Philanthropy and Inequality

The Cycle of American Money: Making it, Giving It Away, Re-making the World

Editors’ NoteWith the below post, Zoltan J. Acs continues HistPhil’s philanthropy & inequality forum. In the coming weeks, we’ll be moving on to our next forum on philanthropy & education. Please reach us if you’d like to contribute to either discussion.

The foundations of the American ethos and mythos are that we are all created equal and that we should have the liberty (or freedom) to pursue our goals and our potential. Reality is of course different; these foundations may not be honored in the breach and can be at times inconsistent with each other. Equality of opportunity suggests that we all have an equal chance to become unequal, since in a capitalist society, some get ahead and some fall behind. There are a variety of reasons for this separation, some having to do with family background, others with education, and still others with the nature of the returns from entrepreneurship. The winners get rich. Notable about the American experience, however, is that there is an unparalleled fluidity and mobility; there are always possibilities for individuals to create and exploit opportunities. This stands in sharp distinction from most other societies that have entrenched and reinforcing social classes and castes that prevent innovation and opportunity. Capitalism, by its nature, creates inequality. But American capitalism, by its nature, also generates opportunity.

The motor for change is entrepreneurship. Entrepreneurship guarantees an unequal outcome as the winners are rewarded. But it also provides the promise that others can also win, and the imbalance corrected—if not necessarily on a societal basis, certainly on an individual one. A lubricant is philanthropy. Only through giving—in particular, through the organized large-scale action of philanthropic foundations—is the imbalance inherent in capitalist growth corrected to create a self-sustaining process of wealth creation, social innovation, and opportunity. Thus develops a virtuous and self-sustaining cycle: Opportunity creates entrepreneurship; entrepreneurship creates wealth; and wealth reconstituted through philanthropy, in turn transforms society-creating opportunity. This is the inner dynamic of American capitalism and the source of its prosperity.

Entrepreneurs are vital to economic development not because they take risks (as we have seen recently in financial markets, risk-taking does not in itself necessarily correlate with the creation of social value), but rather because they create “new combinations” of economic activity by exploiting opportunities. Successful entrepreneurs are, by definition, builders of economic institutions—industrial and financial. The institutions they build may take the form of new companies, but, more broadly, they take the form of new approaches to providing goods and services to society. In other words, they innovate.

A fundamental outcome of successful entrepreneurship in a market economy is great wealth. Over the centuries, wave after wave of entrepreneurs exploited opportunities and created great wealth. In the 18th century, it was the great merchant traders and planters that exploited opportunities to create great wealth. In the 19th century, it was the industrialists and organization builders. And in the 20th century, it was the great innovators and technology entrepreneurs.

Great wealth, however, can and does generate resentment and responsibility, the former through income inequality, and the latter through the impetus to give back to society. Beginning with the Puritans who regarded excessive profit making at the expense of the community as both a crime and a sin, there is a long history of popular prejudice against ostentatious displays and enjoyment of riches. The luxury of doing good deeds was almost the only extravagance the American rich of the first half of the nineteenth century could indulge in with good conscience.

Philanthropy has never been the exclusive endeavor of the wealthy. Nonetheless, philanthropy has been transformed by the actions and ideas of a few wealthy and visionary men and women who steered it from charity to social transformation. Whereas charity seeks to alleviate misfortune, the new form of philanthropy sought to spread opportunity to more people by enabling them to achieve their potential by exploiting the possibilities inherent in the capitalist system.

A key, and unprecedented, means to that end was the creation of the philanthropic foundation. The quintessential foundation is uniquely privileged and distinct from charity or other non-profit organizations. Once established, it never again needs to raise funds. Its perpetual endowment allows it to design grant-making programs that reach to hundreds, even thousands, of other non-profit institutions. It has an extraordinary license to spend tax-protected wealth on projects and purposes of its choosing with only minimal accountability. Trustees and officers change guidelines, start new programs, and reallocate grant dollars on their own authority as long as grant making can be claimed to serve the public interest. The official ambition of the American foundation is to improve the world. But it only works because it is independent of both market forces and political pressures.

Only through giving—and, in particular, through the organized large-scale action of foundations—is the imbalance inherent in capitalist growth corrected to create a self-sustaining process of wealth creation, social innovation, and opportunity. American capitalism is a dynamic process by which opportunities create wealth that is in turn invested to create further opportunities. So the success of American capitalism—the standard by which we judge it—must turn not on its transient ability to generate growth, but rather on its sustained ability to generate opportunity.

Creating opportunity for future generations is about creating knowledge today, and the model to study is the Rockefeller Foundation. Rockefeller funds supported the eradication of hookworm in the American South, the discovery of the yellow fever vaccine, the development of penicillin, the establishment of public-health schools all over the world, the establishment of medical facilities in all parts of the world, and the creation and funding of great research centers such as the University of Chicago and Rockefeller University. In short, Rockefeller funds created new opportunities by eliminating impediments to individuals through improving health and enhancing education.

It is important to highlight how distinctive the American system is and how both entrepreneurship and philanthropy underpin its strengths. Some countries offer opportunities. Some countries allow you to create great wealth. Today in places like Indonesia and Russia that occasionally boast rapid rates of growth, institutionalized giving (other than to organized religion) is almost unknown. Yet without giving, entrepreneur-led growth in a capitalist economy can be a dead end. Why? Both theory and historical experience indicate that while markets may be efficient, they are not necessarily equitable. Opportunities draw forth-entrepreneurial effort, which concentrates wealth, which in turn may well act in its own service to perpetuate inequality. Inequality has always been with us, opportunity rarely so. Philanthropy provides an answer to the societal-directed question of what to do with wealth. When philanthropy is absent, development is slow, even when wealth among the few is great. Absent the cycle, America would resemble one of three alternative forms of political economy that long dominated human existence and continue to be prevalent even today: a socialist system, a corporatist system, or an oligarchy.

The story of American money, the cycle I outlined above, despite the unequal distribution of wealth, with its sharp balance between entrepreneurship and philanthropy, should be encouraged. Much of the new wealth created historically has been given back to the community to build institutions that have a positive feedback on future economic growth. Rather than constraining the rich through taxes, the rich can campaign for social change through the creation of opportunity. If we shut off the opportunities for wealthy individuals to give back their wealth, we will also shut off the creation of wealth, which has far greater consequences for an entrepreneurial society. And to fulfill the promise of America, we need more philanthropy, not less.

-Zoltan J. Acs

Zoltan J. Acs Ph.D is the former chief economist at the U.S. Small Business Administration and the Founder and President of The GEDI Institute, a Washington think tank. He is a Professorial Research Fellow at The London School of Economics and University Professor at George Mason University. He is the leading advocate of the importance of entrepreneurship for economic development. Along with Dr. Laszlo Szerb he is the founder of the Global Entrepreneurship and Development Index (GEDI) that is the first tool to track entrepreneurship and economic development in the global economy. He received the 2001 International Award for Entrepreneurship and Small Business Research, on behalf of The Swedish National Board for Industrial and Technical Development. His most recent book Why Philanthropy Matters: How the wealthy give, and what it means for our economic well-being, 2013 was published by Princeton University Press.

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