Freeman

ARTICLE

Corporate Giving: The Case for Enlightened Self-Interest

NOVEMBER 01, 1991 by EDWARD CRANE

Mr. Crane is president of the Cato Institute in Washington, D.C.

Lenin once said the capitalists will one day sell the rope used to hang them. In this area, at least, he has proven to be disturbingly close to the mark, with the only modification being that many capitalists seem determined to give the rope away. A truly curious aspect of American corporate philanthropy has been the tendency to give corporate profits to groups openly hostile to profits in general and corporations in particular.

A recent survey by the Capital Research Center in Washington, D.C., found that the 146 corporations responding (out of the Forbes 250) gave more than twice the funding to generally anti-capitalist organizations than they did to groups supportive of the free market system. There is reason to believe that the giving pattern of those companies not responding to the survey is on the whole even more skewed toward the economic and environmental left.

This trend in corporate giving is disturbing on two accounts. First, it is not in the long-term interests of shareholders or employees. Second, it is an abrogation of a broader societal obligation corporations have, as centerpieces of the free enterprise system, to promote understanding of and support for market capitalism. Americans have a much higher level of respect for the business community than most businessmen realize.

The typical senior business executive who is expected to address issues of public concern is often confronted by anti-corporate activists, a skeptical (if not hostile) media, and government bureaucrats who derive great psychic income from the arbitrary power they hold over corporations. Perhaps it is therefore understandable why so many of them assume a defensive, almost apologetic posture when it comes to speaking out. The truth is, however, that the vast majority of Americans have few axes to grind with corporations. They respect competence, innovation, productivity, and yes, profits. If many detractors of corporate America are motivated by envy, most Americans take genuine pleasure in the legitimate achievements of others, including corporations.

The point is, simply, that senior executives with the courage to speak out in defense of capitalism and the role their corporation plays in our society would find a much stronger positive response than they might imagine. Corporate executives, because of the somewhat hostile public environment they find themselves in, tend not to recognize the moral suasion they possess. And the moral argument for capitalism is made all the more compelling because it is a system based on voluntary exchange, rather than compulsion. Capitalism is a moral system.

It is important to recognize that the revolutions that have occurred in Eastern Europe are less revolts against Communism—a system that has been intellectually bankrupt for decades—than they are revolts against government control of people’s lives, per se. People risked their lives for the right to be free to choose, as Milton Friedman put it. They want to choose where they live, what they read, at which jobs they will work, and for how much money. The victory of capitalism over socialism is more fundamentally a victory of freedom over coercion.

Claiming the Moral High Ground

The very fact that choice (and private property) is at the heart of capitalism provides the business executive with a clear moral high ground, if only he would choose to employ it. Behind the moral pos-turing of capitalist detractors invariably lie schemes to limit individual choice—to direct the workings of the marketplace by bureaucratic edict and coercive redistribution. The chipping away at our free enterprise system by critics of business should be dealt with through a principled counter-assault rather than tepid protestations and financial handouts that only serve to embolden the adversary.

The lack of a vigorous, principled business-community stand in support of the free market system has been a significant factor in the ominous growth of government during much of this century. The business community should, in fact, support limited government in general—not just in the economic realm—because it is the principle of limited government that ultimately protects market capitalism.

More than 200 years ago Thomas Jefferson wrote that “The natural progress of things is for liberty to yield and for government to gain ground.” Certainly events in the 20th century should remind us of the wisdom of Jefferson’s admonition. In the early part of this century, government spending at all levels—Federal, state, and local—amounted to just 10 percent of National Income. By 1950 the percentage had risen to 26 percent. Today, the total of all levels of government spending has reached 43 percent of National Income. The greater the amount of private sector money spent by the public sector, the less efficient and productive will be the market system, and the less competitive American industry will be in the international marketplace.

The Systemic Nature of Government Growth

One of the great dangers of the present approach to public policy undertaken by the business community is that it fails to recognize government’s encroachment on the private sector as a systemic problem, the “natural progress of things” that Jefferson warned us of.

