My Newest Love: Economics

Economics is a fascinating subject. I don’t know if it’s just me, but I am entranced. Now, before you go off thinking that I’ve totally lost my mind, let me explain.

Learning about what best serves everyone’s economic interests is ever so interesting. For example, learning why it may, in many situations, be more beneficial to invest money than to donate it hit me like a cannon. And I don’t mean beneficial for me — I mean for the man who stands on the corner, begging.

Now, for those of you who think that I am simply losing my mind, I’ll explain:

Let’s say you have $1,000 with which you have absolutely nothing to do. Not likely to begin with, but for the purpose of this demonstration, it’ll work. Now, with this money, you could:

1. Choose to walk up to a man standing on the corner and give it to him outright — no strings attached.
2. Donate it through a charitable organization. Let’s say, the Salvation Army.
3. Invest it in a start-up business that provides, let’s say, handcrafted wheat bread.

Now let’s go through what might happen — hypothetically, of course — in each of these situations.

Situation 1 – The man on the street corner uses this $1,000 to buy a new jacket, pay a month’s rent, buy food, ride the bus, repair his bike tire, and maybe stop at a fast-food restaurant several times. And that’s a wrap. Overall, he’s had a nice month, thanks to your kindness and generosity. But what about next month? He’ll likely be relying on someone else’s donation to carry him along. So where is he at the end of the month? Not far from where he started.

Situation 2 – In 2004, the Salvation Army reported an overhead of 17%, meaning 83% of funds donated were actually spent to assist those in need. Assuming there were no other costs along the way, (which seems quite doubtful to me), that means $830 of your hard-earned money made it to those who needed it. And, like in the situation above, much of it will go to pay for food and other amenities. Perhaps a few will have the chance to take part in a class to improve their well-being and self-sufficiency. Well done. In the end, what’s happened? You’ve supported an employee of the Salvation Army, bought food, and maybe helped one person along the way to self-dependence. Not bad, altogether.

Situation 3 – The business in which you invested, Bread Co. Incorporated, uses your thousand dollars to purchase ingredients to make 300 loaves of bread. They also use part of it to pay their employees’ wages. With the revenue generated from the bread they sold (using ingredients supplied through your contribution), they generate revenue to purchase ingredients for 400 loaves of bread for the next month – and still pay their employees’ wages. This perpetuates as the business grows, allowing the business to employ more people, generate more bread (which is also quite useful to the community), and overall, make a profit. Not only that, but your $1,000 has increased drastically, and you can pull some of that money out (part of the profits) and use it to help start another business. Or, if you feel so inclined, donate it as in situations 1 and 2.

And thus you can see, though very few of us would imagine that investing in a business could possibly be helpful to those who are needy. But it most certainly can be. Now, I’m not saying that’s in all situations.

It certainly depends on the specific circumstance in each situation. But at least now we know it’s a possibility. And it’s one that I had never really considered — mostly because it’s something I never would have initially expected. But upon further examination, it makes sense. So, what do you think?