Stuffing Envelopes - altruism and economics

Reason, March, 2001 by Steven Landsburg

Does recent research prove we're altruists--or does it suggest something darker about us?

This is a story about some economists who set out to study altruism and ended up discovering something very frightening about human nature.

Altruism itself has, at best, a mixed reputation among economists. Adam Smith famously observed that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-interest. We address ourselves not to their humanity but to their self-love." In other words, who needs altruism when we've got greed?

In fact, greed can be far more efficient than altruism. An altruistic butcher can't serve his neighbors well unless he knows how many want beef on the table and how many want chicken. How does he get that information? Ordinarily, butchers learn about demand by observing prices: Other things being equal, the higher the demand, the higher the price. But in a world of pure altruism, there would be no prices to observe.

If you happen to like this article so much that you decide to buy a lifetime subscription to REASON, some Asian farmer has to grow another linseed plant. That's because the ink in this magazine is made from linseed oil. How does the Asian farmer know you need more linseed? Because rising subscription numbers set off a chain reaction: They raise the demand for ink, which raises the price of ink, which raises the demand for linseed, which raises the price of linseed. The farmer knows someone needs more linseed when he sees the price go up. Without prices, he'd have to guess at your preferences and might plant rutabaga instead.

Despite such efficiencies, of course, there are obvious advantages to living in a world where people care about their neighbors, and economists spend a lot of time theorizing about both the prevalence and the consequences of altruism. Enter Vernon Smith. Forty years ago, as a young assistant professor of economics at Purdue University, Smith championed the then-unheard-of notion that economists who theorize about human behavior could learn something useful by actually observing some human behavior, preferably in controlled

experimental settings. Today, Smith presides over the renowned Economic Science Laboratory at the University of Arizona, where he and his colleagues recently set out to study altruism--and ended up discovering something dark and disturbing about human nature instead.

Here's one of Smith's experiments: Two total strangers are placed in separate rooms. They never meet, they never learn each others' names, and they come and go by separate entrances. One of them is selected randomly to receive 10 one-dollar bills and an envelope. He can put any number of bills in the envelope and send it by messenger to the other subject. Then everyone takes his money and goes home.

Simple economics predicts that no money ever goes in the envelope. And that prediction is borne out about two-thirds of the time. The remainder of the time, the prediction is still not far off. When there's anything in the envelope, it's most often a single dollar bill.

You might interpret this as evidence that most people are very selfish, but that seems like the wrong conclusion. Not even Mother Teresa was in the habit of sending money to total strangers about whom she knew nothing. Every time you check into a hotel, there's a stranger in the next room, but your failure to send him an envelope full of money is hardly an indictment of your charitable instincts. In fact, the more charitable you are, the more likely you are to keep the money so you can give it to someone who is truly needy. Once those dollar bills leave the economics lab, we have no idea how many of them end up in beggars' cups, church collection plates, or United Way envelopes.

Why, then, does any money ever get passed to the other room? My guess is that it has nothing to do with altruism or charity and everything to do with the subjects' suspicion that they're being observed--and judged--by the experimenter. As a matter of fact, any such suspicion is ungrounded; elaborate procedures, which are explained at the outset, prevent the experimenter from ever learning who passed which envelope. But who says people can't respond to an ungrounded suspicion?

To test the size of that effect, the researchers performed a similar experiment without the elaborate precautions, so that the experimenter knew exactly who the subjects were and what they did. Sure enough, this changed things considerably; 80 percent of the subjects put something in the envelope, and the average transfer rose from $1.08 to $2.66.

Now we come to the dark and unsettling part. James Cox, one of Smith's colleagues at the University of Arizona, has been running a variant of this experiment where subjects know that everything they put in the envelope will get tripled by the experimenter before it's sent to the other room. If they give up a dollar; the other guy gets three. If they give up 10, he gets 30.