The literature from distinguished free-market economists on the growth of government is extensive. To begin with, there is the Public Choice School, led by Nobel laureate James Buchanan, which makes a persuasive case that bureaucrats are not the disinterested public servants our high-school civics texts might have led us to believe. Like the rest of us, bureaucrats are motivated in good measure by self-interest. Indeed, the bureaucratic imperative is constantly to generate rationalizations for expanding existing government programs, if not creating new ones.

Another Nobel laureate, Milton Friedman, has written about the “tyranny of the status quo.” Friedman describes the process whereby a bill will be debated for years, even decades, only to pass in Congress by a single vote. From that point forward, however, the only debate is over whether the budget should be increased by 5 percent or 15 percent. The new government program is protected by what Friedman refers to as the “Iron Triangle”—the direct beneficiaries of the program, the Congressional oversight committee, and the Federal agency charged with administering it. Billions of dollars are spent annually by the federal government on consultants (whose existence depends on the government) to determine the value of (read: justify) these programs. To suggest that the program has proven more expensive than its proponents had claimed it would, or to challenge the efficacy of the program once it is in place, is considered somewhat ill-mannered inside the Beltway.

There are other powerful reasons for the growth of government, also unrelated to the value of that growth. For instance, programs typically dispense concentrated benefits while costs are diffuse. When that is not the case, as in the recent catastrophic health care bill (directly tied to increased taxes on the elderly), the chances of stopping the growth of the state are greatly enhanced. Additionally, Congress has, through incumbent-protection legislation, created an institution virtually impervious to voter discipline. The “culture of spending” that exists inside the Beltway and in the state capitals around the nation tends to distort the good sense of even the best-intentioned legislators.

More Than an Academic Exercise

Determining the causes of government growth and the commensurate threat to the viability of the free enterprise system is more than just an academic exercise. If a business is going to succeed it must not only have appropriate management systems in place, but also a political environment that is hospitable to capitalism and conducive to economic growth.

The purpose of this paper is not to develop an exhaustive case against big government. It is to outline the most effective approach to corporate giving consistent with the interests of shareholders, employees, and consumers. But it would be shortsighted to ignore the systemic failures of government in areas outside of business regulation and taxation. Those failures are directly relevant to the destructiveness of government intervention in the marketplace.

Business in America has, for the most part, assumed a rather myopic approach to public policy, lobbying for changes in this bill, influencing the mark-up of that bill, as often asking for government protection and favors as fighting off unwanted taxes and regulations. Policy-research institutes and public interest groups are more likely to receive funding from corporate America if they are on the pro-government intervention side of this fray.

This is a serious strategic error. As former Secretary of the Treasury William E. Simon wrote in The Wall Street Journal two years ago, “we in the American business community have a right and a responsibility to steer our gifts to institutions committed to maintaining freedom.”

Moreover, this myopic approach to public policy is dated and unsophisticated. In the past decade American business has revolutionized its approach to management techniques. Faced with the reality of a global marketplace, corporations that had survived for decades employing rigid, topdown management systems have come to recognize that employee involvement and feedback are essential to operating at competitive levels of productivity. In a like manner, the corporate world is ready for a revolution in its 1960s-style approach to corporate giving.

A History of Government Failure

The failure of government runs the gamut of issues. For all practical purposes government has a monopoly in the field of education. Over the past three decades real spending per pupil has tripled while test scores have steadily declined. Yet the government education bureaucracy from the Federal to the local level argues that the problem is a lack of funds.

The Social Security system, sold as a safety net for the indigent elderly, now provides the majority of retirement income for a majority of Americans. As a pay-as-you-go system, it has deprived the economy of true savings, and now offers individuals entering the work force a rate of return upon retirement that we estimate to range from -2 percent to +2 percent. And that assumes a 26 percent combined payroll tax early in the next century. Added to this is the remarkable fact that, unlike a private retirement plan, individuals don’t own the corpus of money paid into Social Security over their working lives.

In the area of welfare, where the state has assumed a massively larger role since the Great Society programs of the Sixties, more money has led directly to larger bureaucracies and more people on welfare. Charles Murray’s path-breaking book, Losing Ground: American Social Policy, 1950-1980, documents the self-defeating incentives government welfare programs have created, often severing what he calls the “tendrils of community” by displacing private charities and absolving capable individuals of any responsibility for their own lives.

