Tax within the context of philanthropic giving
The Great Seesaw of Civilization
by Zoltan J. Acs
Philanthropy seems like a subject with little public policy interest at best and a rather boring subject at worst. That is why not a lot is written on the subject. If you don’t believe me, just go and google the word philanthropy and see what comes up. The first three hits are Wikipedia, the Chronicle of Philanthropy home page and dictionary.com for philanthropy. Wow! Ok, so it’s boring. But what is philanthropy? According to the online dictionary phi.lan.tro.py, noun, is altruistic concern for human welfare and advancement, usually manifested by donations of money, property, or work to needy persons, by endowment of institutions of learning and hospitals, and by generosity to other socially useful purposes.
Recently, Olivier Zunz, commonwealth Professor of History at the University of Virginia has written a little book Philanthropy in America, a history. So do we have a boring history book here on an even more boring subject? On the contrary, as you crack the book open and glance at the jacket flap your views are immediately challenged, “American philanthropy today expands knowledge, champions social movements, defines active citizenship, influences policymaking and addresses humanitarian crisis.” Americans of all classes have invested enormous amounts of energy in philanthropy to enhance opportunity.
Philanthropy has 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. True, so the book is welcome! The new philanthropy was the marriage between the rich, who had made their own money, and various progressive elites of the academic word, local governments, the judiciary and emerging professional associations. Before we could implement this progressive vision some obstacles had to be overcome. For example, the rich and the reformers joined forces to change the Law of Charity: A left over from the days of protecting the children of the rich in the United Kingdom.
So let’s get to the heart of the issue. Philanthropy is the art of putting wealth to use for the common good. This is a powerful statement. It gets to the heart of the issue. Wealth! And let’s dig right into Andrew Carnegie and the Gospel of Wealth. Rich men and women should use their billions for the common good! But the common good was carefully described. It would be a capitalist venture in social betterment, not an act of kindness, as understood in Christianity and later in the 1960 and 1970 as an expression of the Great Society programs that were a form of government charity not philanthropy.
For the improvement of mankind and the common good! What on earth does this mean? For most of civilization no one was interested in the improvement of mankind. No one! For thousands of year’s kings, noble families, the church and bishops, ruled over mankind for the sole betterment of themselves. One only has to read the history of the ruling families of renaissance Italy or the Norman rulers of southern England to see that the improvement of mankind was not what motivated the rich. Looking after the poor had always been part of the agenda of the rich. Starving peasants led to revolt so feeding the poor was important. However, while charity had been for the needy philanthropy was to be for mankind.
Philanthropy is one of those topics that cannot easily be digested by itself and be appetizing: try a plate full of broccoli for dinner, as an example. Even the heartiest nutritionist will have a hard time enjoying dinner! But as a compliment to rib eye steak, grilled to perfection, alongside a baked sweet potato, the broccoli can be rather nice. So the question is, “What do we consume philanthropy with in the broad lexicon of the social sciences and public policy debates of our time?” Ah that is a great question. And like a good lawyer, I would never ask a question that I did not know the answer to. The answer is that, if you want to understand philanthropy, you need to consume it as a part of American-style capitalism.
A few years ago I tried to understand what American-style capitalism was. I wrote in the American Interest that the essence of American-style capitalism today is not a static ‘Iron Triangle’ that balances the interests of large corporations and organized labor with the active intervention of government. Nor, however, is it a rowdy free-for-all in which the interests of the many are readily subsumed by the acquisitive appetites of the few. Rather American style capitalism is a dynamic process which balances wealth and opportunity—the great seesaw of civilization. It follows that the success of American-style capitalism must turn not on its transient ability to generate macroeconomic growth, but on its sustained ability to generate microeconomic opportunity.
For wealth to invigorate the capitalist system it needs to be “kept in rotation” like the planets around the sun Philanthropy strengthens American-style capitalism in two ways. The first is that philanthropy, when targeted to universities, research and other productive used, lays the groundwork for new cycles of innovation and enterprise. The second way philanthropy strengthens capitalism is that philanthropy – like creative destruction—provides a mechanism for dismantling the accumulated wealth tied to the past and reinvesting it to strengthen the entrepreneurial potential of the future. When philanthropy is absent, wealth remains concentrated, rent seeking flourishes, and innovation and entrepreneurship suffers.
But how could philanthropy be a part of capitalism? Capitalism as Max Weber showed is a cultural system, a relatively orderly system of institutions and incentives governed by the tractable logic of supply and demand. Philanthropy by contrast lacks a set of laws to explain its ebbs and flows. Like the charities and art patronages in royal courts throughout European history, philanthropy is subject to the whims of the wealthy. Furthermore, philanthropy is not only largely ungoverned by economic principles but also relatively free from the checks and balances of democracy, such as elections, referendums and recalls.
