The Economics of Altruism: The Economics of Christianity – Pt. 3

Author’s Note: Recently, I participated in a religious conversation about meritocracy. I noticed that the conversation was almost exclusively focused on economic subjects, such as how resources should be allocated, but was devoid of economic concepts and vocabulary. This article is an attempt to utilize modern economics to describe the implications of various interpretations of Protestant christian theology.  

Economic implications & Benefits of An Altruistic Theology

If a purely meritocratic theology is an unstable system, is the opposite alternative any better? Altruistic theologies do away with Darwinian ‘survival-of-the-fittest’ mentality and replaces it with grace. Jean Valjean in Les Miserables (and the priest that showed him mercy) is a good example of this brand of Christian theology. 

The benefits of this mechanism of resource allocation center around the type of behavior that it encourages. Just like no one wants to work in a cutthroat workplace where Machiavellian individuals constantly backstab and politically maneuver to get ahead, few individuals (especially Christians) want to live in a world where second chances are not possible and where moral agents focus solely on their own material self-interest. 

Unlike the meritocracy mechanism of resource allocation, the altruism option is not a set of mathematical axioms. Instead, subjective factors, informed by the principles of grace and equity, dictate resource allocation. For example, imagine a society with five individuals and $75 (shown in Fig. 22). How would an altruistic theology recommend that these resources be redistributed? There are several potential strategies of allocation that a society informed by an altruistic theology could adopt in this scenario. 

The first is illustrated in Fig. 23. Here, pure equality is the recommendation. The individuals voluntarily redistribute the $75 so that each individual has $15. An equal wealth distribution has the benefit of fairness, in the most simplified sense.

Another altruistic rationale for resource allocation could be based on a threshold for welfare. For example, in the hypothetical five-person society, let’s suppose that the poverty level is $10. Thus, a ‘threshold-based’ altruistic theology might state that, while perfect equality isn’t necessary, there should be a minimum level of resources provided to every individual. 

So, as shown in Fig. 24, Person E started with only $5 (below the poverty line). As a result, Person A (the wealthiest) gave $5 to Person E to bring him out of poverty. This variant of altruism is equitable in that it ensure that everyone, regardless of wealth, has a safety net. Everyone, at some point in time, needs to lean on his community to persevere through challenging rough patches. 

Another potential variant of altruistic theology is cyclical donation. In this version, at some determined frequency (monthly, weekly, etc.), all individuals donate $5 to the same person, unless they’re below the poverty line. As shown in Fig. 25, everyone donates $5 to one of their peers, except for Person E who started out below the poverty line. This version is equitable in that everyone will receive equal income during regular intervals, unless he or she is impoverished.  

 

Figure 22: Pre-Altruism Outcome
Figure 23: Post-Altruism Outcome - Pure Equality
Figure 24: Post-Altruism Outcome - Welfare Threshold
Figure 25: Post-Altruism Outcome - Cyclical Donation

There is a virtually infinite number of ways that an altruistic theology could be interpreted for the purposes of resource allocation. These examples provide a few basic possibilities. 

The limitations of pure altuism

As shown above, altruistic theologies’ advantages are mainly qualitative in nature; “it’s nice to be nice.” Any axiomatic forces that govern resource allocation in a purely altruistic framework are completely arbitrary. The various examples of altruistic theology shown above are arbitrary postulations of ways to systematize the vague notion of grace. They were, to be crude, “pulled out of thin air.” 

Economics is concerned with how societies gather, allocate, and consume scarce resources. Incentives are at the heart of this science. Altruism, unlike meritocracy, provides no objective way to determine an equilibrium allocation. In the Neo-Classical meritocracy model, the unbiased forces of supply and demand dictate the wage and quantity of hours ultimately needed by the market. There’s nothing arbitrary about that framework. 

Unfortunately, there are virtually no discernible concrete economic incentives that are beneficial to society that arise from an altruistic theology. Grace, in the absence of any other ideal or theological axiom, tells us nothing about who gets what. Even more dangerous, assuming that grace is the only mechanism of resource allocation, the incentives of an altruistic theology are patently counterproductive to society. 

