corporations, interlocking directorates, and a multitude of other matters – to place a wall between the control of banks and the control of corporations. Similarly, among financial institutions, it was until quite recently thought appropriate to separate banks, insurance companies, stockbrokers, and trust companies, forbidding each type of firm from encroaching on the business of the others. Now, as financial business becomes more complex and more international, the lines are dissolving and corporations may be in all four businesses at once. Not all countries shared these concerns. In particular, Germany and Japan were content to allow a much closer association between banks and corporations.

The danger in prohibiting banks and other financial corporations from controlling manufacturing corporations is that control may revert to a self-perpetuating oligarchy of the managers or to financial pirates who find ways of diverting revenue from ordinary stockholders. Regardless, control of large corporations is the Achilles heel of capitalism. Modern industry requires large aggregations of capital. The revolution in computing technology generates ever larger economies of scale and facilitates a far greater span of control, over diverse production processes and among many countries, than anything we have seen in the past. The national income and the rate of economic growth are both significantly higher when some firms are very large than if all firms could somehow be kept tiny. Economies with large, privately owned corporations have proved infinitely more productive than economies where the means of production are publicly owned. There is, nevertheless, a major drain of resources in the contest for control and a disturbing influence of large corporations on the conduct of government.

UNIONS

Like the corporation, the union is a legally established pattern of association, with wellspecified privileges and obligations, that people can choose to adopt or not to adopt as they see fit. Like a corporation, the union is bound by an intricate web of laws specifying how a union is certified, how elections are conducted, the authority of a union over its members, when a union may strike, when the union, or the firm with which it bargains, can demand compulsory arbitration of disputes, whether or not all workers in a unionized firm are obliged to join the union, and many other matters. Unions may be permitted in some industries but not in others. Typically, unions are prohibited in essential services where a strike may do a great deal of harm to the community at large, or, if permitted, their range of activity might be considerably circumscribed.

A union is a workers’ cartel or monopoly over the supply of labor in some trade or industry to raise incomes by restricting the supply of labor. As discussed in chapter 4, there is a general presumption that monopoly is detrimental to society as a whole, but most countries make an exception for trade unions. Though one cannot rule out naked political influence, a rationale for this exemption is to be found in the special circumstances of the labor market. A worker would normally be hired by a

firm for an extended period of time on the understanding that the relationship may be terminated by either party on short notice. Employment may be more or less precarious for the worker depending on the circumstances of the labour market. A worker fired from his job bears a cost, varying from negligible to catastrophic. There may be a flourishing labor market where he can find another job easily and at little inconvenience to himself. He may be confronted with a period of unemployment until a new job appears. He may be required to sell his house and move his family to unfamiliar surroundings if the only available job is in another town. He may have to take a cut in pay. He may not find a new job at all. A union may supply a degree of security in employment.

Unionization may raise the wages of unionized workers, but higher wages must be at somebody else’s expense. Unionized workers may gain at the expense of the owners of the firms with which the union bargains, of consumers who pay higher prices for the products of unionized industries and of non-unionized workers whose wages are forced down by the presence of extra workers who would otherwise be employed in unionized industries. On the other hand, where the circumstances of the worker in the absence of a union conveys a degree of monopoly power on the firm over its workers, the establishment of a union may transform a simple monopoly of the firm over its workers into a bilateral monopoly of a market for labor. In such circumstances, a union may supply a workforce with a monopoly over the firm to balance the firm’s monopoly over its workforce. The situation of unionized workers and their employers may be more like the confrontation between Norman and Mary in the discussion of bargaining in chapter 3 than like ordinary monopoly as described in chapter 4.

A union may defend the dignity of labor, but does not always do so. A union subjects the worker to a second hierarchy that may be every bit as oppressive as the first. The dignity of labor may be undermined by the union’s bureaucratization of employment, blocking the connection between worker and boss with a hierarchy of union officials and destroying the worker’s incentive to innovate in the workplace or to work with extra diligence for extra pay. Unions may turn corrupt, trading high incomes for union officials at the expense of the workers they are supposed to represent and confronting ordinary workers with a situation not unlike the fishermen with public as well as private predators in chapter 2. A free market in labor may be the best defense of the dignity of labor. Good prospects for finding another job may be the worker’s best remedy for the officiousness of the boss and the string of command. In segregating the labor market, unions may render the life of the worker less independent on balance. Unionization may even confront workers with a prisoners’ dilemma in which union members are better off than other workers, but both classes of workers become worse off with every increase in the proportion of workers unionized so that workers in a fully unionized economy would be worse off than if there had been no unions at all.

The balance of gain and loss depends on the circumstances of the industry. One would guess that a union of migrant fruit pickers would raise the incomes and social status of its members and would limit the ability of farm owners to lord it over their workforce, as a modicum of procedure is established for the resolution of disputes. By contrast, a union of university professors is designed to raise professors’ wages by threatening to cancel lectures and exams if, depending on how the university

is financed, the students, their parents, or the taxpayers refuse to pay professors what they insist they deserve. A professors’ union may increase their incomes, but does nothing for the dignity of ordinary professors who lose access to the administration and must contend with the petty regulations of a union which, in the nature of things, comes to be dominated by those least interested in research or students. Nor is a union much help to would-be professors working as waiters or taxi drivers when the number of jobs is cut to augment the salaries of union members already employed.

