Why Philanthropy Matters

How the Wealthy Give, and What It Means for Our Economic Well-Being

Zoltan Acs

• Publisher: Princeton University Press
• Year: 2013
• ISBN:
  9781400846818
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

The hidden role of philanthropy in enriching America's prosperity—and the world's Philanthropy has long been a distinctive feature of American culture, but its crucial role in the economic well-being of the nation—and the world—has remained largely unexplored. Why Philanthropy Matters takes an in-depth look at philanthropy as an underappreciated force in capitalism, measures its critical influence on the free-market system, and demonstrates how American philanthropy could serve as a model for the productive reinvestment of wealth in other countries. Factoring in philanthropic cycles that help balance the economy, Zoltan Acs offers a richer picture of capitalism, and a more accurate backdrop for considering policies that would promote the capitalist system for the good of all.Examining the dynamics of American-style capitalism since the eighteenth century, Acs argues that philanthropy achieves three critical outcomes. It deals with the question of what to do with wealth—keep it, tax it, or give it away. It complements government in creating public goods. And, by focusing on education, science, and medicine, philanthropy has a positive effect on economic growth and productivity. Acs describes how individuals such as Benjamin Franklin, Andrew Carnegie, Bill Gates, and Oprah Winfrey have used their wealth to establish institutions and promote knowledge, and Acs shows how philanthropy has given an edge to capitalism by promoting vital forces—like university research—necessary for technological innovation, economic equality, and economic security. Philanthropy also serves as a guide for countries with less flexible capitalist institutions, and Acs makes the case for a larger, global philanthropic culture.Providing a new perspective on the development of capitalism, Why Philanthropy Matters highlights philanthropy's critical links to the economic progress, health, and future of the United States—and beyond.

CHAPTER 1

A CONVERSATION

He who dies rich dies in disgrace.

— ANDREW CARNEGIE

The Giving Pledge

On August 3, 2010, the Wall Street Journal ran an article titled “U.S. Super Rich to Share Wealth.”¹ The piece was about the Giving Pledge—an effort by Bill Gates and Warren Buffett to get the world’s richest individuals and families to give away half of their wealth during their lifetimes. The pledge’s initial outreach effort, which stemmed from Gates and Buffett’s conversations with wealthy individuals over the previous year, ended with forty American billionaires signing on. The article, published a day after the signing, was buried inside the paper and initially didn’t seem to create much excitement.

I expected the story to die, like the patchwork of other newspaper and magazine articles on philanthropy that I had been following over the previous decade—but the Giving Pledge story had legs! Within three months of the signing, it was one of the most talked-about topics in the country, and by the end of the year 7 percent of the traffic on Twitter concerned it. The Giving Pledge has shaken public discourse on the topic of philanthropy and reopened a debate on the role that philanthropy plays in American capitalism.

Reading the letters of many of the signatories sheds light on what these philanthropists hoped to accomplish by giving their money away. George Lucas, the creator of the Star Wars franchise, wrote on the Giving Pledge website that he was “dedicating the majority of my wealth to improving education. It is the key to the survival of the human race.”² Paul Allen of Microsoft wrote, “We will look for new opportunities to make a difference in the lives of future generations.”³ Pierre Omidyar, the founder of eBay, wrote, “People are inherently capable but frequently lack opportunity..… Our common challenge is .… leaving a legacy of hope for those to come.”⁴

Many of the letters written by the signatories of the Giving Pledge equate philanthropic giving with the creation of new opportunities for individuals. As I hope to show in this book, this cycle of giving—from philanthropy to new opportunity creation—has been an essential ingredient of American capitalism throughout the country’s history. Americans’ motivations for giving money, as well as the outputs of their generosity, are woven into the entrepreneurial spirit of America—a system that has both nurtured private innovation and sustained a pattern of private giving that exceeds three hundred billion dollars every year.

Despite the apparent generosity of signatories like George Lucas and Paul Allen, much of the public response to the Giving Pledge has been critical, often laced with cynicism about the motives of philanthropy and the extent to which philanthropy undercuts democratic processes. The Weekly Standard’s readers attacked the Giving Pledge as “grandstanding,” a “publicity stunt,” or “the work of socialists.” The German magazine Der Spiegel reported in its international edition, “One billionaire ‘blasted the effort as a bad transfer of power from the state to billionaires.’ ”⁵ These attacks are misguided, however, because they fail to appreciate that philanthropy, far from being a new fad, is endemic to the entrepreneurial system from which it originated.