Rational Self-Interest & Ability To Leverage Human Nature

For a society governed by altruistic theology to function, all individuals must be totally committed to the same interpretation of the altruistic theology. All of the potential versions of altruism described above necessitate a zealous ideological commitment to the cause, as altruism requires that rational moral agents act in the best interest of their peers, NOT in their own self-interest. 

Rational self-interest is a fundamental assumption that social scientists make when studying societal phenomena. It’s assumed that individuals are MOST concerned about their own welfare. Altruistic theology is actually hostile to this notion. If moral agents are not motivated to make decisions to optimize their own welfare, there is no way to formulate coherent policies that maximize societal welfare, i.e., policies that take everyone’s preferences into account and maximize societal utility with the constraint of finite resources. 

There’s a great benefit to economic incentives in the context of a society filled with rational moral agents who seek to maximize their own welfare: society can leverage human nature to achieve efficient outcomes that consider all individuals’ preferences equally. To accomplish this, we need to know how individuals value products and services and how much they can afford: prices and budgets. We also need to know what individuals want or need, i.e., what gives them more or less utility. 

The Utility Function & Budget Constraint
Figure 28: Cobb-Douglas Utility Function w/ Budget Constraint.

Modern economics is grounded in the moral theory of utilitarianism, which states that actions which result in maximum utility are morally optimal. Economists model human preferences with utility functions. These mathematical functions illustrate different types of consumption preferences. In addition to understanding consumers’ preferences, we need to understand their economic resources: their budget. We’re going to examine a few basic utility functions in a hypothetical world with only two individuals and two goods. This simplified setting stills allows for a robust understanding of the mechanisms that govern efficient resource allocation without introducing needless complexity.

Figures 26 through 28 show some of the most common utility functions. The three examples show individuals with the same budget and market prices but different preferences. In each of the figures, the red lines are graphical representations of the utility function and are referred to as indifference curves (they’re also referred to as isoquant lines). 

Utility increases up and to the right from the origin; the higher the indifference curve, the greater the utility. The budget constraint is the blue line. Any points below or on the blue line are economically feasible for the individual. Because we assume that the individual wants to maximize their utility, the optimal bundle of goods will always be found ON the budget constraint line. The technical term for this assumption is monotonicity: we assume that individuals have monotonic preferences (more goods are preferable to less goods).

The individual in Fig. 26 has preferences that make him view Goods 1 and 2 as perfect substitutes. That is, he views them as totally equivalent. Potential examples include Sprite vs. Sierra Mist, Cream of Wheat vs. Oatmeal, Holiday Inn vs. Marriott, etc. While this individual can afford both bundles at point A and at point B, he will prefer point B since it is equal to the budget constraint at a higher indifference curve (I³) than point A (I²). Thus, point B provides him with more utility than point A. 

The individual in Fig. 27 views Good 1 and Good 2 as perfect complements. Perfect complements are consumed proportionally and together. Examples include peanut butter and jelly, a video game console and video games, swimsuits and sun tan lotion, etc. In this example, the preferred bundle B is tangent to the budget constraint line. While both A points are affordable, they’re on a lower indifference curve (I¹) than point B (I²), meaning they will result in lower utility than point B.

In reality, perfect substitute and perfect compliment preferences are rare. A more common preference type is the Cobb-Douglas utility function, which is shown in Fig. 28. The indifference curves here provide a happy medium between the two extreme examples. Instead of a constant slope or L-shape, the Cobb-Douglas indifference curve is curvilinear and convex to the origin. A person with this preference would rather have a moderate amount of both goods than a lot of one good and a little of the other good. 

Like the perfect compliments case, this individual prefers point B, which is tangent to the budget constraint line, to point A because I² leads to a greater level of utility than I¹. 

