Company charity part II

I have a couple of follow on thoughts from yesterday’s post on large companies being pressured to donate to charity.

Firstly, I was probably a bit flippant in describing the target donation rate as 0%. If charitable donations are what the shareholders want, so be it. However, the shareholders should make that choice, not external pressure groups. Further, the majority of shareholders should not make that choice for the others. If they want donations made, it should be from their share of the profit. This takes us to the simplest solution of giving the money to the shareholders to let them do with it at they see fit.

My second thought is about the level of funding that will go to these charities. If the company does not pay the 1% of profits to charity, the shareholders are unlikely to give all of their 1% larger dividend to charity. On a direct basis, donations to charity are likely to go down. But what of the indirect effects? Do corporate donations crowd out individual philanthropy? I suppose that is an empirical question, but I would expect that there would be some crowding out.

Perth’s Channel 7 runs a charity drive called Telethon each year which raises money for Princess Margaret Hospital for Children. The drive consists of 24 hours of entertainment during which people phone in to pledge cash support. This year the drive opened with Prime Minister Julia Gillard donating $1.5 million on behalf of the Federal Government (several layers of irony there). That donation was quickly followed by a series of companies with their cheques (very cheap advertising time for them). That start certainly reduced the incentive for me to pick up the phone to give $10 or $20.

Also on the crowding out theme, this afternoon I listened to a podcast in which Steven Johnson, author of Where Good Ideas Come From, mentioned Kickstart, an organisation that links entrepreneurs with capital. While the focus of these types of organisations is typically poverty alleviation, Johnson used the example of a band needing funding to, say, record an album. He commented that this was a different dynamic to the artist seeking government grants. It would be disappointing to crowd out these types of innovative approaches to entrepreneurship.

Company charity

The Daily Telegraph has had a go at Australia’s top 20 companies for not donating enough to charity. According to their analysis, the largest 20  Australian companies donated only 0.85 per cent of their profits to charity in 2009-10, with ANZ donating only 0.21 per cent. This is less than the 1 per cent deemed adequate by “social experts”.

I propose a different target: 0 per cent. Those profits belong to the shareholders and ideally, should be in their hands to decide if and how they will donate. These companies have an area of expertise and that is making profit by providing goods and services that people want. They should focus on that.

If these companies are interested in being a good corporate citizen, I’d prefer that they spent their time looking at their own operations and impacts rather than buying public standing through their charitable giving. I am sure that Woodside is better at preventing oil spills than selecting a suitable charity to help the homeless (or as often is the case in Perth, selecting the local theatre or music company to fund).

Having said that, in the same way that Milton Friedman did not want to condemn the cloaking of self-interested activities as “corporate responsibility”, I am not going to condemn any company that does give to charity. Charitable giving may buy customer support and reputation, which have value in themselves. Staff may prefer working for such an organisation. However, the meeting of arbitrary targets set by self-appointed social experts is simply a transfer from shareholders. I would prefer that those shareholders be left to make that decision for themselves.

Better school performance leads to more children

An article by Anna Goodman and Ilona Koupil in last month’s Evolution and Human Behavior found a link between school performance and number of children and grandchildren (in Sweden 1915-1929). This effect, as might be expected, held in males only. The number of children was linked almost entirely to whether the male married, with marriage largely a function of socioeconomic position. As most males married (around 90%), the effect of schooling performance on number of children was largely evidenced in those males at the bottom of the distribution.

One observation made by Goodman and Koupil was that as marriage prospects were largely mediated by socioeconomic position, there was little evidence of selection for cognitive abilities per se. It could be interpreted as a cold hearted conclusion. While money and social position are clearly going to have influence, what of the effort put into conversation, humour and other displays of intelligence. Are they all for nought?

For the group in this particular study, it might be  reasonable conclusion. However, given the differences are only at the low end of the school performance distribution, we might be seeing a threshold effect, whereby women are not interested in marrying someone below a certain standard. It reminds me of some of Bernard Salt‘s work, whereby an eligible man is defined as someone not married, straight, not in jail and earning over $50,000 a year. They are not even in consideration.

From a selection point of view, the elimination of individuals at the bottom of the distribution has somewhat different consequences to different reproductive success across the full spectrum of performance. I am going to dig some more into the data over the next few days to get a feel for what the change in distribution might look like over time.

Procrastination

Procrastination bothers me. Not in the sense that I want to procrastinate, but biologically. Why would a tendency to procrastinate evolve?

