In an economy without grants, income can only be received through exchange, that is, through the sale of some asset, and continued income is obtained only through production: the continuous increase of assets through some productive process. Therefore, in an economy without grants, as the communists say, “those who do not work shall not eat.” That is, only those who produce will be able to consume, unless they can consume from accumulation derived from previous production.
It is clear that, under these conditions, children would immediately starve and society would cease to exist. The existence of society itself implies the existence of an economy of redistributive grants, with grants flowing from productive adults to unproductive children.
Similarly, in an economy without grants, all people who are too old to produce would either consume from their previous accumulation or quickly starve if that accumulation ran out. The survival of society depends on the maintenance of its children, not on the maintenance of its elderly. However, in modern societies this solution is considered unacceptable and, therefore, grants are made to the elderly or disabled adults who have no accumulated resources to consume.
We can imagine an equilibrium of grants that is not entirely different from equilibrium in the price structure. Like the latter, it depends on the demand for and supply of grants. Demand depends on the number of those whose income, through the exchange economy, is perceived by potential donors as inadequate and in need of supplementation, or whose activities are considered to require change.
It also depends on the demand for public goods, such as education, defense, research, medical care and others, which cannot be adequately provided through the exchange economy. The supply of grants depends on the willingness of those who have the power to make them.
As we have seen, the supply of grants from foundations is almost perfectly inelastic. They will make grants regardless of demand, since they are obliged to do so by their identity, if not by their constitution and statutes. For private individuals and states, the supply of grants is generally not perfectly inelastic.
The perception of a need to make grants may increase the amount supplied. An increase in the total resources of donors may also increase the amount. It is difficult to define these concepts of elasticity of demand and supply exactly, in the same way that we can in the case of the exchange economy. But despite the difficulties of measurement, there is no doubt that the idea represents something real.
In price theory, we postulate that a commodity will have an equilibrium quantity and price: a price that provides its producers with profits considered normal, and a quantity that can be sold at that price while providing those normal returns to producers.
We may also postulate an equilibrium in the grants economy, again depending on the complex interaction of supply and demand forces. If grants to a particular person or sector of the economy are below the equilibrium level, this will be perceived as a deficiency in the decision-making processes of those who have the power to make grants, and those grants will increase.
Similarly, if grants to any particular person or sector are above the equilibrium level, they will be perceived as “too high” and will decrease. The equilibrium point depends, of course, on political and other institutions, as well as on moral norms, but this is also true of price equilibrium.
Consequently, it is obvious that the equilibrium of grants must be included in the general equilibrium of the price system, simply because the amount and distribution of grants affect the general demand for and supply of commodities.
In a pure economy without grants, there would be very little demand for commodities for children, simply because no children would remain. Toy manufacturers would go bankrupt, and soon there would be no one left to demand or supply anything. The market for every commodity has, at least theoretically, a grants component. For some commodities, this component is very large.
This question of the grants component in the exchange economy has great and growing importance for economic policy decisions. Consider, for example, the various proposals for a guaranteed annual income or some form of negative income tax.
Such a system of relatively unconditional grants is likely to have profound effects both on the demand for commodities of different kinds and on the supply of factors of production, especially labor.
One of the most interesting questions for current social research is the possible impact of different types of guaranteed annual income on the labor supply. Would a guaranteed annual income induce large numbers of people to withdraw from the labor market and enjoy the modest standard of living provided by the grant?
Or would we find the opposite effect: that a guaranteed annual income provides a “floor” on which people would wish to build a higher income, so that the security provided by the guaranteed annual income might easily increase the labor supply as people emerged from the apathy and disorganization created by insecure incomes and worked to satisfy conventional needs rather than absolute needs?
Some empirical research is being carried out on these issues, generally with somewhat inconclusive results. But there are indications that these responses depend greatly on the age and family responsibilities of the parties involved.
At the older end of the life cycle, a guaranteed annual income is likely to reduce the labor supply, while at the younger and middle stages it may very well increase it, unless it contributes to the development of a “dropout culture.”
These issues are of enormous practical importance for social policy decision-making. The fact that we know so little about them is a serious disadvantage.
