Why Philanthropy Matters: How the Wealthy Give, and What It Will Mean for Our Economic Well-Being

Zoltan J. Acs

272 pages, Princeton University Press, 2013

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Philanthropy, which translates as “love of humanity,” is often presumed to be “good” by definition. It is also widely understood to be redistributive because it takes money from the wealthy and uses that money to improve conditions for those who are less fortunate. But what if philanthropy does not diminish inequality? What if it increases and further institutionalizes the gap between the rich and the poor? Would we still view philanthropy as being unconditionally good?

Consider this finding by noted economist Emmanuel Saez: Between 1993 and 2010, the average real incomes of Americans in the bottom 99 percent of the income scale increased by only 6.4 percent while members of the top 1 percent saw their incomes grow by 58 percent. “This implies that top 1 percent incomes captured slightly more than half of the overall economic growth of real incomes per family over [that] period,” Saez notes. (Italics added.) Even former US Federal Reserve Chairman Alan Greenspan, a devotee of the libertarian philosopher and novelist Ayn Rand, expressed concern that the United States is developing two distinct and diverging economies.

What is the relationship between philanthropy and inequality? Economist Kevin Laskowski has argued that private foundations are often primarily investment companies that use some of their excess cash flow for charitable purposes. The increase in foundation giving between the 1970s and 2000s, Laskowski has shown, correlates with an increase in the total income share of the top 1 percent. Correlation is not causation, of course. I doubt that foundation giving caused the increase in the share of income that went to the top 1 percent. It is much more likely that other factors have driven both developments. Still, the association between increased economic inequality and increased foundation giving does undermine the assumption that philanthropy reduces inequality.

Complicating the question of what role philanthropy plays in inequality is the emergence of what is sometimes called “the new philanthropy,” also known as “philanthrocapitalism” or “mega-philanthropy.” At the risk of oversimplification, I will distinguish between traditional philanthropy—giving money to museums, hospitals, universities, and other established institutions—from the new philanthropy, which focuses on using extraordinary amounts of private money to fund efforts such as the training of school superintendents, the development of new agricultural practices, and the creation of new medical interventions. In the new philanthropy model, donors then try to leverage vast sums of public money and, in some cases, to create profit for affiliated businesses or for hybrid profit-nonprofit organizations.

In Why Philanthropy Matters: How the Wealthy Give, and What It Will Mean for Our Economic Well-Being, Zoltan J. Acs argues that philanthropy will be the salvation of capitalism. Acs, a professor of economics at George Mason University, argues that as Bill Gates, Warren Buffett, Sam Walton, Eli Broad, and many other new philanthropists put their money behind innovative ideas, they open a space for new talent to rise.

With this book, Acs contributes a distinctive, if at times flawed, perspective to the ongoing debate about the importance of philanthropy in our society. Writers such as Matthew Bishop, Michael Edwards, Chrystia Freeland, Steven H. Goldberg, Michael Green, and Paul Schervish have all been important voices in this conversation, and that conversation needs to continue and expand. Philanthropy will be a central part of the new economy. What roles will it play? Whose interests will it serve? Will it increase or decrease inequality? In what ways can the new philanthropy be conducted to preserve freedom and democracy as well as to encourage innovation and economic growth?

At the heart of the book is an argument that deserves our serious attention: that philanthropy by its nature reduces inequality and promotes social mobility through social disruption. Acs writes: “What is required to sustain American-style capitalism into the 21st century? A global philanthropic revolution! Through philanthropy, the unequal distribution of wealth can be channeled into creating opportunity for future generations through creating knowledge today.” The new philanthropy, Acs argues, promotes the kind of “creative destruction”—the evolutionary chaos—that Joseph Schumpeter famously attributed to capitalism.

I disagree. Acs’s narrative ignores the specific social context in which the great wealth gap is being generated. Consider, for example, how financial regulation and tax codes have changed over time. The Glass-Steagall Act of 1933, which regulated commercial banking in the United States, coincided with the beginning of a period of relatively low inequality and considerable economic growth. In the 1980s, the financial industry was largely deregulated. Then came the Gramm-Leach-Bliley Act of 1999, which largely repealed Glass-Steagall, and by the 2000s inequality was soaring. Today there are heated debates over the fairness of the American system of taxation, notably including the provision that allows a deduction for charitable contributions. None of this proves that financial regulation or changing the tax code will reduce inequality, but it does suggest that Acs’s focus on “creative chaos” lacks historical grounding and academic rigor.

Why Philanthropy Matters would not have to be a scholarly book to be a good book. Bill Clinton’s Giving (2007), Matthew Bishop and Michael Green’s Philanthrocapitalism: How the Rich Can Change the World (2008), and Antony Bugg-Levine and Jed Emerson’s Impact Investing: Transforming How We Make Money While Making a Difference (2011) are all profoundly smart and well researched, and they make clear cases for their positions. None of these writers positions himself as an academic scholar. Acs, in contrast, places his academic credentials front and center. He starts with the premise that philanthropy decreases inequality, and he concludes with the same argument—despite having offered virtually no empirical evidence for that argument in the interim.

The new philanthropy is built on the premise that the very, very wealthy—not just the top 1 percent, but the top .01 percent—are uniquely positioned to create social change by using their resources and networks to leverage public money and to create new infrastructure for public-policy design and delivery. But what are the pros and cons of a system built on that kind of largesse? How might an approach to philanthropy that places policymaking powers in the hands of an elite few affect democracy? If the government collects taxes to fund programs selected by megaphilanthropists, will it lose its legitimacy? At a more pragmatic level, what happens if these philanthropists are wrong? What if they select policies that don’t work (as Bill Gates arguably did with his small-schools initiative)? Are they accountable to anyone for those choices? And what happens to important programs that lose favor with the very rich?