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Tuesday, June 8, 2010

Give Up on “Giving Back”

Gratitude or guilt?

I usually cringe when I hear someone who got rich from business say he feels an obligation to “give back to society.” Bill Gates, the founder and chairman of Microsoft, is perhaps an example of this attitude (here and here). It’s not his philanthropy that I object to — what he’s doing in this area is brilliant — but the reasons he gives for it, as though his wealth is in some way undeserved.

Most readers of The Freeman understand that in a free society people trade because they expect to benefit from it. So if Bill Gates made billions of dollars by offering goods that people find more valuable than what they pay, the principle of reciprocity is satisfied when those customers hand over their cash and the company hands over the product. If the terms of the trade have all been fulfilled, there is nothing more that Gates owes the customer, and vice versa. There is nothing to “give back.”

And of course it really annoys me when politicos try to lay that obligation onto others, to justify, for example, increasing taxes on families earning more than X dollars.

What Can It Mean?

I have wondered, however, whether I could get past my gut reaction to see if there is a sensible way to interpret this notion of “giving back.” While there are certainly moral or religious grounds on which to discuss this idea, it might be best to use economic concepts (something I should know a little more about) to do this. I think I’ve found one or possible two ways.

As I see it, “giving back” implies that something was taken, so the taker ought to return it to the rightful owner. If I borrow my neighbor’s lawn mower, the norm of reciprocity says that I should return it, perhaps with a basket of fresh cucumbers from my garden. If I steal my neighbor’s lawn mower, justice also dictates that I should return it, as well as perhaps suffer some kind of penalty. It’s actions of the first kind, when something is used in the process of generating value (for example, a handsome lawn), that I would like to focus on here.

Getting “Filthy” Rich

If in the process of creating his wealth Gates imposed a cost on nonconsenting third parties – say, by emitting pollutants into the air that damages neighboring property – he is benefiting from using the air as a dumping without having to pay for it. To the degree that his wealth comes from not having to pay these costs, what economists call “negative externalities,” the principle of reciprocity would seem to dictate that he compensate the damaged property owners for what he took from them. “Giving back” in this case makes sense to me.

A related case is that of Alfred Nobel, inventor of dynamite. It seems that remorse over the terrible consequences of his invention led him to establish the Peace Prize that bears his name as a way to make up for the destruction it had been and would be responsible for.

In both cases the entrepreneur wants to give back to society in order to repair third-party damages that a particular product did or will generate.

Gratitude Versus Guilt

An entrepreneur like Bill Gates doesn’t operate in a vacuum. First, there are the various formal contractual relations between an entrepreneur and laborers, producers, capitalists, and other resource owners. But if these involve voluntary exchanges, as with the trade between him and his customers, there are no grounds for giving back.

Moreover, he needs to operate in the proper political context, which includes the rule of law, freedom of association and contract, and limited government, for which presumably he pays taxes and fees. Again, no need for a give-back.

But production also takes place in a social context, and that needs to be taken into account.

In a previous article I mentioned Nathan Glazer’s concept of the “fine structure of society.” One of the best examples of this, which is sometimes called “social capital,” is the safety and security that emerges in a thriving community. (Some writers treat safety and security itself as social capital, others identify the norms of behavior that generate them as social capital, but for our purposes here it doesn’t matter.) If the general public feels unsafe or insecure when using streets and other areas where they expect to encounter strangers, business will suffer.

Now it’s the peculiar nature of social capital that using it contributes, directly or indirectly, to its value to others. If you form a connection to another person or network it can also benefit people you don’t know who may later use that connection to enhance their own work: “Yes, I heard Gates did good work once for Ikeda.” The entire network thus becomes more valuable and there’s no reduction in its value – indeed, quite the opposite. Although something was “taken,” there’s nothing that has to be “given back.”

Still, a successful entrepreneur who had relied on the social capital of the locale or community where he began his business – the valuable connections and contacts he made there – may later wish to “repay” that community in some way. But here he is motivated by gratitude rather than guilt. Philanthropy has been a hallmark of free markets, in which unprecedented numbers of ordinary people, because of the wealth they have created, have been able to make donations that in pre-capitalist times were the privilege of the very few.

The entrepreneur might build a much-needed school, or support the establishment of an arts center, or subsidize an artist or budding entrepreneur or scholar, all of which have the potential to make connections that promote safety and strengthen social networks and result in the emergence of successful individuals such as herself in the future.

So if it’s negative externalities, giving back makes sense. But if it’s gratitude rather than (misplaced) guilt we’re talking about, let’s please stop calling it giving “back.”

If you form a connection to another person or network it can also benefit people you don’t know who may later use that connection to enhance their own work: “Yes, someone I know says Gates does good work.”

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.