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[Review] 'Why Philanthropy Matters: How the Wealthy Give, and What It Means for Our Economic Well-Being'

May 23, 2013

The basic premise of Zoltan Acs' new book Why Philanthropy Matters: How the Wealthy Give, and What It Means for Our Economic Well-Being is that many people — including some very wealthy people — need to understand that philanthropy is both a moral and economic good. Acs' Exhibit A is Mexican telecom tycoon Carlos Slim Helú, who, when asked whether he planned to join the Giving Pledge — a campaign launched by Warren Buffett and Bill and Melinda Gates to convince the world's billionaires to dedicate a majority of their wealth to philanthropy — said: "Charity doesn't solve anything."

While Slim, one of the world's richest men, believes the wealthy do have an obligation to address endemic poverty, his preferred solution isn't charity; it's to use his personal wealth to create more jobs. Acs, who directs the Center for Entrepreneurship and Public Policy at George Mason University, doesn't fault that approach, although he is careful to distinguish between charity and philanthropy. The latter, writes Acs, involves "a reciprocal relationship between the philanthropist and the beneficiary" in which the beneficiary must invest its own time, energy, and resources in order to create a positive outcome(s). "In short," writes Acs, "philanthropy is an investment that stimulates other investments."

Indeed, according to Acs, philanthropy is an underappreciated economic force that strengthens American capitalism in two ways: by supporting entrepreneurship through investments in universities, basic research, and innovation; and by redistributing accumulated wealth into opportunity-creating investments. A former Kauffman Foundation fellow, Acs acknowledges that while the creatively destructive nature of American-style capitalism has served to foster an entrepreneurial spirit among Americans, it has also enabled a significant concentration of wealth in the hands of a relative few. And, he writes, it is only "through philanthropic investments — in particular through the organized, large-scale networks of what I call philanthropic entrepreneurialism — [that] the imbalance inherent in capitalist growth [can] be corrected to create a self-sustaining process in which wealth creation is supported alongside social innovation and opportunity."

Acs, whose heroes are Andrew Carnegie, Leland Stanford, John D. Rockefeller, and other industrialists-cum-philanthropists of the Gilded Age, identifies in American-style capitalism "a self-sustaining circle of opportunity, innovation, wealth creation, and philanthropy" and devotes a chapter to each of them, outlining the development of a distinctly American system characterized by entrepreneurialism and a spirit of giving back. (Acs is a big believer in American exceptionalism.) The lack of a strong state apparatus or class system in colonial America meant that wealth accrued not to a hereditary nobility but to hard-working entrepreneurs and innovators, a notion reinforced by Puritan and Quaker values. The democratic capitalistic system that evolved during the nineteenth century embraced a limited role for government in terms of supporting new enterprises and "in innovating systems of public education such as the land-grant universit[y]" — developments that were complemented by "a sustained parallel role of private philanthropy in innovating systems of private education." The result was the creation of a skilled workforce and a robust research infrastructure able to drive innovation in industry.

Focusing on the investment in universities, Acs describes a feedback loop in which an economy that allows for creative destruction rewards "breakthrough" innovations with outsized personal financial gains, which in turn are invested via philanthropy in new innovations that ultimately displace old industries, igniting a virtuous cycle of profits, wealth, and innovation. This dynamic was short-circuited, Acs writes, after World War II, as big business, labor, and government colluded in the creation of a "managerial economy" that valued stability over dynamism, shifted innovation to corporate research institutes, and eventually produced the economic stagflation of the 1970s.

The malaise of that period was shattered by the personal computer revolution of the late 1970s and '80s, writes Acs, a seemingly unstoppable force that once again led to the decentralization of economic innovation and created new engines of economic growth (e.g., Silicon Valley). In time, it also created income inequality to rival that of the Gilded Age. Which is where the crucial role of philanthropy comes in, Acs writes. Unlike British-style trusts, which are meant to preserve wealth, the private foundation structure in the United States mitigates against the concentration of wealth because most American philanthropists are entrepreneurs who are naturally inclined to support institutions, like universities, that promote and contribute to entrepreneurial activity.

According to Acs, America's prosperity is built on the backs of innovative entrepreneurs who become wealthy and then use their wealth to nurture, often through their philanthropy, the next generation of innovative entrepreneurs — a tidy, circular narrative that, at times, struck this reviewer as oversimplified and idealized. Indeed, even Acs has doubts about the sustainability of "philanthropic entrepreneurialism." He questions, for example, whether the virtuous cycle may have broken down, recognizing that failing elementary and secondary schools across the country are limiting opportunity for lower-income Americans, and wonders whether philanthropy is up to the challenge. And while he duly notes Facebook co-founder Mark Zuckerberg's $100 million gift to the Newark public school system and views charter schools as "the K-12 analog of creative destruction," one has to ask: Is that enough?

Having described at book-length what he calls a "self-sustaining circle of opportunity, innovation, wealth creation, and philanthropy," Acs notes that "[t]oday...the value of giving back is not universally shared, even in the United States, where the rich have retreated from the challenge of recycling their wealth to maximize the benefit to society. What is required to sustain U.S. and global capitalism in the twenty-first century is a renewed spirit of philanthropy among the new rich." How might U.S. philanthropists be encouraged to embrace that spirit? For starters, writes Acs, we should raise the estate tax rate and increase the payout rate for private foundations from 5 percent to 7 percent.

Why Philanthropy Matters is an accessible look at what some might call a relationship of convenience between American capitalism and philanthropy in which each is both a product and an enabling force of the other. It is also a system that Acs would like to see exported around the world in order to nurture and sustain global capitalism.

Which got me thinking: Maybe a better title for the book would be For Whom Philanthropy Matters.

-- Kyoko Uchida

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