The list of major government failures, if not endless, is nevertheless extensive. When one looks directly at government attempts to regulate business the results are much the same. We estimate that deregulation of trucking has saved consumers on the order of $60 billion a year, not just in lower shipping rates but even more importantly in the ability of firms to develop just-in-time inventory systems: Airline deregulation has allowed millions more Americans every year to fly at lower rates. What problems of congestion remain are primarily the result of the failure to privatize the air traffic control system and the airports themselves, which have not responded to increased traffic as a market entity would, by increasing capacity.

Perhaps the prime example of government failure in the business world is the savings and loan debacle. S&Ls have always been something of a creature of government—not a market creation. When the yield curve moved sharply negative in the 1970s, deregulation of investments and interest rates became essential. Unfortunately, Congress not only failed to deregulate Federal deposit insurance, it actually increased coverage to make it feasible for individuals and institutions to Federally guarantee tens of millions of dollars of deposits. Without depositor discipline, some $500 billion of bad investments were made—to be underwritten by the American taxpayer.

In the face of this remarkably unimpressive record of government involvement in society—greatly transcending the limited role envisioned by the Founders—the business community in America has allowed itself to be thoroughly cowed by the opponents of capitalism. Instead of standing up to its opponents, the business community has attempted to appease them at every turn. Instead of proclaiming the moral superiority of capitalism, it has conceded the moral high ground to the likes of a Ralph Nader. Consider Nader’s vision for America as revealed in a recent magazine article:

“‘How’s your hand?’ Rosenfield asks. Nader looks at the hand he scalded in a sink a few days back in Sacramento.

“‘Better,’ Nader says. ‘That hot water was almost boiling. The government hasn’t set temperature limits in Sacramento, so that’s what happens.’”

There is a point that the business community seems not to grasp. If the problem with government is systemic, then orienting one’s defense to protecting the status quo is a mistake. For the status quo is not a given set of programs. It is, rather, a process. And that process is leading inexorably to ever greater government involvement. It is leading to a society in which Americans will have the benevolent hand of government determine the temperature of the hot water in their hotel rooms.

Yet how often do corporate representatives and business lobbyists operate on the assumption that the latest outrage they’ve caved in to in order to appease anti-capitalist activists must surely be all they really want? No. They want to determine the temperature of the water in your hotel room. The danger of government is systemic. It cannot be fought, at least not successfully, in the long run, on an ad hoc, piecemeal, and reactive basis. It most assuredly cannot be fought by letting the opponents of free enterprise determine the agenda for the debate.

“Politically Correct” Intimidation

To be blunt, the Sixties approach to giving placed corporate America (in general—there are several commendable exceptions to the rule) in the vanguard of what has only recently been dubbed “politically correct” thinking. A piece in the New York Times last fall explained that “p.c.,” as it is often referred to, reflects “a large body of belief in academia and elsewhere that a cluster of opinions . . . defines a kind of ‘correct’ attitude toward the problems of the world, a sort of unofficial ideology . . . .” The issues in the cluster include ecology, culture, and foreign policy. The article goes on to note the “Marxist” influence on some p.c. thinking and that “The cluster of politically correct ideas includes a powerful environmentalism” and an anti-capitalist mentality.

This whole phenomenon, the article concludes encouragingly, is being challenged by intellectuals willing to stand up to the left: “But more than an earnest expression of belief, ‘politically correct’ has become a sarcastic jibe used by those conservatives and classical liberals alike, to describe what they see as a growing intolerance, a closing of debate, a pressure to conform to a radical program or risk being accused of . . . thought crimes . . . .” To the list of politically correct ideas one could confidently add the views that corporations are “exploitative” and that profits are “obscene.”

It should be noted here that without some kind of mental serf-flagellation and deep-seated guilt over being a part of Western civilization, one is not considered to have seen the light. Corporate America has been an especially sensitive target for the p.c. enforcers in our society, visibly wincing when accused of being out of step. Funds to support p.c. causes, including anti-business agitation, have been quickly forthcoming from the corporate community for the past 30 years.

