Philanthropy is a holdback of progress
Posted by Alexander Ginzburg on June 10, 2008
Filed Under Philanthropy |
I believe that philanthropy causes an inefficient distribution of resources, which means that everyone would be better off without it. Philanthropy addresses needs that are meant to be fulfilled by other economical agents, like the government and the market. However, in most cases it fails to deal with those needs properly. The reason is that the non profit sector is usually non competitive, therefore, it is less efficient than the private sector or too scattered thus less efficient than the government. This anomaly could be overlooked if it was affecting just the ongoing economic activity, but the fact is that it suppresses the progress. In order to demonstrate those effects, I will show a couple of examples both of the government and for the market functions.
Let’s start with the government. One of its main functions, in a democratic society, is to deal with poverty. This is simply in order to maintain an order, because failing to do so in a sufficient degree, will bring to a violent uprising of the poorest that will eventually overthrow the government. The process will keep going as long as the extent of the unbearable poverty is large enough to make a difference. Let’s imagine a country with high poverty and unemployment rates, which is on the verge of rebellion. If the situation of the low class doesn’t improve soon, the government won’t be able to keep ruling. It has two alternatives for an action: the first one is simply to increase the transfer payments to the needed (welfare), the second one is to improve the financial status of the lower class through employment by engaging a nationwide plan that will encourage the unemployed to join the workforce (subsidizes to employers, negative taxes, training programs). Let’s assume that each one of those actions would cost the government 200, however, the second one would also produce a benefit of 100 (due to the rise in productivity). Now, let’s consider a rational government (maybe it sounds a bit fictional, but I bet that they exist somewhere), it would probably prefer the second alternative for the obvious reasons. However, if there were a philanthropic sector involved, which wanted to assist the poor, the situation would be different. As opposed to the government, the non profit organizations have only the first alternative – to donate money, food and clothing. The reason is that they have no authority to take most of the actions that can be taken by the government. Besides that, the charity funds are scattered between many uncoordinated organizations, which makes it almost impossible to launch a large scale operation, like an employment encouragement plan. From that point and on, the situation of the poor gets better thanks to charity and the pressure on the governments is relieved. Now, they don’t need to take any action on this matter any more and the public ends up with the less favorable solution.
The same result can occur on an international scale. A good example to this can be found in an article authored by Walter Williams (‘Helping’ Africa to death). The author compares between two African countries, Zimbabwe and Botswana. On the one hand those countries suffer from similar negative conditions, high rates of AIDS infections and droughts, on the other, Botswana enjoys from a relative economic prosperity while Zimbabwe’s economy is a total failure. According the author, the cause to such a difference between those countries is their governments. Botswana is the least corrupt country in Africa, with strong law system that protects the private property rights, which are essential for attracting foreign investments. On the other hand, Zimbabwe, as many other countries in the region, suffers form chaos and corruption. Nevertheless, people don’t rise up against the corruptive leaders. The author claims that one of the reasons is the foreign aid, received from the developed countries. Whatever is left of it and haven’t been stolen is used by the leaders to maintain the situation of their subjects tolerable just enough to prevent them from rebelling.
I will continue discussing the downsides of philanthropy in the upcoming posts, and eventually I will project it on the Internet.
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8 Responses to “Philanthropy is a holdback of progress”
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Hi Alex,
It’s a very unpopular case that you are arguing.
What you are saying maybe reasonable in some casesm but for most cases it’s just not true. The “Free Market” economic point of view is not always the one that maximizes public welfare.
Vetal.
[…] Philanthropy is a holdback of progress : NooTag Blog This writer says “everyone would be better off without (philanthropy)”. Not an argument you hear very often! (tags: philanthropy) […]
Hi Vital
Thanks for your comment. I am aware of how ‘unpopular’ my argument may be. However, my goal is not to create a provokation but to emphasize the less noticeable anomalies, especially those which I believe effect the Internet. Earlier I’ve criticized advertising and the economical functionality of search engines, now I present my opinion on the negative effects of philanthropy.
I would really like if you mentioned some examples that would contradict my point. Nevertheless, I am willing to admit that my argument is not always true in case of an international aid. The reason is that there is no single central government that runs our planet; therefore no one has the responsibility to assist countries in trouble, the same way as local governments assist their own citizens. So in cases of natural disasters, starvation, violence, epidemics, etc, a voluntary intervention of other countries is necessary. Finally, this argument has nothing to do with the free market; on the contrary, I claim that the functions of philanthropists should be done by the government.
Alex
Not exactly criticism, but a few questions and my opinions.