CHARITIES

A charity is a private organization supplying what its members see as a public good. It is an association of fund raisers who collect money from the public and pass it on, as services or as cash, to the ultimate recipients: the poor, the blind or the homeless, medical researchers or whoever the focus of the charity happens to be. Fund raising may be voluntary or for pay. Few charities can avoid paid employment altogether, but charities differ in the extent of employment. Some charities make do, almost entirely, with volunteers to publicize the aims of the charity, to collect funds and provide services to the recipients. Other charities are organized like telemarketing firms, with salaried officials, advertising agencies to manage solicitation and house-to-house collectors working on commission.

The government sets rules for charities, specifying the requirements for recognition as a charity, offering tax advantages for donors, matching grants and defending the public against fraud. Governments may contribute as well, directly as in grants to the Red Cross, or indirectly as in the tax exemption for charitable contributions. If one’s tax rate is 30 percent, a tax-deductible donation of $100 to a registered charity costs $70 to the giver and $30 to the government (and ultimately to the population at large) in the form of reduced tax revenue. There need be no clear line between a charity and a department of government. Formally, the Red Cross is a charity that solicits contributions from the government as well as from people. As the only collector of blood for medical purposes, the Red Cross participates in the public provision of medical care, and could not in practice deviate to any significant extent from the role the government expects it to play.

Charity is puzzling to the economist because, as discussed in chapter 5, public goods cannot ordinarily be financed by the private sector. Just as society cannot rely on private donations to finance guns and tanks for the army, neither – or so one would suppose – can it rely on private donations to finance the Red Cross, the cancer foundation or the Public Broadcasting System. Homo economicus, the citizen as modeled in standard economic theory and as personified by Robinson Crusoe in chapter 3, is utterly selfish and would donate nothing to charity at all. Yet there are private charities and voluntary non-governmental organizations.

Consider, for example, the Public Broadcasting System. This is a standard public good because, once on the air, it is available for everybody to watch. If publicly financed, the cost would be covered by a special tax on television sets or out of general tax revenue, and expenditure would be chosen to make the typical person as well off as

possible. Ideally, the government decides how much to spend by a cost-benefit rule, spending up to but not beyond the point where the sum of every person’s benefit from the last dollar of expenditure per head is just equal to one dollar. Suppose the total population of tax payers is one million people and the appropriate expenditure on PBS turns out to be $100 per person, or $100 million in total.

Compare the financing by private donations. As a voter, the typical citizen favored a total expenditure of $100 million, requiring a tax of $100, on himself and everybody else as well. But when donations are voluntary, the typical citizen reasons as follows: If I donate $100, my consumption of other goods and services is reduced by $100 and PBS’s total expenditure on television programming is increased from $9.9999 million to $10 million, a percentage increase too small to have any significant effect on the quality of the programming I receive. I would certainly donate if my donation triggered equal donations from everybody else, but there is no point in my donating if everybody else is going to donate (or not as the case may be) regardless of what I do. Everybody reasons that way, and nothing is contributed. PBS’s appeal for funds is ignored and the network goes off the air, even though everybody would be better off if it continued to broadcast and each person were obliged to pay his share of the cost. Voluntary provision to PBS confronts people with a classic “prisoners’ dilemma.” Nobody contributes voluntarily, even though everybody would be better off if everybody did so.

Notwithstanding the economist’s proof to the contrary, people do contribute voluntarily to PBS and to many other charities as well! There is a major discrepancy here between the predictions of the economic model and the facts of the world. Part of the discrepancy can be attributed to altruism – a concern for the welfare of other people as well as for one’s own comfort and satisfaction – which has so far been assumed away altogether but will be discussed briefly in the next chapter. Altruism could have been incorporated into the model of behavior in chapter 3 but only at the cost of muddying the waters when the model is employed in other contexts where the simple behavioral assumptions have proved effective in explaining phenomena and as a guide to public policy. On the other hand, the commonly heard argument that one contributes to PBS or the cancer foundation or the institute for the blind because one likes PBS television or fears cancer or may become blind oneself is simply false, unsatisfactory because all but a minute fraction of the benefit one can expect as a recipient of charity would accrue regardless of whether one contributes oneself. Nor is it sufficient to invoke altruism because that does not alter the fundamental problem, which is that no person’s contribution to a public good can make a significant difference in the total amount provided.

Something more is required. Giving to charity may provide personal rewards or personal satisfaction beyond mere approval of the work of the charity itself. Names of university buildings are, quite simply, for sale to anybody prepared to make a sufficient contribution. People may feel morally compelled to give time and money to their communities. The size of one’s own contribution may be important regardless of the impact of one’s contribution on the total activity of the charity in question. Motives may be mixed. One’s satisfaction from attaching one’s name to a building may depend on the usefulness to society of the activity within.