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Why entrepreneurs offer more to society when they create wealth than when they give it away

The Wall Street Journal yesterday published an editorial by Kimberly Dennis in which she made a point that isn't stressed enough today. She said essentially that giving to charity is a worthwhile and noble endeavor for wealthy entrepreneurs, but those entrepreneurs actually make a more significant and positive impact on society through their businesses because they create products that improve people's lives and provide jobs that allow people to earn their living. Ms. Dennis was talking specifically about Bill Gates' and Warren Buffett's Giving Pledge where 40 of America's wealthiest entrepreneurs pledged to give away the majority of their wealth to charity:

Successful entrepreneurs-turned-philanthropists typically say they feel a responsibility to "give back" to society. But "giving back" implies they have taken something. What, exactly, have they taken? Yes, they have amassed great sums of wealth. But that wealth is the reward they have earned for investing their time and talent in creating products and services that others value. They haven't taken from society, but rather enriched us in ways that were previously unimaginable.

Even if Mr. Gates makes progress in achieving his ambitious philanthropic objectives--eradicating disease, reducing global poverty, and improving educational quality--these accomplishments are unlikely to match what he achieved by giving us the amazing capability we literally have at our fingertips to access and spread information. The very doctors and scientists who may develop cures for diseases like malaria will rely on the tools Microsoft supplies to conduct their research. Had Mr. Gates decided to step down from his company and turn to philanthropy sooner than he did, they might have fewer such tools.

While businesses may do more for the public good than they're given credit for, philanthropies may do less. Think about it for a moment: Can you point to a single charitable accomplishment that has been as transformative as, say, the cell phone or the birth-control pill? To the contrary, the literature on philanthropy is riddled with examples of failure, including examples where philanthropic efforts have actually left intended beneficiaries worse off. The Gates Foundation has itself acknowledged that one of its premier initiatives--a 10-year, $2 billion project to reorganize high schools around the country into schools with fewer than 400 students--was a complete bust. Good for them for admitting it. In that, they are unusual. In the failure, they are not.

It's not that charities or philanthropic efforts don't offer value to society; of course they do. But if you want to liberate the largest number of people possible from poverty or lift the standards of living for the largest number of people possible, businesses that operate in the free market will do that faster and far more efficiently than charities or a government program. Why? It's simple, really. When Bill Gates, Warren Buffett, and the millions of other entrepreneurs around the nation started their businesses and worked to keep them as profitable as possible, they created jobs that provided paychecks for countless numbers of employees and their families, week in and week out for decades. And a job provides freedom and opportunities that charity simply cannot.

Keep in mind, those millions of employees didn't just earn an income. They learned new skills and gained new competencies that they didn't have before, which made them eligible for promotions that gave them even larger paychecks or new opportunities in other companies. As these employees earned more money, they sent their kids to college to learn skills and competencies that they, in turn, used to earn an income or open up a business of their own. If they ran their businesses well and earned a profit, they provided jobs that brought paychecks to other people and their families, too. And so goes the cycle of benefits of entrepreneurship in the free market.

The crux of the situation is this: charities can not do great work without entrepreneurship and the creation of wealth. How can someone donate to or start a charity without it?

Andrew Carnegie, for example, could not have built over 2,000 libraries if he had not received the benefit of employment at businesses owned and operated by other entrepreneurs. Carnegie was penniless when his family moved to the US from Scotland in the mid 1800's. His first job was as a bobbin boy in a Pittsburgh cotton mill when he was 13 years old earning $1.20 a week. A few years later, he almost doubled his weekly income when he took a job as a messenger boy for the Ohio Telegraph office. He learned everything he could there, gained new skills, and almost doubled his weekly income again week when he took a job as a secretary/telegraph operator at the Pennsylvania Railroad. He advanced at the railroad until he eventually became superintendent of the Pittsburgh Division.  Wanting to move beyond just being an employee of a company, he invested money in a few businesses, including in a company that made sleeping cars for the railroad. His accumulation of capital over the years allowed him to buy his first steel mill. Carnegie's greatest achievement may have been his demand for efficiencies and advancements, which allowed him to produce steel cheaper than any of his competitors. That cheaper steel built the skyscrapers, railroads, bridges, steam locomotives, and ships that powered the industrial revolution and raised the American people's standard of living.

Henry Ford, like Andrew Carnegie, began his career modestly and worked his way up at various businesses, including Thomas Edison's Illuminating Company. Interestingly enough, Ford probably used Carnegie steel to produce his Model Ts at the Ford Motor Company. And like Carnegie, it was Ford's determination to make his automobile company successful that made him look for efficiencies in production. That led to his revolutionary creation: the assembly line. That one invention not only made the automobile far more affordable for many more people, it revolutionized the manufacturing process for all kinds of products. As more products were produced more economically, prices dropped. Vast swaths of people were able to purchase all kinds of convenience products which increased the quality of their lives. Naturally, the increased demand for these products led to more jobs, which led to higher wages and standards of living.