1) Is it really the poor who cause revolutions? The example I can think of (The french revolution) wasn’t a simple uprising of the poor; a lot of middle-class people who were unsatisfied with the inequalities that came hand in hand with the monarchy. Other revolutions or uprisings (IE, India against Britain and even the US) had strongly nationalistic or economical motives.
2) Is central control necessary in taking care of the welfare of people? I don’t think you can simply answer ‘yes’ to that. While there isn’t any competition in the usual sense of the word, I would imagine that an organization that is more efficient will achieve more of the goals that the philanthropists will place for the organization, and therefore will continue to receive funding from them.
3) Is the problem with philanthropy or the philanthropists? As we know a lot of the money that comes into the ‘third sector’ (a term used to define the non-profit organizations that deal with welfare) comes from very rich people and organizations. But are those people/organizations interested only in welfare and prosperity? Certainly there’s an aspect of self-promotion in all this.
4) Is all government intervention a good thing? Right now, the US and many other industrialized nations’ governments are in the process of investing less in welfare and letting the private sector make up for it. But in the not so distant past the policy was in favor of more welfare - but this didn’t always solve the problems of unemployment and poverty. Some european countries have come close to economic collapse due to their welfare policies in the 90’s (I think it was Sweden who was usually discussed).
I agree with you that the greatest problem with philanthropy is, as you said, that it allows the government to neglect its duties. It also disallows any public discussion on the proper ways to aid the poor - unless of course, the public somehow organizes itself and the donations it makes. It also inhibits public discussion about the people who deal with philanthropy - inequality in the Western countries is growing, and countries that rely on a strong middle class (and most democracies rely on it) must make sure it remains strong to function properly. Higher inequality means the very rich people get richer and the rest get (even if only relatively) poorer. This hurts both democracy and business: modern age mass consumption, which is the basis of western economies, can’t be supported by a few rich people (no “mass”) or from the impoverished (no “consumption”).
Basically what I’m getting at is that while I agree with your claim, the arguments one should use are a bit different.
Please read Claire Gaudiani’s book, “The Greater Good” which shows the true impact of philanthropy on the economy.
Regards,
Bill Huddleston
The blurb below is from her website
(www.clairegaudiani.com)
The Greater Good
The Greater Good is a passionate, pragmatic and finally optimistic manifesto for revitalizing the promise of the American economy…
“Most people think that Americans are generous because we are rich. The truth is that we are rich…because we are generous…” Claire Gaudiani tells us.
Stories…
The Greater Good is filled with stories, stories of personal generosity by individual Americans. We have a great tradition of helping each other get an education, develop good ideas, and build our communities. We do this for the greater good of everyone, not just for ourselves.
These stories describe the remarkable contributions to American prosperity that have resulted from these generous acts. If you are involved in giving or raising money, you will find an inspiring story here that you can share with others committed to your cause.
If you’d like to read one such great story, the founding of the Provident Hospital in Chicago, click here.
Philanthropy is Red White and Blue
Personal generosity for the greater good is a unique American value. No other people in the world are as generous as Americans. Eighty-nine percent of us give each year, and not only to our churches or synagogues, or to our relatives. We give to causes that will help other Americans, because we care about the greater good for all citizens. The Founding Fathers understood the need for citizens in the new country to help each other out, so everyone had a stake in the future. We need to keep this commitment alive and well in the 21st century.
Americans are Inventors and Investors
The Greater Good is a manifesto, as well as a history of philanthropy. Claire challenges all of us to maintain, in fact to increase, our generosity. We have more accumulated wealth as a nation than ever before, thanks to our democratic capitalist system tempered by generosity, and we must reinvest this wealth through generous acts.
The Greater Good tells many stories of philanthropic entrepreneurs, investors in people, in our environment built and natural, and in ideas. We need generous investors today to address our current challenges, schools, neighborhoods, housing, whatever is needed to keep the American dream alive for all citizens.
Generosity is Essential
The Greater Good argues from sound economic evidence that forward generosity is essential to continued American prosperity. The book demonstrates that philanthropy sustains upward mobility, develops new industries and nourishes democracy. It has provided the early investments in people and physical and intellectual capital, the areas that economists such as Paul Romer of Stanford University have shown to be most important for fueling the country’s growth.
Claire notes the challenges of the moment (rising personal debt, slow growth, gated communities, shrinking civic involvement, flat giving rates) as well as the opportunity (the next fifty years will see the largest private intergenerational wealth transfer in human history). She sets forth an agenda for forward generous investment to ensure that American social and economic success is assured.
As always, your post is inspiring. I wish I had more time to give this post the comment it deserves, but I don’t. Instead, I’m going to highlight some points you might be interested in looking to further.
