Competing charities – what does that mean, and when is it a problem?

I wrote a post on this blog a couple of months back now that tackled some of the myths and misunderstandings about the charity sector that I frequently came across while researching for my honours thesis. As a kind of sequel to that post I decided it would be a good idea to delve a bit deeper into the notion of competition between charities. If you haven’t already, I would strongly recommend reading this post in conjunction with my previous post on the charity sector.

I’m a big believer in always having a ‘first principles’ understanding of an issue –  that is, starting at a kind of logical ground zero. The human brain is very good at taking short cuts – or, more technically, using ‘heuristics’ – to try to reach an understanding of something. The best way to get around this is to start at square one.

So, what is square one here? I think the first question that needs to be asked when we’re trying to understand the nature and desirability of competition between charities is to understand why we would want more than one charity for any given cause (something that I touched on briefly in my earlier post). For instance, what’s the benefit of having Oxfam if we already have World Vision? There are, of course, many different reasons why we may have more than one charity. If we stick with the previous example then, for starters, Oxfam and World Vision were founded in separate countries in a period where communication and the flow of resources was notably less globalised than it is today. Indeed, it’s not hard to think of lots of reasons why multiple charities may form. We have religious charities and we have secular charities. We have ‘branded’ charities (for instance, celebrity charities) and we have charities established to focus on a certain niche area that particularly concerns their founders. And so on.

But why we would have many charities is not the same question as why we would want many charities. (The first question is definitely interesting from a regulation perspective, but not so important here). The first proposition I’d like to make is that having multiple charities increases the efficiency of the ‘production’ of charity (if you’ll let me use that terminology). There’s a phrase in economics called ‘X-inefficiency’. The phrase was basically developed to explain the fact that companies just don’t operate as efficiently as economists’ models expect them to. Businesses are complex entities made up of complex people whose incentives are rarely exactly the same as the companies they work for. This is as true for the charity sector as it is for the private sector. But here’s the important point: in the private sector, competition for dollars forces firms to stamp out X-inefficiency, or else risk losing customers to competitors who can deliver the same things more cheaply or at a higher standard. This logic carries across to the charity sector. Oxfam cannot afford to consistently operate less efficiently than World Vision, or whatever other development NGO prospective donors weigh them against, because donors would sooner or later realise that every dollar they give Oxfam delivers less results in the cause they care about than if they were to allocate that dollar to another charity. (Quick aside – obviously none of this should be taken as an assessment of the relative merit of these charities/causes). Of course, the diffusion of this information may take a bit longer in the charity sector as ‘social impact’ is a more opaque concept than price. But the logical foundation is the same.

Wait a second. Charities don’t actually compete that way, right? Don’t they compete using fundraising? This was a comment I got from many people in response to my previous blog post on charities, and I can definitely understand where they are coming from. But I think there’s a deeper conceptual layer here that needs to be properly understood. I don’t buy a particular brand of clothes because of their marketing campaign. Instead, I buy that brand because the marketing campaign has convinced me that the product looks better/feels better/is better/is cheaper/whatever. Again, the logic is the same for charities. Oxfam’s advertising campaign is intended to convince me that giving to Oxfam is the best use of my discretionary dollar. The fundraising effort is ultimately just a mode of communication – the actual competition is occurring at a deeper level.

The potential social benefit of fundraising is that it fosters competition between charities – ultimately, it is difficult for a charity to consistently persuade people that it does the best work if that’s clearly not the case. By definition, then, fundraising is socially beneficial if the increased value it produces through improved efficiency exceeds the cost of fundraising. At an aggregate level, I think this is a very low bar which is easily met, and probably well exceeded, by what we actually observe from the fundraising activities of charities.

In fact, I think I’m of the view that the charity sector should probably spend substantially more than it presently does on fundraising (though there’s been no empirical study of this to date, so it’s just a hunch). This is only in part because of the benefits I just mentioned in terms of increased competition. The other really important point to make is that a charity is not just competing for some fixed pie of total charitable donations. Certainly, some people have a fixed giving budget each year, but this is neither indicative at an aggregate level nor is it constant over the longer-term. Rather, when you think about it, the charity sector as a whole is actually competing for a slice of total discretionary spending in the economy. When I decide how much of my money to allocate towards charitable giving I am weighing up how much ‘utility’ (economics jargon for something like happiness or satisfaction) I expect I will get from giving to my preferred causes against how much utility I will get from spending my money on other stuff. My expectation of the relative utility I will get from these different destinations for my money is strongly connected to the messaging I have been exposed to, which includes marketing from the charity sector. In other words, World Vision is not just competing with Oxfam, but it’s actually also competing with Myer, Apple, JB Hi-Fi, and the numerous other companies who want to trade you your money for some purported increase in your happiness.

In my own experience, giving $100 away to a cause I care about brings me far more joy and lasting satisfaction than buying a new pair of jeans. Perhaps money can buy some measure of happiness – you just have to find the right cause.