There are other considerations that underline the autonomy and independence of the grants sector within the economy, and therefore the need for an independent study of this sector. If we observe the traditional functions of the exchange sector in society, that is, markets, the organization involved in buying and selling, and the price structure, the set of prices or relationships through which things are exchanged, we find that all of its important functions have a parallel in the grants sector.
The determination of what the size of each segment of the economy should be is carried out through the “price-profit mechanism.” This mechanism works in such a way that, if any given segment of the economy is “too large” in relation to the demand for its product, the price of that product will have to be “too low” for that segment to be profitable. Thus, the resources previously used to produce the good in question will flow toward more profitable sectors of the economy.
Conversely, if any given segment is “too small,” the price of its product will be “too high,” making it abnormally profitable, and resources will flow toward that segment. Therefore, if we define equilibrium as a certain situation, position or range of positions of a system whose disruption gives rise to activity aimed at correcting the divergence produced, we may say that a pure exchange system will generate an equilibrium in the distribution of resources among different occupations and industries. In each state of technology, this condition will be fairly stable, although spectacular long-term changes should not be ruled out.
However, the grants sector of the economy also plays a significant role in the distribution of resources. Suppose we postulate a “resource-neutral” grants structure, in which neither the distribution of resources nor the combination of goods that make up the economy’s output changes. If the beggar has a cup of coffee with the coin I give him, and if, because I have given him the coin, I cannot have one myself, the grant redistributes income but not resources.
If taxes were not paid to provide a public education system, people could use their income to purchase, in the free market, an educational system of the same kind. The highly unlikely nature of these examples suggests that the existence of a grants system neutral with respect to the distribution of resources is extremely improbable.
Moreover, the explicit objective of a set of one-way transfers is generally the redistribution of resources in the direction that the donor considers desirable. Thus, the central authority of any organization uses internal grants to redistribute resources within the organization, for example, by increasing or decreasing sales or maintenance expenses, or by channeling resources toward or away from one department or another.
Likewise, grants within the family generally pursue the objective of changing the recipient’s activity, as when a father pays for his child to attend university. Foundation grants are generally designed to encourage recipients to carry out activities that they otherwise could not have carried out.
Similarly, grants in the form of foreign aid are generally tied to some development program, with the aim of having the recipient do something that they otherwise would not have done. If a grants system were to be neutral with respect to the distribution of resources, grants would therefore have to be carefully planned, with neutrality as their objective. However, there is practically no motivation to plan grants in this way; in fact, the motivation lies in the opposite direction.
A very interesting question is whether it makes sense to postulate an “equilibrium” in the allocation of resources in a combined system of exchanges and grants. In general, economists have regarded grants as a somewhat arbitrary distortion of the equilibrium produced by the smooth functioning of an exchange economy.
It is by no means impossible to suppose that political demands and community preferences, which provide a complex mixture of benevolence, malevolence and demand for public goods in the grants economy, could also give rise to something like an equilibrium in the distribution of resources.
Presumably, all activity originates, in a certain sense, from the divergence between an ideal and some perceived real value of a variable or condition. It is therefore equally reasonable to apply the concept of equilibrium to the grants economy as to the exchange economy.
Thus, if market demand for education appears to provide an educational sector that, in a politically conscious way, is widely recognized as “too small,” the grants mechanism will come into play to expand it, through charity or through taxation and public spending. And, of course, these grants will harm other sectors, which will release resources for education.