First, it’s very important to understand where philanthropy comes from. Although there are many sources for the money that fuels non-profits, most of it comes from various funds and like sources. These funds are based, among other things, upon contributions made by old people, or by the families of the deceased. I’m going to argue here, that this redistribution of wealth have a positive effect on society, and is much more efficient than any government mechanism to do the same. Inheritance taxes will never be as efficient.
The second thing I’d like to mention is rather a comment about your Zimbabwe example. Accidently, I have been interested in this topic, but the explanation I know differs from the one you mention. Ironically, the Zimbabwe government is very rational and sees it’s role as maximizing the wealth of it’s leaders. Their method of doing so is by keeping the population oppressed and keeping the flow of aid regular. Kind of like what the Hamas government is currently doing in the Gaza strip. The directions of the Zimbabwe govermenet and the one at Bostwana are totally different, which makes comparing them irrelevant.
All in all, great post on a great topic.
Roman
Hi Nitzan,
I really appreciate your comprehensive analysis. I’d like to refer to some of your arguments.
Firstly, I defiantly agree with you that not all the revolutions are caused by the poor; however it does not mean that the low class can not evoke a change of the leadership as a result of his economic condition. It doesn’t have to be a violent rebellion of a historical proportion, even though it might be. As I have mentioned in the post, the effect is more significant in a democratic society where the government is replaced in elections, even though it can happen anywhere and can even cause a change of regime (the rise and the fall of the communism in Russia were both a result of poor welfare of the people). In a democratic society, by definition, a dissatisfaction of a significant part of the population will result in a replacement of the government, if the number of the discontented is large enough. The most obvious examples I can come up with are the Great Depression in United States in the 30’s and the economic crisis in Argentina (1999-2002). The first led to a crushing defeat of the Republican president Hoover by the Democratic candidate Roosevelt in the elections of 1932. The second made the president De La Rua resign. I still believe that strong philanthropic activities can delay the replacement of failing rulers.
Secondly, the welfare of a society is a public good (a product which many enjoy, no matter who is the producer). Therefore, in order to determine the optimal amount of social welfare, it must be provided by the entire public (or the government as its representative) and not by few contributors with their own agenda. You’re right about the existence of partial competition between the non-profit organizations; however there are still millions of them which make every one of them pretty limited. Along with the fact that the government has more than just funding at its disposal but also legislative measures, in my opinion, it’s still a more suitable candidate to provide a public good such as social welfare.
Thirdly, I totally agree with you that the philanthropy may be used by some wealthy people to promote their own interests. I intend to dedicate a separate post to this matter. In brief, my answer to your question would be that the problem is in both. As long as philanthropy exists it will involve wealthy people with their own interests. If it was based on all the public, it wouldn’t be philanthropy but a tax enforced by the social norms rather than by the law (which is also a kind of social norm).
Fourthly, I believe that the government intervention needed only to provide public goods, which is true in case of welfare. The effect of passing this responsibility to philanthropy can be seen in a comparison between the Scandinavian countries and the United States. Event tough all those nations are very wealthy, we can observe two cardinally different approaches to welfare. On the one hand, the United States is, by far, the nation with the highest private philanthropy as a percentage of GDP (about 1.7%) while it is negligible among the Scandinavians. On the other hand, the welfare expenditure as a percentage of GDP, in Sweden, Norway, Finland and Denmark is twice higher than in United States. If we examine the outcome of these approaches, we can see that the Scandinavian countries are much better welfare states than the United States. The relative poverty rate in United States is four times higher than in the Scandinavian countries (about 15% compared with about 3.5%).
I certainly agree with you that there is a connection between philanthropy and inequality. It’s a strong motivation for the rich to maintain the status quo, and keep the poor from changing the current order which would lead to a more equal distribution of fortune. I will keep posting about other aspects of this subject, which some of them you’ve mentioned. Thanks for your insight and I hope to hear your opinion in the future.
Alex
Hi Roma,
Thanks for the kind words.
You’ve recognized precisely the issue that I intend to discuss in my next post. Why would someone who wishes to share his fortune with the unfortunate be prevented from doing so, especially if he enjoys it? Isn’t it better than nothing? I say NO, and I will explain it in my next post.
About the Zimbabwe-Botswana comparison, you’re just making my point stronger. We’re talking about two neighbor countries both with pretty similar harsh conditions but with very different leaderships. One manages to maintain a prospering economy (GDP of 16,500$) while the other brought the economy to a disaster (GDP of 200$ and inflation of 100,000%). The conclusion is that Zimbabwe’s government is to be blamed, no matter how good their intentions are. My point is that with the foreign aid the chances of replacing the failing leaders are much lower. As long as the people receive help, even if it is just enough to survive, they will be much more hesitative in standing up to the corrupted rulers.
Alex