Two most important distributions in effective altruism

There are two important distributions to explain effective altruism. The first distribution is the distribution of income (and wealth) of people, which explains the altruism part of effective altruism and answers the question why we should do good, why we have to donate more to charities. The second distribution is the distribution of cost-effectiveness of projects, which explains the effectiveness part of effective altruism and answers the question how we should do good, how we can donate to more effective charities. Both distributions are very similar, which makes them important: they are very skewed.

The income distribution

Let us first look at the income distribution. Most likely you belong to the 10% (or fewer) richest people on earth. Your income and wealth is roughly an order of magnitude (a factor 10) bigger than the world average income. The vast number of people have income levels below the average, because a small minority of very rich people (like you) pull the average up. Your wealth could even be two or more orders of magnitude (a factor 100 or more) higher than the poorest people on earth.

In economics we have the law of decreasing marginal utility, which means that the richer you are, the less value an extra unit of money (an extra euro) has for you. Suppose you find a euro. Your happiness increases a little bit. But if the poorest person finds the same euro, the happiness of that person might increase with a factor 100 bigger than your increase in happiness. It is as if you would find 100 euros. Or in other words: if you donate 1 euro to the poorest person, your decrease in happiness is 100 times smaller than the increase in happiness of that poorest person. Your 1 euro can generate the happiness equivalent of 100 euros for other people. It is as if at the pub you could buy a drink for yourself or treat a drink for 100 other people. What would you do?

This huge gap in income and the law of decreasing marginal utility explains why we might have a duty to donate money. By donating money, total well-being on earth might increase a lot and your well-being will decrease only a little bit.

But there is more, we have a stronger duty to donate money. A lot of our high income and wealth are the result of economic rent or surplus profit. This is unearned or undeserved income because it is not the result of labour, risk-taking or entrepreneurship. The unearned income, economic rent or surplus revenue is the income above what is required to generate normal profits: profits from labour, entrepreneurship and capital investments.

In the economy, production factors such as labour, capital and entrepreneurship are compensated, for example by wages, interests and profits. Without such compensation, a production factor would not be used. Surplus profit is the additional compensation for a production factor that is higher than necessary to enable or produce this production factor. Compensation for entrepreneurship or capital investments are forms of normal profit, and these profits are just like the wages of labour earned income. The extra surplus profit is an unearned income because there is no production of a production factor. Normal profits in economy can be justified, but earning surplus profits cannot be justified.

There are various forms of economic rent or surplus profits, such as Ricardian rent due to the possession and use of scarce natural resources and inherited wealth (named after economist David Ricardo) and monopoly rent due to a monopoly power by a company. Someone who has scarce natural resources such as land, minerals and fuels has a kind of monopoly over those resources and can enjoy unearned income from that property. This income is unearned because it is not the result of labour, risk taking or entrepreneurship. Nobody has made those natural resources themselves. The same goes for the possession of inherited wealth created by our ancestors: none of the present generation has produced that wealth. These resources already exist and therefore they no longer have to be compensated to serve as a production factor.

When you appropriate a quantity of natural resources such as land, you acquires an exclusivity or monopoly, meaning someone else cannot use that resource. Natural resources are thus exclusive: they can be used exclusively and their use or possession excludes the use or possession by others.

Much of our income and wealth is based on surplus profits where we earn an extra income because we have a kind of monopoly on a scarce good that was not produced by the current generation of people. Because of that monopoly, we exclude others from the possession of that scarce resource or production factor. That exclusion is a form of damage we cause to others, especially the poorest people. We basically steal the scarce resources of the poorest people. Because of the exclusion or theft we should pay the poorest people a compensation or remuneration fee.

That compensation can also be understood as a fair distribution of surplus profit. The scarce natural resources and inherited wealth belongs to everyone. Everyone has an equal right to an equal share of that wealth that is not produced by anyone of us. The surplus profits should therefore be divided fairly. If one appropriates a large share of that wealth, the excluded will receive a greater part of the surplus profit as a compensation. That is a matter of justice, not charity.