The Politics of Environmentalism

The collapse of the intellectual case for socialism and the planned economy has led many anti-capitalist activists into a new camp: the environmental movement. To be sure, concern over a clean and healthy environment is something most Americans share. Corporate America has not always acted responsibly with respect to the environment. Advocates of the free market should support the “polluter pays” principle of protecting the environment. But there must be sensible, rational standards for what constitutes unacceptable levels of pollution.

The environmental movement has, for the most part, been taken over by individuals with a political agenda that is considerably more ambitious than merely cleaning up the environment. What leftist environmentalists recognize that most Americans don’t think about is the fact that economic activity is inherently “polluting.” It necessarily entails the transformation of scarce resources into higher-valued objects and then into some form of “refuse.” Thus, in the name of eliminating pollution, nearly all human action could be subject to regulation. But to allow the environmental movement to micro-manage levels of pollution and the environmental consequences of economic activity is to invite central economic planning via the back door.

It should not be considered alarmist to suggest that many leaders of the environmental movement have just such an agenda in mind. Indeed, their philosophy transcends an anti-business posture and at times seems aimed squarely at the very idea of improving the human condition.

During the brief window when there was heightened optimism over the viability of “cold fusion,” the Los Angeles Times interviewed several leading environmentalists to get their views on the subject. One might have thought that the prospect of dean, inexpensive energy would be cause for an environmentalist celebration. But one would have been wrong. Paul Ehrlich said viable cold fusion would be “like giving a machine gun to an idiot child.” Jeremy Rifkin said, “It’s the worst thing that could happen to our planet.” Barry Commoner, who once ran for President on a socialist platform, offered the helpful advice that we not convert our plant and equipment over to cold fusion until it is proven to work. Otherwise, he said, it would be

“like starting to build a bridge over a river without knowing where the other side is.” Luckily, American industry did not switch to cold fusion without first finding out if it worked.

Our point is that accommodating the environmental movement is an endless task. There is an anti-progress (anti-human?), almost Luddite mentality behind many of the demands from this group, as the above quotes from their leadership reveal. The Earth Day slogan was “We changed the world. Now it’s time to change it back.” From a capitalist standpoint, there is quite literally no satisfying this movement.

The accommodating approach of business to the Clean Air Act of 1990 illustrates the dangers involved here. The Act imposes an enormous burden on our economy, which we estimate to be in the range of $30 to $40 billion a year. Further, it imposes a bureaucratic command and control system on business that greatly inhibits the flexibility industry needs to stay competitive. And all this is done in the name of such problematic goals as reducing CO2 in the air in order to solve an acid rain problem that the best scientific evidence says doesn’t even exist. 60 Minutes, a television program hardly biased in favor of business, devoted a segment to the absurd cost/benefit ratio of the Clean Air Act. Yet the business community, rather than fighting the Act on a fundamental level, opted to accept the major premise and hustle to patch in damage-control nuances.

An even more recent example of capitulation of a major business to disingenuous lobbying by an environmental group is the McDonald’s Corporation’s agreement to cease using foam packaging at the behest of the Environmental Defense Fund. The fact that McDonald’s was on the verge of a major recycling project for its foam containers or, more important, that total worldwide human production of CFCs (the offending chemical) is less than 1/400 of the chlorine released into the atmosphere by sea water evaporation made no difference. The politically correct position won an easy victory.

Indeed, solid-waste management and “wasteful” product packaging are among the latest ratio-nalizations for regulating business. State and local laws are proliferating. Congress has worked on a re-authorization of the Resource Conservation and Recovery Act, which will be horrendously expensive and without tangible benefit, and the Environmental Protection Agency has proposed expensive new regulations on local landfills. Once again, corporations appear all too ready to concede the left’s premises in the hope of winning some marginal compromises. It will not work. An examination of the premises makes this clear.

The prejudice against disposable product packaging is actually a prejudice against consumption. The (false) claim that Americans waste too much masks a belief that Americans consume too much. The prejudice against consumption is itself based on the fallacy that resources are finite, as well as on a fundamental belief that human action disturbs the natural world. Compromise will only whet the left’s appetite. If these premises go unchallenged, we will move inexorably toward ever wider recycling regulations, packaging restrictions, deposit policies, and even product bans. This would be a major step toward the politicization of business decision-making.