Figure 26: Perfect Substitutes Utility Function w/ Budget Constraint
Figure 27: Perfect Complements Utility Function w/ Budget Constraint
Figure 28: Cobb-Douglas Utility Function w/ Budget Constraint.
Matthew, John, Loaves & Fishes: Pareto Efficiency

Let’s imagine a world with two individuals, Matthew and John, each endowed with the same level of wealth and both face the same market prices. In this world, there are only two goods: loaves and fishes. Matthew’s preferences and budget constraint are modeled in Fig. 27 and John’s are modeled in Fig. 28. Matthew’s preferences dictate that his optimal consumption bundle occurs at point B, where he consumes QL’ units of loaves and QF’ units of fish. John’s optimal bundle occurs at point A where he consumes QL* worth of loaves and QF* worth of fish. For our purposes, the values of these variables are not important. What IS important is the differences in Matthew and John’s preferences. Even though they have the same level of wealth, their consumption behaviors are different because their preferences are different.

Because Matthew and John are the only two people on the planet, the total quantity supplied and consumed of each good is equal to the sum of the two individuals’ consumption levels: QL=QL’+QL* and QF=QF’+QF*. 

Figure 29: Matthew Budget Constraint & Indifference Curves
Figure 30: John Budget Constraint & Indifference Curves

This scenario allows us to consider how ‘efficient’ or ‘optimal’ allocation of finite resources between two individuals with different preferences should be formulated. In economics, Pareto Efficiency (also called Pareto Optimality), is an allocation of resources such that no individual can be made better off without another individual being made worse off. Our discussion of budgets, preferences, and utility maximization has provided us with the necessary conceptual vocabulary to objectively describe such an outcome. 

Before I describe exactly what a Pareto Efficient outcome is, it’s important to note that all of the scenarios illustrated in Figures 21 through 25 are not based on any conceptual vocabulary. They are based on generic intuitions of what MIGHT be merciful or equitable. Conversely, the mathematical concept of Pareto Efficiency is objective in its prescription: resources should be allocated in a way so that it is NOT possible to make anyone better off without making anyone else worse off. 

Figure 31: Edgeworth Box and Initial Endowment

Let’s imagine the scenario shown in Fig. 29: there are 16 fish in the world (QF=QF’+QF→16=5+11) and 13 loaves (QL=QL’+QL→13=7+6). This representation of Matthew and John’s allocation of resources is called the Edgeworth Box. Matthew’s origin (OM) is located in the bottom left corner of the box. John’s origin (OJ) is found in the top right corner of the box and John’s graph has been turned clockwise 180°. The allocation marked by the blue dot means that Matthew has 5 fish and 7 loaves, while John has 11 fish and 6 loaves. 

So, is this a Pareto Efficient allocation? Let’s find out. Pareto Efficiency requires that a specific condition be fulfilled: the Marginal Rate of Substitution (MRS) is equivalent for both Matthew & John. What does that mean? The MRS is the rate at which an individual will give up some amount of one good in exchange for another while keeping his level of utility constant. 

As shown in Fig. 32, because the allocation featured in Fig. 31 does not lead to equal MRS values for Matthew and John, we know that it is NOT Pareto Efficient. 

Figure 32: Matthew & John's Marginal Rates of Substitution
Figure 31: Edgeworth Box and Initial Endowment
So what does a Pareto Efficient allocation look like?
Figure 33: Edgeworth Box, Initial Endowment (Omega), & Indifference Curves

In Fig. 33 above, we see another initial allocation (ω) and two indifference curves – one for Matthew (IM) and one for John (IJ). 

How could we reallocate the fish and loaves more efficiently?

Figure 34: Pareto Improvement (Omega to Phi)

A reallocation of resources (shown in Fig. 34), such that Matthew and John move from point ω to point φ, is a Pareto Improvement, but is not Pareto Efficient. This change moves John further away from his origin, which places him on a higher indifference curve. So, John’s utility increases, which means that he is BETTER OFF. Matthew, however, remains on the same indifference curve. So, Matthew is indifferent between point ω and point φ. John was made better off without Matthew being made worse off.