So, all this brings us back to Kimberly Dennis' article and the question what does the greatest good, creating wealth or giving it away. While Bill Gates, Warren Buffett, and other successful business leaders are being very generous by pledging to give away most of their wealth, Ms. Dennis was right when she said they and others make a mistake by thinking that they will do more good for more people giving away their money than they did when they were earning it.


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Comments (11)

It should come as no surpri... (Below threshold)
jim m:

It should come as no surprise that the amount of wealth generated by a company is primarily used to keep hat company running and not lining the pockets of the owners. The revenues are used to pay employees and grow operations, which in turn results in hiring more employees.

Charitable giving by the owner is necessarily just a fraction of the wealth generated by a company. it could never hold a candle to the money spent on the operations of the business.

The problem comes in that we celebrate the charitable giving far more than the competent running of a business. This creates the impression in many people that the giving is more useful to improve the lives of others, but that is really more a function of the ignorance most people have regarding economics and the market place

Or send it over seas where ... (Below threshold)

Or send it over seas where it can create more wealth for some others and never make it back over here.

The fly in the ointment is ... (Below threshold)

The fly in the ointment is the 'charitable giving' part. Take Barry Obama and Bill Ayers. How much charitable giving did they blow through, accomplishing nothing in the Chicago school system.

Gates and Buffett better spend some time on deciding WHO is going to handle all those bucks when their gone. Or are they planning on spending it all before they kick the bucket?

...those entrepreneurs a... (Below threshold)
Les Nessman:

...those entrepreneurs actually make a more significant and positive impact on society through their businesses because they create products that improve people's lives and provide jobs that allow people to earn their living.

I think I remember a John Stossel 20/20 report some years ago where he said much the same thing to that braying ass Ted Turner right after Ted promised to give $1 billion to the U.N.
Naturally, the Lefty Turner loudly hee-hawed at the idea.

An excellent point.<p... (Below threshold)
Jim Addison:

An excellent point.

Even if the charitable donations are not frittered away on plush offices, high salaries, and crushing "fund-raising expenses," and actually get to their intended recipients (as with the Salvation Army, where no one is paid), that money goes to an individual to be consumed. It not only does not efficiently create new wealth itself, it takes the capital out of the economy where it might have eventually increased its effect tenfold, or a hundredfold.

I am all for charitable giving to the poor and disaster victims, for medical charities and all that serve those in true need. But we should all give our share, and the guys with 10-figure net worth bear a larger share. There's no need for them to pat themselves on the back for it any more than it would be appropriate for you or I to brag about our own smaller contributions.

Jesus instructs us, in fact, to give alms quietly, secretly, so to avoid taking public credit for them. Only thus can we be sure our motives are purely charitable . . .

But each must give of his best talents, too, and for the entrepreneurs who revolutionize society, the focus of that should be in their area of expertise. Give to charity, but don't divert capital from economic expansion to it beyond your obligation.

Jim Addison says: "But we s... (Below threshold)

Jim Addison says: "But we should all give our share, and the guys with 10-figure net worth bear a larger share."
Really? And just what is my share? Or my neighbor's share? And who determines that? You? Some politician? People that make more money bear a larger share? Just like the progressive (read Marxist) progressive income tax system in the country? Wow. Amazing.

Charitable giving should be a private endeavor. Unfortunately, in today's world it has become a business unto itself. Because of that, it has developed many of the poor aspects of running a business (paperwork, waste/inefficiency, high overhead, legal issues galore, etc.) and few of the benefits. Legal terms like "non-profit" and "not-for-profit" are handed out often-times for political purposes.

Universities have degree programs for those wishing to "enter the field", many of these graduates going on to make 6-figure salaries. Most disgusting are the strong-arm tactics such as that employed by United Way, to publicly compel employees at private business to "give" or face being frowned upon by management who can then use this as an unofficial means to deny promotion and raises (which should be earned on merit and performance, not on how much money you give). Corruption has also hit many "charities" with some of those running them skimming money and benefits on the order of some of our greatest crooked politicians (i.e. Rangel, Waters, Jefferson, Blago, etc.).

Add to this that the vast majority of charitable organizations never actually seek to end the problem they are purportedly trying to fix. For if they did so, they would no longer have a reason to exist and those in charge would have to find another way to make a living. In this aspect, these people act very much like government bureaucrats.

Does this mean all charities are bad? No. Just 95%+ are (my opinion). I advise anyone wishing to give their hard earned money away to research, research, and research again. Find out who is getting your money and exactly what they are doing with it. ANY charity who has paid employees and not volunteers is immediately crossed off my list. To me, the idea of charity should be shared by those who wish others to join them in their charitable endeavors. Those seeking to profit from it (i.e. professional, 6-figure salaried employees) should re-evaluate why they are involved in the first place.

"Those seeking to profit fr... (Below threshold)

"Those seeking to profit from it (i.e. professional, 6-figure salaried employees) should re-evaluate why they are involved in the first place."