Even without considering evolution, time inconsistency is a subject of debate in economics. The problem of “hyperbolic discounting”, in which people rapidly discount events in the near future but discount more slowly for further delay, has been well established in experiments. This also accords with our experience (For an example of hyperbolic discounting, as well as some general thoughts on procrastination, it is worth reading James Surowiecki’s recent article). From a rational perspective, why would someone make a rational decision about the future but then change their mind when that time nears?

Biologically this shortcoming is more serious. The individual that is able to make the rational choice at all times should have higher fitness and come to dominate the population.

One explanation for hyperbolic discounting may be uncertainty. A bird in the hand is better than two in the bush. But that explanation is only satisfactory where there is immediate reward. What of situations where we know something is good for us and yet we delay the up-front cost?

The value of a species

Today I listened to an old (2006) interview with E.O Wilson by Michael Novacek (thanks NYAS). Wilson had a few criticisms of economics – the heavy basis in mathematics for one – and he stated that this had come at the expense of building a microeconomic foundation based on evolutionary biology.

He also spent some time on the subject of valuation of diversity and ecosystem services. Much of this is a no-brainer. There is clear value to clean water, recreation etc. Where it gets more interesting is when we get to the value of a species. There might be some value in the genetic or biological information, the willingness to pay of some people to simply let it exist and some degree of moral obligation. A great example of this is gecko. In another NYAS podcast, Kellar Autumn laid out what had been learnt from the amazing properties of the hairs on gecko feet. There are applications from nanosurgery to aerospace that may come from this.

The flip side is, of course, that the value must have a limit. In the same way that the optimal healthcare system will see some people die, some ambulances arrive late and not every treatment is provided to everyone it could help, there is a limit to the costs that society can bear. At what point do we draw that line?

There is but one social science

“There is only one social science and we are its practitioners” – George Stigler, economist

I am not sure of the source of the above quote (it has been mentioned several times on Econtalk), but I consider that Stigler was thinking of the wrong field. He should have thought of biology.

An article in the Economist this week noted the increasing use of biology in the study of business and management. Biology has been slowly entering field after field as people click that humans are biological organisms that have evolved over billions of years into our present state. We are not pure rationalising machines, nor solely the product of our environment or culture. We have natural predispositions and whatever drives our “utility”, the one measure that will always be present is reproductive success.

That does not mean that everything is biologically pre-determined or that there is no point is studying culture or environmental factors, but we need to recognise the biological basis. It would be fantastic to see the teaching of biology start to creep into business schools, economics faculties and the rest of the social sciences. With a sound biological foundation, I believe that many “puzzles” in these fields will suddenly seem a lot more tractable than they did before.

The short wingman – do humans use visual illusions to attract a mate?

An ABC news article last week reported a study by Professor John Endler on the use of visual tricks by male bower birds to make themselves look larger to females. By placing small objects at the front and larger objects at the back of their bower, the court in which the male bower bird is viewed appears smaller, which makes the male look larger. Endler noted, however, that it was not clear whether the male had any empathy for the females perspective or if the male simply arranged the objects based on his own preferences.

It seems certain that humans use illusions to attract mates. I have some difficulty in coming up with many examples off the top of my head. There is evidence that being the tallest amongst a group of short people is advantageous, but this may be more a question of opportunity than visual trickery. We also use a vast array of visual techniques (dress, ornamentation, dancing etc). But how many of these are for the purpose of creating an illusion? I would expect that some body paint patterns would make individuals appear taller and wider. But generally when we do make illusions in art etc, those illusions are not for the purpose of making the male appear more attractive (although they may be a way of appearing clever to attract a mate).

One possible example (although a selected, not conscious illusion) might be narrow waists on females – making the hips appear wider. But even that may have a simpler explanation – evolving to to separate the genuinely wide hipped from cheaters who have a bit of extra fat all over.

Some extra research on my part is going to be required on this one.

Economics versus history – is this the right debate?

Over the past few days, Tim Harford has been engaging in a debate with Gideon Rachman (along with a few other bloggers) regarding Rachman’s contention that economists should be swept from their throne and historians given greater due.

A debate like this is always going to be at cross purposes. Both history and economics are large fields with differing schools of thought (and battles within). To tar all of economics with the same brush is to ignore the breadth of economics. Paul Krugman’s characterisation of saltwater and freshwater economists is a case in point. The strongest and most coherent critics are generally on the inside.

Similarly, history has a variety of schools of thought. Which historian is representative? Niall Ferguson, for example, has built his career on controversial and counter-intuitive ideas. If he is wrong, should that be a black mark on all historians? Or are historians his strongest critics and counterbalance? And of course, Ferguson is constantly making predictions, the very crime that Rachman accuses economists (but not historians) of committing.