Figure 35: Pareto Improvement Zone

In fact, all points within the region bounded by the IM and IJ indifference curves represent Pareto improvement points. But they’re NOT Pareto Efficient

Figure 36: Pareto Efficient Allocation (Tau)

As shown in Fig. 36, at the point τ, Matthew and John’s indifference curves are tangent. This means that the slopes of their indifference curves are equal, which tells us that their MRS values are the same. It is NOT possible to make John better off without making Matthew worse off. Matthew is still indifferent between point ω and point τ. However, any further increase in John’s utility (moving down and to the left) would necessitate a decrease in Matthew’s utility, which increases up and to the right. 

While real-world scenarios involve the allocation of resources between hundreds, thousands or millions of people, the guiding principles that govern efficiency in multi-dimensional commodity spaces are identical to the example above. There are two fundamental theorems of welfare economics (note: here, welfare does NOT refer to government transfer programs like food stamps; it refers to human well-being, measured by utility and economic surplus)ℜ:

  1. In the presence of a market for every commodity and perfect competition, the latter of which requires that there are no market failures (meaning the absence of externalities and the absence of asymmetry of information between producers and consumersand that producers are price-takers (meaning producers’ prices are equal to the marginal costs of their output), if we allow human beings to trade freely and adjust their economic positions as they please, a PARETO EFFICIENT allocation of resources will emerge in equilibrium from an initial endowment of resources.
  2. The Second Theorem is slightly more demanding: If all conditions of the First Theorem are satisfied, AND there are also no costs associated with transferring resources away from any initial endowment (point ω in the example above), society can achieve a PARETO EFFICIENT allocation of resources through the transfer of resources from some original endowment point.

Obviously, these criteria are often NOT satisfied, which leads to inefficient allocations of resources. Monopolies or Quasi-Monopolies, such as Google, Facebook, Microsoft, Amazon and other giant corporations prevent Pareto Efficient outcomes. Negative externalities, such as pollution, lead to nonefficient outcomes since some of the costs associated with firms’ production are not accurately reflected by the market price. Regarding the Second Theorem, in reality there ARE many costs associated with transferring resources from one individual to another.  

While the ideal scenarios described by the First and Second Fundamental Theorems of Welfare Economics are not always satisfied, they offer us a template and a compass to help guide public policy decisions. If policies are engineered to bring us closer to these ideal scenarios, we make can make resource allocations MORE efficient.

The economic concepts of utility and preferences allow us to accurately model human tendencies and choices in an environment of scarcity. Models that accurately describe human behavior can be used to predict it. Even more consequential, these tools can be used to formulate policy solutions that optimize human welfare by leveraging rational self-interest in productive directions. The best public policies aren’t those that are merely proficient at controlling human behavior; the best policies exploit human tendencies and rational self-interest to incentivize behavior that will benefit society.

However, the fundamental assumption of utility is that, even though their preferences differ, human beings seek to maximize their own utility. Humans are rationally motivated to make themselves better off. The cultural DNA of a 2000 year-old religion is no match for the chemical, billions-year-old DNA that governs human psychological infrastructure and behavior. Self-interest is human nature. Philosophies and ideologies that prescribe certain allocations or reallocations of resources AND ignore human nature are bound to fail. We can deny human nature, but we cannot suppress it.

If We Ignore Human Nature, We Cause the Dark Side of Human Nature to Flourish.
Jesus SAID TO HIM, "ONE THING YOU STILL LACK; SELL ALL THAT YOU POSSESS AND DISTRIBUTE IT TO THE POOR, AND YOU SHALL HAVE TREASURE IN HEAVEN; AND COME, FOLLOW ME." -LUKE 18:22
Figure 37: Matthew & John - Altruism or Self-Interest?

A theology grounded in pure altruism explicitly or implicitly characterizes selflessness as morally superior to self-interest (or selfishness). The Bible (the New Testament in particular) unambiguously champions selflessness and often paints moderate forms of self-interest as greedy, vain, or morally suspect. 

The only way that altruism will result in a predictable equilibrium, in terms of an allocation of resources, is if all individuals in a society practice altruism in the same fashion, i.e. all individuals behave according to the same prescribed altruistic code of conduct like the ones suggested in Fig. 22 through Fig. 25. That is to say, we must believe that humans will voluntarily transfer their resources to their fellow societal peers on a continual basis with regularly scheduled donation intervals. We have to have a VERY rosy view of human nature to believe that this is a reasonable ask of rational human beings.