In addition to those who criticize philanthropy for its lack of accountability, others question what philanthropic giving can hope to accomplish. Carlos Slim, a Mexican telecommunications magnate who in 2010 overtook Bill Gates as the world’s richest man, scoffed at the Giving Pledge, saying, “Charity doesn’t solve anything.”⁶ Slim, himself a philanthropist, questioned whether contributions promised by signatories of the Giving Pledge would result in any measurable improvement for society. His provocative statement raises an interesting question, although perhaps not the one he intended. How do we define, or categorize, philanthropy vis-à-vis charity? As I will maintain throughout this book, it is important to think of philanthropy and charity as two separate things, even though they are often equated in public discourse and in reactions to events like the Giving Pledge.

Philanthropy necessitates a reciprocal relationship between the philanthropist and the beneficiary. When a philanthropist makes an investment, it requires the recipient to make some investment—such as in time and energy—to benefit from the largesse. For example, consider the case of a wealthy individual who donates money to start a university, as Leland Stanford did when founding the university that bears his dead son’s name. The recipients of Leland Stanford’s largesse—namely, students—do not benefit without making their own investment of the time and energy necessary to earn a degree from Stanford University. In short, philanthropy is an investment that stimulates other investments. Charity, by contrast, requires no such reciprocal relationship. Soup kitchens are charitable, for example, because the recipient need only show up to receive the benefit.

So what? you may ask. Isn’t the distinction minor? Haven’t we always had both charity and philanthropy? The simple answer is yes. We have always had charity. Alms giving is as old as civilization. We have also had some form of philanthropy for a very long time. Patronage of the arts is also as old as civilization. What is new is America’s invented use of philanthropy as a vehicle not for its own ends but for the creation of opportunity for the broad middle class, to build a better society in the long run through hard work and sacrifice. The mix of charity and philanthropy matters. I do not want to argue that charity is bad, just that only charitable gifts that result in the creation of economic and social opportunity for individuals qualify as philanthropy. Philanthropy has a positive long-term externality for society, that is, it creates a better society in the long run.

Philanthropy touches aspects of American society from early childhood education programs to cutting-edge research on biotechnology. When one considers where the preponderance of money that is given away actually goes, the reciprocal relationship inherent in philanthropy begins to make more sense. Consider the biotech industry, in which the contributions made by philanthropists bear fruit only if they are met with trained scientists who can turn research dollars into life-saving medicines. The opportunity afforded to those in research is a reciprocal relationship, as is the ability of life-saving medicines to allow people to rejoin the workforce.

Philanthropy and America

The Giving Pledge is certainly one of the highest-profile discussions of philanthropy in recent history, and it singles out the commitment that some American business leaders have to extending opportunity beyond what is provided by the marketplace. But how much do the actions of those individuals reflect a broader, more ingrained feature of American generosity and giving? In this book, I argue that to understand philanthropy is to understand something about the American psyche and its fidelity to promoting enterprise and opportunity.

The Giving Pledge has reignited an American conversation about philanthropy, but this new conversation has roots in an ongoing dialogue that can be traced back to those who first left England. Consider, for example, a sermon that the Puritan leader John Winthrop delivered in 1630 on board the ship Arabella as it sailed to the New World. Winthrop’s shipmates in part were seeking refuge from religious intolerance. Appropriately, Winthrop’s sermon was titled “A Model of Christian Charity,” yet it laid forth a number of practical ideas about the necessity of industry and hard work, on the one hand, and the importance of frugality and humility, on the other.

These early colonists who came from England in the seventeenth and eighteenth centuries left a society that was on the cusp of experiencing an enormous burst of entrepreneurial activity, invention, and economic growth. But it was also a closed society, where the ability to participate was largely limited to those with land and title. This was most apparent in the landed aristocracy with their vast wealth and disproportionate political influence. Yet even the great advances that would fuel the wool and textile industry in England benefited almost exclusively those with inherited lands who used this wealth to purchase inclusion in this period of entrepreneurial upheaval.

If the Puritans were around today, they might not be wholly pleased with the state of affairs in American business. The Puritans were wary of excessive profit making, reflecting their distaste, not for enterprise and industry, but rather for windfall profits divorced from self-reliance and hard work. Similarly, today the American psyche seems torn between its love affair with entrepreneurial success and its uneasiness with the trappings of inherited wealth. Thus, long before Andrew Carnegie proclaimed his so-called Gospel of Wealth, the Puritans and other early American colonists leaving Europe were laying an intellectual and moral foundation on which successive generations of enterprising Americans would build, helping to ensure that entrepreneurial profit seeking in the New World bore little resemblance to the entitled rent seeking of the Old World.⁷ Rent-seeking behavior is an attempt by an interested party (in this case the nobility) to alter the rewards in society in their own favor. This type of behavior does not increase wealth in society; it just changes its distribution.

Through these values, the American experiment has triumphed on a balance between altruistic behavior and self-interest. Self-interest and altruism, though very different motives for human activity, are in fact fundamental traits of human nature and both are crucial to maintaining the strength and vitality of any society. Philanthropy, as I argue in this book, is part of the implicit social contract that continuously nurtures and revitalizes a society.

