The Faulty Logic Behind Warren Buffett's "Giving Pledge"
"The world has been carried forward on the shoulders of a few of our ablest and most constructive men." Howard E. Kershner, Dividing the Wealth, p. 53.
Almost like clockwork, whenever a giant of American capitalism achieves great financial fortune, the media and politicians begin to call for this individual to begin giving away the money earned. It's said that those who've been financially successful must "give back."
Not asked enough is why the wealthy in our midst owe others for the act of growing wealthy. Also not addressed is what made them so rich to begin with. Did they somehow tap the economy in order to attain their wealth, denying others less enterprising and industrious of the fruits of their toil?
As Schumpeter long ago observed, "the capitalist engine is first and last an engine of mass production for the masses." Or put more plainly, individuals grow rich by making rather commonplace what was once obscure and expensive. Luxury, far from a static notion, is a predictor of what we'll all have if economic progress continues.
What's fascinating about the elite view of charitable action by the wealthy is how very contradictory it is. Bill Gates, the software visionary, was long demonized by media and politician alike as evidenced by Microsoft's eventual (some would say inevitable) prosecution by the Justice Department. Seemingly a deviant, a predatory capitalist then, he's now lionized for giving his many billions away.
Not recognized enough is that there's no charity without capitalistic success first. The question then becomes why the deep thinkers in our midst express discomfort with the commercial profits of the wealthy, yet venerate those same individuals when they eventually devote their substantial means to works that the chattering class deem good.
Does the act of charity trump hoarding one's wealth with an eye on growing it? Giving away one's billions is surely a brilliant public relations move for our "vital few," but is it the most economy and life enhancing decision to do so? Probably not.
Capitalistic success and deep pockets. John D. Rockefeller made kerosene and then the byproducts of oil available to the masses through constant expansion and acquisition of marginal producers. As is increasingly well known, the cost of what Rockefeller produced consistently fell for customers as this most focused of businessmen aggressively sought efficiencies that made price cuts possible, holding competition at bay.
Profits and the wealth they ultimately bestow on their creators are logically a sign of the businessman doing his customers a great turn. But media coverage of this most brilliant of commercial thinkers was critical. For doing well by his customers, and being rewarded with great wealth in the process, Rockefeller was termed a "Robber Baron."
We take automobiles for granted today, but they would have had no economic value without the efforts of Rockefeller and other intrepid individuals who saw a future powered by hydro-carbons from the earth. And while a car was a rare luxury in the beginning, Henry Ford's genius with the assembly line (essentially perfecting Adam Smith's pin factory) made common what was once rare.
Not long after, the Hartford brothers built the A&P grocery empire. Where grocery stores had previously been very small with limited inventory, the Hartfords built a near-nationwide food-supply chain, the scale of which allowed a great lowering of grocery prices for a growing nation. Their public reward, like that bestowed on Rockefeller, was prosecution by the Justice Department.
In more modern times, Sam Walton perfected what the Hartfords began in building Wal-Mart. Streamlining the mass purchase of everything from groceries to clothes to televisions, his business model essentially gave regular Wal-Mart customers a "raise" during every visit to the retail behemoth. And Wal-Mart is presently the world's largest employer.
Turning to technology, Bill Gates' Windows software vision to this day ubiquitously animates the personal computer, and so successful in the marketplace was his prosaic innovation that Gates is the world's richest man. But for making the PC an easy to understand and essential device, Gates too suffered a Justice Department prosecution. Though the consumer ultimately decides which businesses will grow large, and which will fail, it's often the companies most loved by the consumer as evidenced by profits and share prices that the government goes after.
During their commercially productive years of earning gargantuan sums as a reward for improving our lives, few of these men attained popular appeal. Operating in a world impoverished by the horrifying habit of envy, their wealth signaled to those with the proverbial microphone a culture of excess.
Though profit is what stimulates Man to do great things, and profit unquestionably signals market needs met, that's not enough for the commentariat. In order for the incredibly wealthy to succeed in winning over the media and political class, it's necessary that they "give back." The fact that present and past profits are a certain sign that they've given back in spades doesn't register.
