The most important and difficult problem is how to evaluate both grants and exchange, in all their complex and branching structures, according to what is desirable for society. The problem has two closely interrelated aspects.
First, one must consider the general problem of what proportion of society’s activities should be organized through grants and what proportion through exchange. This problem lies at the heart of the socialist controversy. The answers given depend largely on a subsequent set of evaluations concerning the legitimacy of exchange or grants in different situations, or even on what we actually interpret as exchange or grant.
Thus, capitalist economists have generally regarded interest and profit as an essential part of the exchange economy and, in general, as a legitimate part of it. Socialist economists, by contrast, have regarded these phenomena as part of the grants economy, representing a grant from workers to capitalists and, moreover, an illegitimate grant.
This disagreement is fundamental and not easy to resolve, although this difficulty may be due in some measure to the fact that neither side in the controversy has really possessed a satisfactory theory of the grants economy. Beneath all these disputes, however, lies a set of questions about the “deficiencies” or “pathology” of both the exchange economy, on the one hand, and the grants economy, on the other.
The pathology of exchange is familiar to us: depressions, inflation, unemployment, poor income distribution, inadequate public goods and so on. The pathology of the grants economy is less familiar because we have not thought about it as much in this respect.
Our evaluation of the relative merits and relative proportions of grants and exchanges within the total system will depend greatly on our assessment of the relative efficiencies and the relative tendency toward pathological states of the two systems.
The absence of a theoretical view of the grants sector of the economy as a system in its own right has distorted opinion and, to some degree, has prevented the resolution of this controversy. We are highly aware of the nature and pathologies of the exchange economy. And because we are much less aware of the nature and pathologies of the grants economy, it has been placed at an unfair disadvantage in this controversy.
Only when we come to regard the exchange economy and the grants economy as equal partners in the social enterprise will we be able to determine properly the function that should be assigned to each. This volume is a modest attempt to correct the present imbalance and to assist the process of making more balanced and accurate evaluations.
The Micro-Theory of Grants and Donor Behavior
A grant is always a relationship between two or more parties. In the simple two-party relationship, it includes the donor, or giver, on one side, and the recipient on the other. Thus, a grant involves at least two decisions: a decision by the donor to make the grant and a decision by the recipient to receive it.
The donor’s decision may seem the more significant of the two, but the recipient’s decision is by no means insignificant. There may be elements of coercion in the decision to receive, just as such elements may play a part in the donor’s decision to give.
It is not always unreasonable to be unwilling to accept a gift horse without looking it in the mouth. Grants may also be initiated through a request or solicitation by the recipient. Therefore, if we are to perceive the special importance of the grant within the spectrum of human relations and behavior, we must first observe the general model of these relationships.
All of this, however, fits quite well into the pattern of our previous analysis. Once the foundation has been established and a professional staff has been acquired, the situation becomes different, especially with respect to the opportunity costs of grants.
When a private person makes grants for charitable purposes, the opportunity cost of those grants is determined by what they could otherwise have done with the money, such as investing it or spending it on consumer goods to obtain some immediate pleasure or satisfaction.
A foundation does not have this option. Once the commitment has been made, the funds at its disposal must be granted; they cannot be used for consumption or investment, except under very unusual circumstances.
A foundation, therefore, is an organization that owns income-producing assets that continuously provide inflows of money into the foundation’s account. From a certain point onward, however, money becomes a disutility for the foundation. An increase in assets, especially liquid assets, is a disutility, and the foundation must reduce its net worth by making grants.
Thus, a foundation is almost literally an organization that expels money. Decision-makers in foundations must decide to whom and for what purposes grants will be awarded; they rarely have the option of not making grants, especially where tax laws or other laws regulate their conduct.