Ya mean like that uber liberal savior of the poor, Joe Kennedy, and his 'not-for-profit' fuel co-op that pays him 1/2 million a year in salary?

think of the billions or ev... (Below threshold)

think of the billions or even trillions in wealth created by Gates and Jobs. Look at the value of the companies that exisit today that sell products that work with or on Windows and Apple computers.
Who will be the next Gates or Jobs if that wealth of dropped down the black hole of charitable organizations ?

The best part about this ar... (Below threshold)

The best part about this article is how well it meshes with the teachings of Christ, who had exactly the same philosophy as revealed in Mark 10:17-27.

17 And when he was gone forth into the way, there came one running, and kneeled to him, and asked him, Good Master, what shall I do that I may inherit eternal life?
18 And Jesus said unto him, Why callest thou me good? there is none good but one, that is, God.
19 Thou knowest the commandments, Do not commit adultery, Do not kill, Do not steal, Do not bear false witness, Defraud not, Honour thy father and mother.
20 And he answered and said unto him, Master, all these have I observed from my youth.
21 Then Jesus beholding him loved him, and said unto him, also accumulate vast wealth during your lifetime; the treasure you accumulate in life will await you in heaven.
22 And the man was pleased at that saying, and went away joyous: for he had great possessions.
23 And Jesus looked round about, and saith unto his disciples, How hardly shall they that have no riches enter into the kingdom of God!
24 And the disciples were astonished at his words. But Jesus answereth again, and saith unto them, Children, how hard is it for them that have no riches to enter into the kingdom of God!
25 It is easier for a camel to go through the eye of a needle, than for a poor man to enter into the kingdom of God
26 For the poor man gave nothing back to society during his lifetime, created no jobs, and really did nothing whatsoever of value
27 But the rich man has benefited us all through his glorious actions, investment, and innovation

Yes troll, twist what the s... (Below threshold)

Yes troll, twist what the scriptures say to get across your political POV. God I can't wait for November to roll around so we can see and hear the weeping, moaning, and gnashing of teeth of uber-libs like you.

I'm sorry if my quot... (Below threshold)

I'm sorry if my quoting of scripture doesn't agree with you. I included all of the references, so you can go read them yourself, if you disagree or think I have "twisted" them in any way. I'm not sure how you would even begin to claim that I could twist something as simple as Jesus' proclamation that "It is easier for a camel to go through the eye of a needle, than for a poor man to enter into the kingdom of God." Do you think that eyes of needles are easy for camels to pass through? Let's hear your bizarre interpretation that gives the destitute some additional leeway.

You probably think that Jesus was some coddler of the poor and downtrodden (and you call me an uber-lib!?). Nothing could be further from the truth. Jesus absolutely loved the rich and powerful and his gospel was directed to them or those who aspired to join that blessed group. Need more proof? Let me give you a few more verses to cogitate on.

Luke 16:19-25
19 "There was a certain rich man who was clothed in purple and fine linen and fared sumptuously every day.
20 But there was a certain beggar named Lazarus, full of sores, who was laid at his gate,
21 desiring to be fed with the crumbs which fell from the rich man's table. Moreover the dogs came and licked his sores.
22 So it was that the beggar died, and was carried by demons to hell. The rich man also died and was lifted to heaven.
23 And being in torments in Hades, Lazarus lifted up his eyes and saw Abraham afar off, and the rich man in his bosom (no homo).
24 "Then Lazarus cried and said, 'Father Abraham, have mercy on me, and send the rich man that he may dip the tip of his finger in water and cool my tongue; for I am tormented in this flame and he never lifted a finger to help me during our lives.'
25 But Abraham said, 'Son, remember that in your lifetime you were useless and deserve eternal punishment for that, and likewise the rich man received his due for his great deeds, then and now; your torture continues while his comfort is multiplied.

Mark 12:41-44:
41 And Jesus sat over against the treasury, and beheld how the people cast money into the treasury: and many that were rich cast in much.
42 And there came a certain rich businessman, and he threw in nothing whatsoever.
43 And he called unto him his disciples, and saith unto them, Verily I say unto you, What this businessman hath contributed is more than all they which have cast into the treasury:
44 For all they did foolishly reduce their abundance; but he of immense wealth knew that he could contribute more by investing back in his own businesses, creating jobs, and expanding wealth for all, yea, even sevenfold above the rate of inflation.

Matthew 6:24
24 A man can serve two masters: loving both equally, as long as those two masters are God and money, for those two are almost indistinguishable, both bringing untold blessings to mankind.

And of course, Luke 12:15:
15 Greed is good.

Don't get me wrong. Jesus had a message of hope to all people. For the rich, they were justly rewarded for their contributions to society in this life and the next. For the poor, all they needed to do to attain their heavenly rewards was become rich. Jesus understood that the more the wealthy earned, the more poor they could lift from poverty to wealth at the same time, through economic expansion. Salvation of the earth is possible through free market principles.

Note: All scripture quotations from the RCE (Revised Capitalist Edition), endorsed by Joel Osteen, Kenneth Copeland, and the Wall Street Journal.






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