All human action involves trade-offs, and the very purpose of a market economy is to make possible intelligent trading off. It does so through the price system, which encapsulates socially dispersed knowledge about supply and demand and puts it into a form usable by all participants in the market. The anti-market mentality is characterized by a refusal to believe that trade-offs are unavoidable.

For example, recycling is presented as a costless method of reducing waste and saving resources. No consideration is given to the resources used in the recycling process itself. The handling of separated materials requires more vehicles using more fuel creating more auto emissions. The production of foam packaging, which was devised in response to the anti-paper, save-a-tree lobby, is more energy efficient and less polluting than other forms of packaging. According to research, in the United States, where there is said to be more packaging “wasted,” there is less food thrown away than in countries where less packaging is used. Finally, recycling costs consumers time. Why should the environmental movement have the power to decide that consumers’ time is worth less than they think it is? These trade-off considerations won’t be found in the literature of the recyclists.

Government is incapable of making intelligent decisions about what kind of packaging is best; it simply doesn’t have the necessary information. The factors that go into a market-based decision include the relative scarcity of the competing materials and the preferences of consumers. To insure that the price system faithfully reflects real conditions, it is necessary that all costs be “internalized”; that is, every scarce resource must carry a market price.

Thus, regarding packaging, it is essential that landfill services and other disposal costs not be subsidized by government at any level. Such a subsidy distorts decision-making toward more packaging because consumers don’t pay the full costs of using it. In contrast, government efforts to increase the costs of using packaging will result in other, unintended losses (such as food, as noted above). If consumers must pay the true costs of disposal, they will make packaging decisions consistent with their values, with their means, and, without intending it, with what economists call “social utility.” We thus can say that the free market promotes ratio-hal conservation.

As noted, the corporate response on this issue to date has not been encouraging. It has been ad hoc, material—specific, and fragmented. The very least American business could do to protect the remnants of free enterprise that we enjoy would be to move their foundation contributions from those that seek greater control over people’s economic activities to those that will develop and propagate the kind of arguments outlined above.

A Principled Approach to Public Affairs

If the free enterprise system is to survive in the United States, it is imperative that the business community develop an effective strategy for saving it. Without a principled counteroffensive against those forces determined to destroy it, the corporation in America has a less promising future than the spotted owl. The environmental movement, egalitarian ideologues, and high-tax redistributionists won’t lose sight of their goals simply because your corporation has made an accommodation to their latest demands.

In order to seize the moral high ground, however, the first thing the business community must do is stop using government to gain a temporary competitive advantage in the marketplace. Doing so not only hurts competitors, it also imposes costs on consumers. Part of the new enlightenment of corporate America, in addition to employee-oriented management, is a recognition that the consumer (at whatever level of production) must be treated with respect. In addition, it is difficult if not impossible to maintain an entrepreneurial spirit in the workplace while diverting corporate resources to manipulating the coercive levers of government to gain competitive advantage. Is the company’s goal to make the best product at the lowest price, or to unfairly restrict competition and consumers? Corporate America cannot have it both ways.

As Paul Weaver wrote in his Cato Institute/ Simon and Schuster book The Suicidal Corporation; How Big Business Fails America:


The effort to grab competitive advantage from the political process doesn’t work any more, for the same reason that protectionism doesn’t work. The effort to beggar one’s neighbor soon becomes apparent to the neighbor, and he proceeds to do something about it, Fifty years ago and more, business’s efforts in the U.S. to lobby government for advantages at the expense of many parts of the population stimulated farmers, workers, consumers, and others to organize and lobby for protection and subsidies of their own. Over the years, it worked all too well. Sooner or later the policy makers got around to giving at least something to nearly everyone. The heavy, unpredictable, economically harmful burden that government puts on American business today is the end result, direct and indirect, of a century of busi ness lobbying.

Under the pressures of a competitive global economy, American executives are beginning to face up to this shocking and disillusioning truth. As they do, I believe—I hope—that they will turn away from the blind, manipulative, self-destructive selfishness that is corporatism and begin to embrace the humane system of enlightened self-interest and voluntary cooperation under law that some call capitalism.

