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Wednesday, December 20, 2017

Creating Wealth Does More Good than Giving it Back

This view of charity is very counterproductive and leads to the general demonization of markets.

In this holiday season, we constantly see appeals to “give back.” Google indicates that there are 154 million mentions of “giving back.” While many of these are self-serving requests for contributions, a sampling of these listings indicates that giving to charity helps create a “purpose” in life. The assumption (sometimes explicit, but always implicit) is that what we do in the workplace to earn our money is somehow selfish, but we can help others by giving to charity.

“Giving Back”

I have no difficulty with charity; my wife and I donate to several charities, and this website is itself funded by donors. Moreover, someone with the wealth of Bill Gates or Warren Buffett or any of the other multi-billionaires (or even multimillionaires) cannot really spend all of their wealth, nor can their descendants. Once one becomes sufficiently wealthy, there is no option but to give money to charity. Moreover, Mr. Gates is apparently doing a commendable job through his Foundation of allocating his (and Mr. Buffett’s) contributions to the most efficient causes.

The social benefits of Gates Foundation pale in comparison to Microsoft and the computer revolution he helped to create.

But what is not socially useful is to call these or any other contributions “giving back.” The implication of the term is that the donor has taken something from society by earning money and that this has created an obligation to return something through charity.

This view of charity is very counterproductive and leads to the general demonization of markets which has become rife in our society. The important point is that the act of creating wealth is itself productive. In a market economy, the only way to become wealthy is to create some good or service that others find valuable. The wealthy may contribute to social good by giving to charity, but before that, they created even more social good through the very behaviors that created their wealth.

However much good Mr. Gates may do through his Foundation, the social benefits pale in comparison to his contribution through Microsoft and the computer revolution he helped to create. Mr. Gates was able to gather for himself only a small portion of these benefits; the rest went to all of us in the form of consumer surplus.  Mr. Buffett is a highly skilled investor, which means that he created huge amounts of social wealth by his contribution to the efficient allocation of capital. In an earlier era, John D. Rockefeller made his money by rationalizing the production and distribution of petroleum, first for kerosene lighting and then for automobiles.

The Ugly Side of Charity

Henry Ford (a vicious anti-Semite) nonetheless created huge amounts of social wealth (which also benefited Jews) by developing methods of producing automobiles at low cost. In fact, when Henry Ford “gave back” he did it in part by publishing an anti-Semitic newsletter, the Dearborn Independent, and contributing to other hateful causes. Hitler borrowed heavily from Ford’s newspaper.

Giving to charity is meritorious, but the benefits of charity are secondary.

This perhaps illustrates that in producing wealth it is necessary to benefit people by satisfying their desires, but in giving back it is possible to do harm as well as good, depending on the targets of giving. For example, the Koch Brothers and George Soros both give back by contributing large sums to political action, but it is impossible that they are both contributing to social good since the causes they advocate are diametrically opposed.

Giving to charity is meritorious, but the benefits of charity are secondary to the benefits created by earning the wealth that can be contributed.

Reprinted from Economics21.

  • Paul H. Rubin is a Research Fellow at The Independent Institute, the Samuel Candler Dobbs Professor of Economics at Emory University, and Editor in Chief of Managerial and Decision Economics.