Of course great business success is often followed by a move into charitable endeavors. Though John D. Rockefeller has long since died, the Rockefeller Foundation continues to contribute millions to causes large and small, as does the Ford Foundation. Not much more than a decade removed from the Justice Department's lawsuit against Microsoft, Bill Gates now devotes half his time to charitable giving. The alleged predatory monopolist is now feted around the world, and with good reason, for the efforts of the Bill and Melinda Gates Foundation.
The grand business success that has put individuals like Gates in the position to dole out billions never impressed the media while the money was being made. But once Gates converted productive goods into charitable funds, his reputation soared. There's a paradox here. Without his hard charging success with Microsoft, Gates would not be overseeing a foundation that is bursting with billions.
To state the obvious, there's no charitable foundation without commercial success first. Rather than demonizing the business acumen that leads to profits, all the while elevating the charitable aftermath, it would be more realistic to acknowledge that profitable business concepts are what make charity possible. You can't have one without the other. To love the act of giving to the less fortunate is to love even more the business success that makes giving possible.
Do we oversell the positives wrought by charity? In Dividing the Wealth, Howard E. Kershner argued that "the noblest charity is to show another how to avoid charity."Kershner had a point, in that charity presumes the giving of something while asking for nothing in return.
While many of us decry government programs that foster dependency, is charity so different? It's not. It's fair to suggest that those reliant on handouts will have less incentive to produce for themselves. If so, we then must at least consider whether or not the act of charity is as noble as commentators assume. On its face some forms of charity may actually reduce the work incentive of recipients and so weaken their contributions to the economy.
Consider what's often necessary to create eleemosynary institutions to begin with. They convert productive assets and investments in the private sector into consumptive capital necessary to support whatever mission the charitable institution undertakes.
This should not be minimized. If it's agreed that there are no jobs without savings and investment first, it should then be said that the individuals who maintain (or hoard) their base of financial capital are actually engaging in a highly compassionate act. Their savings are ultimately lent out to entrepreneurs and businesses eager to grow.
Looking back to Kershner's point that helping individuals avoid charity is a noble act in itself, perhaps it's time to elevate the notion of wealth-hoarding over charitable giving. Unless stuffed under a mattress, savings and investments are what author future growth.
Warren Buffett has generated for himself a great deal of attention and fanfare for his "Giving Pledge" program whereby he's convinced numerous billionaires to give away at least half their fortunes. But maybe the bouquets thrown in his direction should be reconsidered. Business formation and job growth are certainly the result of matching ideas with capital. But if capital is removed from the productive sector in the name of good works, it's possible that wealthy donors eager to do good are in fact depriving those who would otherwise strain themselves to improve their lot in life.
Though individuals should be free to dispose of their wealth in any way they please, it's possible the giving narrative could be enhanced with another theme. Specifically, those interested in improving the world would do well to remember that a job is the greatest life enhancer yet conceived of, and that jobs are funded by savings left in the productive sector.
That being the case, a theme parallel to Buffett's could fall along the lines of a "Capital Formation" pledge, whereby those with means might promise to invest as much of their disposable income as possible. As evidenced by how profoundly positive the rise of companies such as Microsoft, Wal-Mart and Ford Motor Co. has been, the massively increased wealth of such idividuals will surely enrich those lucky enough to work for or benefit from new business innovation funded by savings.
Conclusion. It is an unfortunate but prevalent theme in modern times that those who are successful, smart and hard working enough to create a great deal of wealth somehow owe the rest of us. To the contrary, their wealth is a sign that they've done enormous good; profits and wealth being a means of removing unease from the marketplace.
Equally unfortunate is the schizophrenic notion that business success is somehow unseemly, while the charity that it makes possible is noble. The greater truth is that there is no charity absent success in the marketplace first.
What still needs to be addressed more carefully is the good or bad of charity. Given a free pass by most, it's important that we start asking whether an individual funding a charity with previously earned wealth is doing more good than the individual intent on creating even more wealth through keen investing.
Is society improved when wealth creation ends so that charity can begin? Logic says no. While individuals should be free to do as they wish with their money, we might in the future look with more admiration on those who abstain from charity with an eye on expanding, rather than prematurely distributing, their net worth.