We can illustrate this unrealistic view of human nature through a simple utilization of game theory. Game theory is the study of rational and strategic decision-making through the use of mathematical models. ∑  Game Theory has profound implications for microeconomics, biology, and other disciplines. It was developed by some of the most brilliant minds in history, including John von Neumann and John Forbes Nash Jr. (the latter is the subject of the film, “A Beautiful Mind”). 

Figure 38: Strategy Payoffs

We’re going to return to our good friends, Matthew & John. Fig. 35 shows the payoffs of choosing a policy of altruism or selfishness in a strategic game between Matthew and John. This game is variant of the famous “Prisoner’s Dilemma” scenario. The first number in each cell is Matthew’s payoff and the second number is John’s payoff. We’ll suppose the prescribed altruistic policy for them is to donate $5 every week to the church, which then redistributes it to the other individual (since there are only two individuals in this simplified scenario). 

Fig. 36 shows the payoff values of each strategy for Matthew and for John. As shown in the upper left cell, if both individuals choose to follow an altruistic strategy, they’ll each donate $5 to the church who, will then redistribute the funds. The selfish option involves investing the $5, which yields a rate of return of 12%. If Matthew chooses altruism and donates his $5 to the church and John chooses selfishness and invests his money for a return, Matthew will end up with nothing and John will end up with [(1+r)*(M$+J$)]=(1.2)*($5+$5) = $11.20. The opposite is true if the strategies were flipped. If both individuals choose selfishness and invest their $5, they’ll each end up with (1.2)*($5) = $5.60. Because each individual is better off choosing selfishness, independent of the other player’s strategy, the equilibrium strategy is to be selfish. 

This example, though contrived, accurately illustrates the deficiency of an altruistic theology: because it denies the reality of human nature and rational self-interest, pure altruism will never lead to a stable, equilibrium position of universal reciprocal altruism. 

Pure Altruism Makes Compliance With Universal Societal Expectations Impossible

Another problem with pure altruism is its inability to influence human behavior. A practical example of a type of human behavior that society seeks to minimize is crime. Humans are motivated to commit crimes due to their financial returns, i.e. the marginal benefit of each crime. If the only response to non-compliance of any kind is grace, then human beings have no incentive to change their behavior. 

As shown in Fig. 39, the number of crimes (Qe) committed in any society occurs at the point where the Marginal Benefit of Crime (MB) is equal to the Marginal Cost of Crime (MC). The most profitable crimes occur at the top of the MB curve; as the number of crimes committed increases, the financial payoff of each crime decreases. Thus, the MB curve slopes downward. The MC curve slopes upward because, as more crimes are committed, the probability and magnitude of penalties increase.

When laws or law enforcement policies lower the penalties for crime, the MC curve shifts down (as shown in Fig. 40), which results in a higher quantity of societal crimes. When criminals, through technological innovation, find ways to commit new crimes or extract higher returns from victims, the MB curve shifts up (as shown in Fig. 41), which also leads to more crimes committed. 

Effective policies to prevent crimes, as shown in Fig. 42, either raise the cost of crime, lower the financial return on crime, or do both. Altruism, personified by grace/mercy, doesn’t allow for any such movement in crime equilibria.

The Parable of the Unmerciful Servant

Then Peter came to Jesus and asked, “Lord, how many times shall I forgive my brother or sister who sins against me? Up to seven times?”

Jesus answered, “I tell you, not seven times, but seventy-seven times.”

Matthew 18:21-22

Forgiveness of wrongdoing can serve as an incentive for more wrongdoing. In addition to incentivizing non-compliance with societal expectations of human conduct, altruism offers no way to deter harmful behavior. 