Let me give three examples of surplus profit. First, we use and consume many natural materials such as fossil fuels and minerals. Those natural resources in the soil belong to everyone, but the amount of available raw materials is limited. The resources can be distributed equally such that everyone receives a fair share of property rights to those resources. If we use more than our fair share of available raw materials, then we need to buy property rights from others. If we do not, we violate the property rights of others. This is a form of theft for which we have to pay a compensation.

The oil in our cars and the minerals in our cell-phones are often stolen goods. Many poor countries are rich in commodities, but corrupt regimes have conquered power and thus gained control over those raw materials in the soil. These corrupt regimes appropriate the resources and sell them on the international markets, but the poor populations in those countries do not get any income from the commodity sales. To make matters worse, the corrupt regimes use the profits from selling the resources to buy weapons and create armies to suppress local people. Therefore, international trade in oil and minerals is largely a trade in stolen goods, stolen from the poorest people. A basic principle of free trade states that one cannot trade in stolen goods. The effective altruist philosopher Thomas Pogge therefore proposed the idea of a global resources dividend. The revenues from a tax on the appropriation, use or consumption of oil and minerals sold by corrupt regimes can be distributed as a basic income or resource dividend to all the people, especially the poorest.

A second example is the theft of emission rights. Rich people in developed countries emit too much greenhouse gases. We must restrict emissions to prevent climate change. The atmospheric absorption capacity for greenhouse gases is limited. The right to emit greenhouse gases is therefore scarce, and what is scarce has an economic value. People who emit too much greenhouse gases, claim too much of those emission right for themselves. We can think of an economic system of cap-auction-trade of emission permits. Governments put a cap on total emission permits to avoid climate change. Then they sell or auction the emission permits to the highest bidders. Everyone who buys a permit can also trade those bought permits. An emission permit is a kind of ownership of some of the earth’s atmospheric processing capacity for greenhouse gases. There are also other emission rights possible for other substances for which terrestrial ecosystems have limited processing capacity, such as reactive nitrogen compounds and acidifying gases. For all those substances an effective emission trading scheme can be implemented.

The government revenues from the auction of emission permits can be distributed as a universal basic income to everyone. This basically means that everyone has an equal right to this scarce good that the earth offers us. But in our current economic system we do not have an auction of emission permits, which means that emission permits are not divided fairly.

How much would an emission permit cost? In order to achieve climate targets (especially to reduce global warming below 1.5°C), an efficient emissions trading system would put a price of about 85 euros per tonne of CO2, with an annual increase of 5 euros per tonne of CO2. So the emission right for 1 tonne of CO2 has an economic value of 85 euros. An average person in a rich country emits about 15 tonnes of CO2 and equivalent greenhouse gases each year. Thus, an average person should pay about 1300 euro for emission permits in 2017. An average human being on Earth emits about 7 tonnes of CO2-equivalents per year, so if an international government would allocate an emission permit revenue as a universal basic income, every person on earth would receive 600 euros per year. Thus, an average person in a rich country would have to pay 700 euros net because that person emits too much greenhouse gases. The poorest people in the poorest countries are given almost 600 euros a year, because they do not produce much greenhouse gases.

This actually means that rich people steal emission permits from the poorest people, worth on average 700 euros per year per person (and increasing with 100 euros per year). The rich acquire part of the scarce CO2 absorption capacity of the atmosphere without paying for this scarce good. Those 700 euros are a kind of compensation that a rich person is obliged to pay to the poorest people. The poorest people are entitled to 600 euros a year.

The third example is the exclusion of jobs due to closed borders of countries. Demand and supply on the global labour market are not in equilibrium due to a policy of closed borders between countries and restrictions on labour migration. These borders create a fundamental injustice in the global economy. Labour productivity (the economic value a worker can generate per unit of work) is up to 10 times higher in rich countries than in the poorest countries. This means that someone in a rich country acquires up to 10 times more purchasing power than a similar person in a poor country who is equally skilled (trained, talented and motivated) and does the same job (equally long, risky and heavy). Wages in the rich countries can be 10 times higher for the same work than in the poorest countries. This is the so-called place premium.