To achieve that goal, corporate representatives must be directed to take principled stands in support of an open-market system when testifying before Congress or lobbying in its halls. Certainly they should stop their practice of developing such close relationships with Congressmen and their staffs that they end up lobbying the corporation on behalf of government.

In general, one of the most highly leveraged means of influencing the public policy debate isthrough support of policy-research institutes and public interest advocacy groups. Regrettably, as noted, most corporate support for such organizations is perversely invested. There are a good number of important, efficient organizations supporting capitalism and limited government that are deserving of corporate support—much more so than many groups that receive much more. We recommend the following guidelines for corporate support of policy research and advocacy groups:

1. The organization should be openly supportive of free enterprise and limited government.

2. The organization should be non-polemical and nonpartisan.

3. Its product should be professionally packaged and marketed.

4. Avoid endowed organizations unless they appear to be utilizing their income stream from the endowment efficiently.

5. The policy approach should be innovative, entrepreneurial, and designed to move the debate off dead center. Avoid supporting groups that spend a high percentage of their resources defending the status quo.

6. Do not support organizations that accept government funds.

7. The organization should have a high level of output and visibility relative to its resources.

In his preface to Patterns of Corporate Philanthropy, former Delaware Governor Pete du Pont wrote:

If the public policy program requesting funds is designed to change things at the margin, by five or ten percent, forget it . . . . Become the entrepreneurs your companies’ founders once were. Look for exciting new ideas, bold new solutions, interesting new experiments to be tried, and give them a chance, because that is where America’s future lies.

During the past decade, America’s corporations have displayed courage in managing their own affairs. While government has relied ever more on an outdated model of bureaucracy, corporations have adapted to the new realities of the information age by cutting bureaucracy and relying ever more on market forces to dictate decisions. Now, as they look at their public policy philanthropy, corporations need to take a page from their own lesson books and promote a new approach to public policy, an approach that seems radical only by the standards of American government in the 1990s.

In an op-ed last year in The Wall Street Journal entitled “Socialism is Dead; Leviathan Lives,” James Buchanan wrote that “The death throes of socialism should not be allowed to distract attention from the continuing necessity to prevent the overreaching of the state-as-Leviathan, which becomes all the more dangerous because it does not depend on an ideology to give it focus.” Consistent, principled opposition to Leviathan on the part of American business can make an enormous difference. Support of free market public policy research groups should be a major part of the principled opposition.

The distinguished University of Pennsylvania historian Alan C. Kors, in discussing the decline in importance of American universities, said in a recent interview, “But what’s coming out of certain think tanks and certain foundations and certain institutes is very exciting and much more central to the real debates about the problems of American society.” It is time for corporate America to decide which side of the debate it supports. []

Ideas On Liberty

Democracy and Diversity

Some corporations have defended their grants to anti-business activists on the grounds that such grants supposedly strengthen the democratic process by encouraging “diversity.” The reasoning seems to be that by supporting a wide range of opinion and thought in policy research and advocacy, the “best” ideas in the current policy arena will prevail. In fact, however, one of the principal reasons for this study is that diversity is the last thing being encouraged.

The federal government has provided hundreds of millions of dollars to nonprofit advocacy organizations, at least 98 percent of which promote inter-ventionist economic policies, in addition to which government funding of public policy research far outstrips private, corporate funding and is biased heavily toward the left. Government agencies fund policy research that calls for a more activist government, intellectual support for which is obviously conducive to the larger budgets they typically seek. Government’s predominant role in funding academic public policy research is an important reason why this research—and academic opinion in general—is so heavily biased in favor of state intervention.

Thus, the overall funding of public affairs organizations and of public policy research is already grossly unbalanced in favor of those who espouse inter-ventionist economic policy. Additional corporate funding merely augments this imbalance, exacerbating an already overwhelming anti-free enterprise bias. It does not encourage balance and diversity; it stifles them.

—Thomas Dilorenzo

from Patterns of Corporate Philanthrophy, 1990

(Capital Research Center, 1612 K Street, NW, Suite 704

Washington, DC 20006)

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