My two cents worth is that Rachman is right the influence of economics should be tempered. In his Nobel Banquet speech, Freidrich Hayek stated that he would not have created the “Bank of Sweden Prize”. He stated:

… I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it. … the Nobel Prize confers on an individual an authority which in economics no man ought to possess. This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

In his prize speech, Hayek also touched on the mess made by economists and the “scientistic” approach which may lead to error.

Hayek’s message that economics is full of fashion and pretends to be a harder science than it should be still holds today. But at the same time, there are pockets of theory and thought that have stood the test of time (read Adam Smith). The innovative uses of microeconomics continue to astound, with examination of incentives providing a framework for predictions. Amongst the problems, mistakes and unfortunate influence, there is value. But since there are internal differences, we should be careful about the extent of the influence and power of any one individual or school of thought.

And in that sense, it is probably no different to history.

Education in the developing world

Following from my recent blog on over-education, Tyler Cowen’s words on under-education for most of the world should be noted.

Of course Bryan favors rising wealth and falling fixed costs, as do I.  But in the meantime he also should admit that a) education “parachuted” in from outside can have a high marginal return, b) collectively stronger pro-education norms raise demand and can alleviate the high fixed costs problem, c) there are big external benefits, some operating through the education channel, to lowering the fixed costs, d) stronger pro-education norms put a region closer to a “big breakthrough” and weaker education norms do the opposite, and e) a-d still impliy “too little education” is the correct judgment.  On b), some evangelical groups in Latin America do seem to have stronger pro-education norms in their converts and it appears to be much better for the children of these families and no I’m not going to buy any response which ascribes the whole effect to selection.

…..

Signaling models are important but they are not the only effect and of course a lot of signaling is welfare-improving for reasons of screening and sorting and character reenforcement.  The traditional story of high social returns to education is supported by evidence from a wide variety of different fields and methods, including cross-sectional growth models, labor economics, political science, public opinion research, anthropology, education research, and much more.  You can knock some of this down by stressing the endogeneity of education, but at the end of the day the pile of evidence, and the diversity of its directions, is simply too overwhelming.

Sports stars born early in the year

One of the more interesting pieces of evidence in the nature or nurture debate is the that athletes on professional sports teams tend to have a higher proportion of players born early in the year. Malcolm Gladwell documented this phenomenon for ice hockey players in his book Outliers. The basic idea is that when young, those born earlier in the year are bigger and faster than their peers and, as a result, tend to get more game time, are selected for further development and so on. This ongoing cycle amplifies the original difference. (The precise time of the year can change if the age cut-off is based on another date, but the same concept still holds.)

This morning I went through the current player lists of the Australian Rules Football teams and saw a similar result. Around 30 per cent more players were born in the first quarter of the year than the final quarter (although as a quick google discovered, I was not the first to have done this). Still, there is nothing like playing with the data and seeing it with your own eyes.

This is clearly evidence in favour of the nurture side of the debate. There are also a few possible policy responses. Gladwell talks of setting up parallel sports leagues for children, with one having a different birthday cut-off (say, mid year). Another suggestion might be to spend less time trying to pick future stars at such a young age. Within a single country, there is probably not much benefit to these policies, but for international sports, could this give a country an edge by ensuring that talented individuals born later in the year have a chance?

There is some evidence for this effect in academic pursuits, with the difference in test results between children born earlier and later in the year enough to differentiate who might be selected in a gifted academic program. The longer term effects of this is not so clear however. What would be a good dataset to test whether someone born later in the year is under-represented in an academic field?

To me, whether this all matters depends on whether this effect extends beyond the top end of the bell curve. Whether a few dozen professional sports players make it to the big league or not is of no great social consequence. If this effect was throughout all levels of society, with those born later in the year being invested in less than the early birds, there may be some serious misallocation of resources and sub-optimal use of human resources.

I have one further hypothesis regarding this scenario: the long term effect is larger in sport than in other areas. This is based on two ideas. Firstly, it comes from some scepticism on my part about the benefits of “gifted child” programs and the like. Secondly, in the area of sports, if you are shorter or slower, you tend not to be picked for the sports team or not given the ball. In academic areas, you still have to do your math problems, sit through the test and undergo most of the academic training that the “gifted children” do.  I’m not fully convinced of my hypothesis, but if there was a dataset to examine the birth effect for academic related outcomes in adulthood, it would be worth a look.