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Warren Buffett and Bill Gates’ call for billionaires to give half their net worth to charity is hard to criticize. Surely there is something noble about deciding to devote to the public good half the wealth billionaires have accumulated and will never be able to spend in their lifetimes. But to say that their creating public pledges to donate so much to charity is an unalloyed good misses some important lessons about philanthropy, as well.

First, and most obviously, a lot depends on the quality of the charitable projects which receive the gifts. Much money has been wasted in charitable giving, particularly in the area of education (reported as the most recurring theme among participants in the Gates/Buffett roundtables). Notable examples of disappointing results include Annenberg Foundation’s $1 billion campaign in the 1990s to create model schools, and another $2 billion from the Gates Foundation to reorganize schools into smaller administrative units. It is quite possible that if billionaires swarm to sign up for the Buffett/Gates pledge, the very scale of new money will lead to a lot of crowding out of good but small projects and much waste.

But that, in and of itself, may be the inevitable cost of business in the non-profit world and the proof will be in the pudding. What I have in mind is something much more general, and has to do with a notion about philanthropy which is not often enough discussed: “opportunity cost.”

We need to remember that whatever funds the pledges generate will not be taken from under a mattress and introduced into the economy as new money. For example, Gates will sell shares of Microsoft and give it, via the Gates Foundation, to a charity. The funds which go into the non-profit sector, therefore, will be taken out of the capital stock of for-profit businesses and given to non-profits. Whether the world is better off depends on how the non-profits use it (either distributing it for consumption, in a soup kitchen, for instance, or investing it, say, in a job skills program) compared to how Microsoft and its employees would use it (investing in new products, providing jobs for workers, supporting the local economy where those workers live, and investing in their own for- and non-profit patterns of spending and investing). One alternative to giving to charity might be for Gates simply to distribute his wealth among Microsoft’s 95,000 employees and let them decide how to invest and consume it. (Or – tax free – he could send a $13,000 check to 2.3 million well-selected individuals.) The net effect of all this distributed decision-making would be much less spectacular, but might be considerably larger than the decision-making which will be processed through a centralized non-profit board.

This is not to criticize Gates and Buffett, but to point out that there are costs associated with their decision, as well as benefits. My bias is towards high levels of strategic charitable giving by wealth creators, and for this reason I applaud much of the impetus behind the Gates/Buffett initiative. I would encourage them, however, to continue to focus as much on the “how” of giving – including being personally involved, “giving while living” and strictly sunsetting what they leave behind when they die, as they do on encouraging others simply to give per se. The first rule of philanthropy, as of medicine, was coined by Hippocrates: “Do no harm.” Recognizing the opportunity cost of philanthropy helps remind us of this.

2 thoughts on “The “opportunity cost” of philanthropy”

  1. Tammy Lee says:

    Frankly, I think the ‘opportunity cost’ – along with much of the uncertainty regarding the effective, sustainable impact of philanthropy – would not be quite so high were philanthropic organizations less biased against business principles. They don’t work have to work for money (which many organizations seem to assume), they just have to work for efficiency. It’s just an unfortunate fact that money is often the biggest motivator for efficiency.

  2. I recall once writing to Milton Friedman to ask how one would calculate the relative value of giving to a nonprofit over investing or consuming. This was when Capital Research Center was publishing our annual Patterns of Corporate Philanthropy. He responded by saying it was a very interesting question and if he were fifty years younger it might be a worthwhile career-long project to tackle.

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