The answer to this puzzle is found in the writings of the moral philosopher Adam Smith who wrote, “How selfish soever man may be supposed, there are evidently some principles of his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” So philanthropy is governed by natural principles: embedded altruism, while capitalism is governed by culture and institutions.
The story of philanthropy in America is the story of the convergence of big money philanthropy and mass giving. From Andrew Carnegie to Bill Gates and from ordinary people who purchased Christmas seals to fight tuberculosis and polio the nation has come to, “view philanthropy as both a quintessential part of being American and another means of achieving major objectives. Foundations originating in large private fortunes have collaborated with institutions of mass philanthropy to promoting scientific research, supporting education institutions, and fighting for human rights” according to Zunz.
Historically, philanthropy has been loyal to the institutions of American capitalism. This has been most evident in the institutions supporting opportunity creation, entrepreneurship and innovation; philanthropists have invested fortunes in schools, universities, libraries, and research centers. The strength of American-style capitalism depends on the health of these institutions and on their ability to produce new ideas and train new workers for the marketplace.
Philanthropy has long been a powerful force for social change, often viewed as moving in parallel track with capitalism. Rarely is it understood as an entity intertwined with American capitalism. Yet, it has both emanated from the capitalism system and continually nurtured the system. It is a product of capitalism—another way in which industrialists have sought to shape American society and values.
American philanthropists presumably value a strong capitalist system because it is the system that nurtured their individual success. Thus, they seem to recognize that the strength of American-style capitalism resided neither in the size or influence of an industry, or a set of firms, nor in a country’s GDP. Rather, as philanthropists have put it, the strength of capitalism is measured in a more aspirational way. Opportunity allows individuals to participate in the economic system and keeps the door open for new ideas and new firms. Innovation follows from opportunity; it is what you get when you take smart, educated people and allow then to solve problems.
Of course, the ‘American dream’ itself, is under attack today and we wonder how philanthropy fits into this picture. As President Obama talked about the promise of opportunity in the 2014 State of the Union he said, “Too many…are working more than ever just to get by.” American-style capitalism has contributed to the creation of opportunity much more then it is often given credit for. It is easy to point out that income inequality and persistent poverty in inner cities and rural areas has resulted from a heartless and individualistic system of capitalism—and maybe this is enough for some people to conclude that the American experiment is a failure—but this ignores the extent to which American capitalism has stayed true to opportunity creation throughout much of its history. Relatedly, the start-up rate of new firms and new ideas provides evidence of opportunity for upstarts and underdogs.
Why does philanthropy matter I ask? Philanthropy is the invisible, underappreciated force for progress in American-style capitalism—the secret ingredient that fails to get mentioned in economic accounts of capitalism. Philanthropy provides an extra gear that propels capitalism into overdrive. It is what gives American-style capitalism a competitive edge in the global economy. Including it gives us a fuller, more realistic picture of capitalism and therefore a better handle on how to govern it.
In this age of globalization, most observers about political economy have been on the theme of convergence, the idea that the world is moving toward one dominant system of liberal democracy a la Fukuyama’s the End of History or Thomas Friedman’s the World is Flat. It seems strange to think of the United States as having a different model. Nevertheless American-style capitalism is fundamentally different from the style of capitalism practiced in the rest of the world.
In this essay I have argued that is it philanthropy, not entrepreneurship, that propels the basic machinery of American-style capitalism. So in addition to well-functioning markets, property rights, contract law, capital markets, and the like, philanthropy—a little understood economic force—provides a super-institutional element that serves to promote vital nonmonetary institutional forces necessary for achieving growth through technological innovation promoting economic equality, and cultivating economic security.
Philanthropy, when targeted to universities, research, and other productive uses, lays the groundwork for new cycles of innovation and enterprise. As an economist, I understand that it is not always easy to measure the precise contribution that philanthropy has made to economic growth. Take the Rockefeller Foundation, for example, which is funded by the oil fortune made by John D. Rockefeller in the late nineteenth century. He founded some of America’s great research Universities, such as the University of Chicago (winner of scores of Noble Prizes over the years), the Rockefeller University (a medical research center), the Brookings Institution (a nonpartisan policy research institute) and the National Bureau of Economics (NBER).
This feedback loop has helped America fulfill its dual obligation to create both wealth and opportunity—the critical balancing act that determines the true strength of a civilization.