This huge wage gap is a form of global apartheid. Foreigners are excluded from having a job in the rich country. That exclusion is similar to the exclusion due to the possession of natural resources. Because the exclusion of foreigners, the global labour market is not in economic equilibrium. This means workers in the rich countries benefit from surplus profits due to higher wages. That exclusion is a form of damage, because by this exclusion we limit the job opportunities of foreigners. It’s like I prevent you from working with somebody else. You want to go to a company for work, and I prevent you from entering at the gates of that company, even when the employer of the company is willing to hire you. That is basically what countries do: governments do not own the companies but they prevent some people from working at those companies. Because of this exclusion, the labour market is not in equilibrium and in the poor countries the demand for work is greater than the supply. As a result, wages are pushed down in poor countries. A policy of closed boundaries thus harms the poor populations: the poor populations are paid wages that are too low.

There are two options: either open the borders for foreign workers, or pay those foreigners a compensation. That compensation is a remuneration fee that a job owner in a rich country has to pay to the excluded persons who are at least as capable of working but who are prevented to work. This is comparable to a rich owner of natural resources who has more commodities than the fair share and has to pay compensation for the poorest people who have too little resources.

So what does this all mean? Basically we have a duty to pay a compensation fee to the poorest people due to our unearned surplus profits from economic rent on natural resources, inherited wealth, emission permits and jobs. The total value is probably more than 1000 euros per year, probably more than 5% or 10% of our income. We can donate this money to charities that help the poorest people. An obvious effective charity, recommended by the most credible charity evaluator GiveWell, is the organisation GiveDirectly which distributes unconditional cash transfers to the poorest families in Kenya, Uganda and Rwanda. Cash transfers like those from GiveDirectly have arguably the strongest existing evidence base among anti-poverty tools.

The cost-effectiveness distribution

Let’s move to the second distribution of cost-effectiveness of projects. For many projects, campaigns or interventions, measuring the impact is not possible. But what if we would measure the impact or cost-effectiveness of the measurable projects? This has been done in the fields of e.g. human health, poverty relief and education. The impact or cost-effectiveness of health interventions can be measured in terms of the increase of quality adjusted life years per euro donated.

As a shocking result, we see again a very skewed distribution: a small minority of projects, less than 10%, have a cost-effectiveness more than 10 times higher than the average project. The vast majority of projects have a cost-effectiveness below average. The average is higher than the effectiveness of most projects, because the highly effective minority raises the average. Some highly effective interventions are more than two orders of magnitude effective than the least effective interventions. For example: the cost to train a guide dog to help one blind person for 10 years is equivalent to the cost to prevent blindness for 1000 people in Africa, buy paying for very cheap surgeries to reverse the effects of trachoma. This skewed distribution is similar to the income distribution, and has far reaching consequences. Knowledge about the cost-effectiveness distribution kick-started the effective altruism movement about a decade ago.

As a first consequence, we realize that by selecting the most effective projects or donating to the most effective charities, we can increase the amount of good that we do with more than a factor 10. Even someone who donates only 100 euros to a highly effective charity can do more good than someone who donates 1000 euros.

Another consequence is that donating to a charity that focuses on a few highly effective projects is better than donating to a well-known big organization that has a lot of projects with unmeasured impacts. If an organization has many projects randomly chosen, a vast majority of those projects will likely have a cost-effectiveness below average. A project that has a proven high cost-effectiveness is probably more effective than a random project with unknown or unmeasured cost-effectiveness. We can still support unmeasured projects, if we have strong reasons to believe that those projects are highly effective, that their effectiveness has a high expected value.

A third, counter intuitive implication of this skewed distribution is that fundraising for a charity with a low cost-effectiveness might be harmful. Fundraising increases the total donations a little bit, but the biggest effect of fundraising is a shift in donations: people shift their donations away from other organizations towards your organization. If your organization focuses on a few projects that are not so cost-effective, the cost-effectiveness of that organization can easily be lower than the average. That means you shift donations away from other organizations that have an average effectiveness towards an organization with a below average effectiveness. As a result, fundraising for that organization will decrease the total amount of good done in the world. Some kinds of fundraising can be really harmful in the sense that doing nothing will do more good than fundraising. The world where you do fundraising can be a world with a lower overall well-being than the world where you enjoy leisure time.

 

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