Philanthropy is also an invisible, underappreciated force for progress in American-style capitalism—the secret ingredient that fails to get mentioned in economic accounts of capitalism. Including it gives us a fuller, more realistic picture of capitalism, and therefore a better handle on how to govern it. We have to rethink the economics of capitalism to incorporate the role of philanthropy—just as we did for entrepreneurship, following Joseph Schumpeter—if we are to create policies to promote its better aspects.⁸

American-Style Capitalism

In the aftermath of the Great Recession, the future of capitalism in America has moved to the forefront of debate in the United States. One strain of this new conversation has questioned whether the United States ought to move in the direction of Europe, toward a more robust government involvement in the marketplace. In many ways, this knee-jerk reaction to a financial crisis that was fueled by greed and inadequate oversight, and followed by a sustained period of economic malaise, is typical. The standard paradigm observers of capitalism use to understand the American system focuses on conflict between big and small government—privatized health care versus government-run programs, unions versus business, and regulation versus individual freedom.⁹

These old debates—which harken back to the ideological conflicts over the New Deal and the Great Society, as well as to American disagreements over the merits of European-style social democracy—undercut our focus on the entrepreneurial ingredients of American capitalism. Innovation in America will not live or die based on whether we build one more government agency, or how we decide the particulars of labor disputes between large corporations and unions. What is of consequence, however, is how policymakers work to create the conditions necessary to incubate innovation and to nurture an environment in which these innovations can be efficiently commercialized.

Capitalism requires an interplay between individuals and government—between commerce and control. On this point, even the most extreme right-wing and left-wing political factions generally agree. Each society chooses its own rules to govern this interplay. What is American-style capitalism and is it distinct from other styles? American-style capitalism has pushed against the protected relationships between business and government that typify what I consider the worst examples of capitalism throughout the world.¹⁰ There are, of course, many differences between the United States and Europe. Europe has different labor markets and labor laws, and its social services (such as universal health care) are much stronger.¹¹ But one crucial difference is the degree of entrepreneurial activity and innovation. Europe gave birth to just twelve new big companies between 1950 and 2007. America produced fifty-two in the same period. And Europe has only three firms founded between 1975 and 2007 on a list of the world’s five hundred largest publicly traded companies.¹²

I have spent my academic career studying entrepreneurship, predominately in the United States and Europe, but also globally. I was first introduced to the notion of a uniquely American style of capitalism by studying data on entrepreneurship and innovation in the United States. Entrepreneurship is important everywhere, but the United States is a magnet for entrepreneurship like no other country. For example, in a recent ranking of seventy-nine countries on variables including innovation, availability of venture capital, and the share of high-growth firms, the United States ranked first, far ahead of the European Union, Brazil, China, and India, and even ahead of small entrepreneurial countries such as Denmark, Singapore, and Israel.¹³

The United States owes its entrepreneurial success in no small part to the opportunities it has afforded talented and hardworking immigrants. In the global competition for talent, America excels because it provides opportunity both through jobs, which are created by the marketplace, and through education and high-tech research, which are tied to philanthropy. In the United States, 20 percent of high-tech companies were started by immigrants or had immigrants on their founding teams.

At the heart of American-style capitalism—and the ability to attract and sustain entrepreneurial activity—is an acceptance of the cycle of creative destruction. To some, this is a double-edged sword. On the one hand, the forces of creative destruction enable superior innovations to displace old companies and products. This process can also be damaging, however, as the losers in this process are put out of work, and in some cases whole towns and regional economies can suffer. In some countries, government plays an active role in holding creative destruction at bay, whereas American politicians—and presumably voters—have supported a system that allows creative destruction to do its work. Americans seem to accept that although creative destruction creates uncertainty, it also nurtures dynamism and, perhaps most important, fuels the entrepreneurial spirit of American-style capitalism.

The tension in American-style capitalism, thus, is not between the winners and losers that are sorted out by creative destruction. Rather, the tension is between enabling vast amounts of wealth creation for those who innovate and protecting opportunity for all Americans. If government and society put too much pressure on the system from either side, the balance of American-style capitalism could shift in fundamental ways.

Indeed, the growing income inequality in the United States could create lasting cleavages between rich and poor that would do irreparable harm. Among other things, it could damage our meritocracy—our system for allocating talent and good ideas to thei...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Preface
• Chapter 1. A Conversation
• Chapter 2. Creating Opportunity
• Chapter 3. Entrepreneurship and Innovation
• Chapter 4. The Wealth of Nations
• Chapter 5. Charity and Philanthropy
• Chapter 6. American-Style Capitalism
• Chapter 7. The Global Perspective
• Epilogue. Changing the Tax Laws
• Pledge Letters
• Notes
• Index