Figure 39: The Economics of Crime
Figure 40: Decreased Marginal Cost of Crime
Figure 41: Increased Marginal Benefit of Crime
Figure 42: Successful Crime Deterrence
Innovation & Societal Surplus

A benefit of meritocracy is that it provides an incentive for individuals to excel, accomplish, and innovate. For altruism to benefit the most vulnerable members of society, people at the top must be altruistic. Yet, in order for individuals to give money to the poor, they have to actually have money. Simply relying on wealthy benefactors’ altruism will never result in the societal surplus necessary to finance altruistic redistribution. The inability of pure altruism to generate societal surplus means that it is not a sustainable societal course of action.

THE ENDGAME OF PURE ALTRUISM

Left unchecked, pure meritocracy results in continuously increasing levels of inequality, which will ultimately results in revolution and chaos (even though SOME inequality is necessary for society to flourish). Left unchecked, pure altruism also results in chaos. It offers no hope of self-sufficiency, of human dignity. It glorifies societal codependence and pathological (perhaps even masochistic) sacrifice. It characterizes any form of self-interest as greed. Pure altruism, as exemplified by the Amish, views efforts at achieving self-actualization (becoming a doctor, going to college, writing a book, etc.) as selfish because those efforts are focused on personal enrichment instead of caring for the community. Altruism does not allow for any substantial planning for the future, other than knowing that food and shelter will be secured for some period of time due to the efforts of certain benevolent parties.

While it doesn’t intend to, altruism can function as a societal enabler. Like a codependent parent of a drug addict, pure altruism often doesn’t tell recipients of grace what they NEED to hear. Sometimes, but certainly not always, individuals end up in less than ideal situations because of their own choices. Unconditional grace ensures that such individuals never get the feedback that’s necessary for them to change their behavior and improve their situation.

Ultimately, those individuals who practice altruism will be exploited by those who don’t. Pure altruism denies human nature and the billions of years of evolution that shaped it. 

Click on the link below to go to Pt. 3.

Sources Referenced

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♦Kaufman, Scott Barry. (2018). “IQ and Society: The deeply interconnected web of IQ and societal outcomes.” Scientific American. https://blogs.scientificamerican.com/beautiful-minds/iq-and-society/

∇ Goldschein, Eric., Bhasin, Kim. (2011). “11 Uncomfortable Facts About How IQ Affects Your Life.” Business Insider. https://www.businessinsider.com/facts-you-dont-want-to-know-iq-2011-11

⊗ Nicholson, Christie. (2010). “Lower IQ Scores Linked to Higher Suicide Risk.” Scientific American. https://www.scientificamerican.com/podcast/episode/lower-iq-scores-linked-to-higher-su-10-06-05/

⊥ Cobb-Clark, Deborah., Schurer, Stefanie. (2011). “The Stability of Big-Five Personality Traits.” IZA – Institute of Labor Economics, Discussion Paper No. 5943. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1922015

∫ Association for Psychological Science. (2011). “Are the Wealthiest Countries the Smartest Countries?” https://www.psychologicalscience.org/news/releases/are-the-wealthiest-countries-the-smartest-countries.html

Ψ Peterson, Jordan B. (2017). “2017 Personality 14: Introduction to Traits/Psychometrics/The Big 5.” The University of Toronto. https://www.youtube.com/watch?v=pCceO_D4AlY

η Understand Myself (Jordan B. Peterson). (2018). “The Big Five Aspects Scale.” UnderstandMyself.com

ℜ Hammond, Peter., (1997). “The Efficiency Theorems and Market Failure.” Department of Economics, Stanford University, CA 94305-6072, U.S.A. http://web.stanford.edu/~hammond/effMktFail.pdf

∑ Myerson, Roger B. (1991). Game Theory: Analysis of Conflict. Harvard University Press. https://books.google.com/books?id=E8WQFRCsNr0C&printsec=find&pg=PR7#v=onepage&q&f=false

∂ Burton, Roland. (2017). “Full Metal Jacket – Pvt Joker’s Born to Kill/Peace Sign and the Jungian Duality of Man.” https://rolandscivilwar.wordpress.com/2017/06/24/full-metal-jacket-pvt-jokers-born-to-killpeace-and-the-jungian-duality-of-man/

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