The Invisible Hand on Charity

Emily Collins
Mrs. Straub
25 April 2014
Economics

The Invisible Hand on Charity

The Invisible Hand Theory, created by Adam Smith, is the theory that the public will create their own competition, motivation, and therefore success without the help or forceful hand of the government. This theory not only applies to businesses that make up our economy, but charities as well. Charity is giving money to the poor, but the key thing about charity is that people are giving out of choice. They are not giving because the government is taking money out of their paychecks in order to even out the large gap between the rich and the poor, they are giving out of their own will.

Not to say that charity is a selfish act, but “individuals seem to derive more benefits from the act of giving itself than from the benefits that their gifts generate for others.” People don’t give out of the kindness of their hearts, just like they don’t work hard simply to create a product that will benefit others; they do it because they are getting something out of it. An example would be two pizza chains; they both make the same product and are therefore in direct competition to each other. The pizza make isn’t making his pizza with the thought of “I hope this pizza brings joy and satisfaction to people”, he is making it with the thought of “I hope this pizza is better than the other guys because I want to win”.

This same thought process lingers behind every donation to charity. The great thing about this thought process is that it leads people to give way more than they would if the government were reaching into their pockets and making the decision for them. This is where the invisible hand comes into play: if you let people act on their own terms, the outcome will be so much more prosperous.The risk of letting the government do all the work is simply this: “Individual donations can be completely "crowded out" by government contributions. Using the example above, if the government taxes the donor $10 and hands it over to the charity, the donor will simply reduce his contributions to the charity by $10. For the charity, the net effect of the government donation is zero.” Just like most decisions in life, people prefer to be making them on their own because the fact is that “donors get more satisfaction out of giving a dollar directly to charity than they do out of seeing a dollar of their tax money go directly to that same charity. They want to contribute on their own.”

As seen in the picture above, giving to the poor can even benefit you when it comes time to pay your taxes. Now wouldn’t you rather give on your own time and reap the benefits rather than have it taken out of your paycheck without your consent? Most would want the choice to be theirs.
Works Cited:

"Publications." The Economics of Charitable Giving: What Gives?. N.p., n.d. Web. 25
Apr. 2014. <https://www.stlouisfed.org/publications/re/articles/?id=347>.

"Invisible Hand Theory Gets Tested on the Environment." Invisible Hand Theory: Free
Market Forces. N.p., n.d. Web. 24 Apr. 2014.
<http://www.ecocommerce101.com/invisible-hand-theory.htm>.